Author: Tom Slee

Yet more from Mark Thoma, who seems to collect interesting information like I collect  collecty things.  He posts a series of graphs from the latest Piketty and Saez paper on trends in incomes — in this case particularly incomes at the very top. In short, the income share of the top 1% took a slight dip between 2000 and 2002 but it looks like a brief post-dot-com interruption in the general trend of increasing inequality starting in the 1970s.

This paper summarizes the
main findings of the recent studies that have constructed top income and wealth
shares series over the century for a number of countries using tax statistics.
Most countries experience a dramatic drop in top income shares in the first part
of the century due to a precipitous drop in large wealth holdings during the
wars and depression shocks. Top income shares do not recover in the immediate
post war decades. However, over the last 30 years, top income shares have
increased substantially in English speaking countries but not at all in
continental Europe countries or Japan. This increase is due to an unprecedented
surge in top wage incomes starting in the 1970s and accelerating in the 1990s.

Oddly, the trend seems to be limited to English speaking countries. Why on earth would that be? There are some speculations both at Thoma’s Economist’s View and at Brad DeLong’s site.

Link: Economist’s View: The Evolution of Top Incomes.

Which matters more, the income of the average citizen or the average income of citizens?

Via Brad DeLong and Ruy Teixeira, the story of the American economy in the last five years is summarized in one page by the Economic Policy Institute.

Their headlines are:

1. Profits are up, but the wages and the incomes of average Americans are down.
2. More and more people are deeper and deeper in debt.
3. Job creation has not kept up with population growth, and the employment rate has fallen sharply.
4. Poverty is on the rise.
5. Rising health care costs are eroding families’ already declining income.

An economy is a big thing, and there are a lot of stories in it, some happy and some sad. Productivity, debt, growth, uncertainty, technological advances, poverty, millionaires. Averages give only a very limited picture, and how you evaluate the overall picture depends on which stories you think are important.

Me, I think the income of average Americans is more important than the average income of Americans.

From The Guardian, a piece on how the free market is even screwing up football/soccer, or at least some parts of it, and how FIFA may provide an example of how to make things better for poor countries.

The forces of globalisation are hindering the chances of another Derby
or Nottingham Forest pipping Chelsea or Manchester United for the
league title as they did in the 70s but are likely to make this
summer’s World Cup more competitive, according to a World Bank
economist.

An in-depth study of the free market in football confirms
what Premiership fans have long suspected: the influx of overseas stars
has improved skill levels but at the expense of growing inequality
between the elite clubs and the rest.

 

Yet national teams of poor countries have benefited from mobility of
labour says an article by Branko Milanovic in the latest Review of
International Political Economy. Since the national teams of rich
countries cannot buy the best in the way that their clubs can, when a
Didier Drogba returns home from Chelsea, the Ivory Coast team gains
from his experience.

Using
basic economic theory, Milanovic came up with the hypothesis that
putting a good player with other good players would lead to all of them
becoming even better players – or increasing returns, in the jargon of
the dismal science. Given that some clubs are richer than others, he
says you would expect a small group of clubs to dominate.

At club
level, this is precisely what has happened. A study of the Champions
League (formerly the European Cup) showed that there used to be a far
better chance of an unknown or unfashionable club making it to the last
eight than now. In the five years from 1958 to 1962, 30 different teams
made it to the quarter finals (out of a possible maximum of 40), but
between 1998 and 2002 this had fallen to 22.

A separate study of
Serie A – Italy’s equivalent of the Premiership – told a similar story.
From the 1960s to the 1990s, there used to be three or four clubs on
average from the poorer regions of the south. In 2002, for the first
time since the second world war, there was not a single club from the
south in Serie A.

Sepp Blatter, the president of Fifa, has condemned the greed of the
modern game and, in words that could have been uttered by an
anti-globalisation protester, accused Europe’s top clubs of conducting
themselves increasingly as "neo-colonialists" indulging in "economic
rape". At the international level, Fifa has maintained limits on the
inequality generated by the "leg drain", preventing rich countries from
buying the national teams of poor countries. As a result, poor
countries are able to capture the benefits of higher skills acquired by
their players abroad when they temporarily return home to play for
their national squads.

Adopting Fifa’s approach to the "brain
drain" of skilled workers, the paper says, might mean that the doctors,
nurses, teachers and scientists who emigrate to the west should be
obliged to spend one year in five back in their home country.

Milanovic
says the ability of poor countries to hold on to their best players has
made the World Cup more open. In the late 1970s and 1980s it was highly
unusual for a newcomer to make it to the last eight of the competition
but each tournament since has thrown up at least of couple of newcomers
– including Cameroon, Nigeria and Turkey – who have made life difficult
for fancied teams. Matches, the economist adds, are also getting
tighter, suggesting some nail-biting nights for England fans this
summer as the spectre of the dreaded penalty shoot-out looms.

· Globalisation and goals: does Soccer show the way? Branko Milanovic; Review of International Political Economy; www.tandf.co.uk

An article I am working on, hoping to publish somewhere…

Once upon a time, 35 years ago to be precise, the British
beer industry was dominated by five big breweries. It had been that way for a
long time, and it didn’t look like changing: fifty years had passed since any new
ale breweries had been founded. Sure, some people complained about the poor
quality of beer, but they were probably just dreaming about a non-existent
golden age and grumbling about progress. After all, if cask beers from small
breweries were really better than the brand-name, large-scale production of the
big brewers, why had the small breweries gone out of business? If people really
wanted a different kind of beer, surely companies would be competing to provide
it for them?

But then a strange thing happened. As many people know, some
of these grumblers got together to form the Campaign for Real Ale (CAMRA).
CAMRA held local beer festivals, published an annual Good Beer Guide, and local CAMRA groups published newsletters that helped
to keep information as well as ale flowing. And they didn’t stop there: CAMRA
campaigned for less restrictive pub licensing laws and selling practices, against
takeovers of smaller breweries, and against deceptive advertising. CAMRA tries
all kinds of tactics: “Lively and sometimes controversial campaigns are mounted
at local level, with backup from headquarters. MPs, councillors, trade unions,
licensees and workers might be involved. Tactics we have used include petitions,
threatened boycotts, publicity stunts, marches, laying wreaths outside closed
breweries and so forth.”

CAMRA now boasts a membership of 75,000. Three hundred new
breweries operate in the UK.
The Good Beer Guide claims that “In spite of the best efforts of the
global brewers who dominate British brewing, there is greater choice today than
at any time since the … early 1970s.” CAMRA has changed the British beer landscape. It turns out that there
was a demand for a different beer after all.

*  * *

Why write about a thirty-year old British beer-drinkers
organization? Because CAMRA’s success has a lot to tell
us about the world we inhabit as consumers. It shines a light on one of the
basic questions about our society: does a free market economy really give us
what we want? Many areas of our consuming lives are dominated by a few big
companies and their heavily advertised brands, just like the market for beer in Britain in 1970. And just like CAMRA, we can ask the question, does their success mean
that we really like them?

Another way of asking this question is “who is in charge
when it comes to brands?” There are two common answers. Here in the red corner representing
the anti-corporate constituency is Naomi Klein, who argued five years ago in No Logo that brands provide a front for
“corporate rule” and that we are being pushed around by “Brand bullies”. And
over here in the blue corner representing the free-market enthusiasts is The Economist, which claims that “Brands
do not rule consumers; consumers rule brands… When we like a brand we manifest
our loyalty in cash. If we don’t like it, we walk away. Customers are in
charge.”

CAMRA showed that there is a third possibility. Enterprising
landlords always had the right to set up “free houses” which could sell beer
from any brewer. So although the big breweries made it easier to drink their beer
than that of their smaller competitors, it is difficult to argue that beer
drinkers were being bullied. On the other hand CAMRA’s success proves that the
market was not giving people what they wanted: for many years, the British beer
industry really did provide low-quality, albeit predictable, fare and got away
with it.

Some free-market enthusiasts would argue that CAMRA is
simply the market at work, facilitating the sharing of information needed for
the market to work properly. But are activist, volunteer groups setting out to
discredit big companies (and with a Trotskyist ex-leader of the Socialist
Workers’ Party playing a leading role) needed for markets to work well? If so,
we are a far cry from the way that the invisible hand and consumer sovereignty
is supposed to work.

So consumers were not being bullied, but they were still
trapped by the big breweries. In principle they were in charge, but in order to
be in charge you have to have a way to issue orders. Until CAMRA came along something was stopping
British beer drinkers from demanding better beer and was keeping them in a
bad-beer trap. But what?

The answer matters because although the CAMRA story is
interesting—at least, I think it is—it would be interesting only in an
anecdotal, “isn’t that odd” kind of way if it was only an exception to the rule.
But there are good reasons to believe that the forces at work among British
beer drinkers are working in a lot of other areas of our consuming lives. The
CAMRA story is a tale of conflict between marketing-driven brand-name companies
and smaller suppliers who have to rely on word of mouth for their success. It
shows that the success of brands may not be a good thing, and it shows that
individual choice and the market may not be enough to get us out of the various
traps we find ourselves in.

The answer matters because faith in markets is now so
widespread. It is commonplace to hear that if people are eating at McDonald’s
while independent restaurants go out of business, or if people are watching
American sitcom re-runs while Canadian productions can’t find funding, then—like
it or not—this is a reflection of what consumers want. If we liked
Canadian-made TV shows we’d watch them without any help from the CRTC. If we
really cared about healthy downtowns, we wouldn’t be shopping at Wal-Mart. The argument
is used as a verbal cudgel to beat those who argue for government intervention
or who protest the global spread of brand-name companies and cultural
homogeneity. Even Paul Krugman—New York Times columnist, fierce George Bush
critic, and every US liberal’s favourite economist—argues that because “no one
forces you to eat at McDonald’s”, anti-globalization activists are hoping that
“individuals be prevented from getting what they want”.

* * *

To better understand the CAMRA story we turn to economist
George Akerlof. Just before CAMRA was founded he had an insight that explains
why markets often fail. Akerlof’s big idea is called “the market for lemons”—lemons
as in bad quality cars, not as in the fruit—and it has had a huge impact on
economics, winning him the Nobel Prize in 2002. Unlike some other big ideas it has
not made the jump into the realm of public discussion. It is time it did so,
because it has a lot to say about many of today’s most topical issues,
including the conflict between the big brands and smaller vendors.

Akerlof observed that, in many exchanges, buyers cannot tell
the quality of what they buy before they buy it, while sellers know the quality
of what they are selling. The used car market was his example; when you buy a
used car direct from its owner it is hard to tell if it is in good shape or
whether the brakes are just about to fail. On the other hand, sellers know how
well they have maintained their cars and have a better idea of whether there is
anything dodgy under the hood.

In situations like this, where one side knows more than the
other, there is a problem of trust. Buyers of used cars must ask themselves the
question “if he (or she) wants to sell
that car, do I really want to buy it?”

The logic goes like this.

• Buyers will only pay a premium price if they are confident
  that they will get what they are paying for. If they can’t identify or verify
  quality then they will not offer top dollar because they know they might be
  buying a lemon instead (they can’t tell the difference). They don’t trust the
  seller.
• As buyers will not offer a high price, sellers of good
  quality used cars will tend to hold on to their vehicles rather than selling
  them at an unwarranted discount. They are driven out of the market.
• Realizing that sellers with good quality used cars will hold
  on to them, buyers will further lower the price they are prepared to offer.
  This drives the sellers of the second-best cars out of the market.
• The spiral continues and the market unravels until the only
  cars that can be sold are those for which the quality is certain: lemons.

The morals of the story are that markets where trust cannot
be established are much less active than they would otherwise be—they are
“thin”—and that it is particularly difficult to buy and sell high quality goods
when their quality is not easily verified. Even when buyers would be happy to
spend money for good quality merchandise, and even when sellers could make some
money by providing it, the “lemons problem” means that many potentially
beneficial exchanges fail to take place. There is no magic in the market that
guarantees success for producers of good things unless they can establish a
level of trust in what they are supplying.

But there is more to the lemons problem than this.

In many markets where trust is difficult to establish, there
are “nearby” markets where it is less of a problem. The quality of a new car is
more easily verifiable than that of a used car, because the seller can offer
guarantees, and legally is held to account more than the private seller of a
used car. Faced with a choice between a predictable new car and a second hand
car that may be a lemon, the good choice is to go with the predictable.

It is not quite so simple, of course, as Akerlof knew very
well. The market for lemons is both less than and more than the truth. On one
hand, few goods are of completely unknown quality ahead of time: sellers can
offer guarantees, and buyers can tease out information in many different ways.
Plenty of used cars, even good quality ones, do get bought and sold. But on the
other hand, the forces Akerlof identified are present to some extent in almost every
market transaction. In fact, many aspects of consumer society are taken up with
trying to get around this basic problem of establishing trustworthiness.
Establishing trust is not impossible, but it is costly.

* * *

Hidden in the market for lemons is an explanation of why British
beer could stay as low-quality for years, and of how CAMRA could give independent
producers a chance to sell their products.

The competition between the big breweries and the
independents in the UK was really a battle between two ways of establishing trustworthiness and
reputation. Brands rely on direct communication to the consumer through large-scale
marketing campaigns and an obvious uniformity, while the independents have to
rely instead on word of mouth among an educated customer base to build their
reputation.

Once the big breweries had tightened their hold on the
market, small breweries were faced with an information Catch-22. They lacked a
base of well-informed consumers to establish their reputation, and consumers lacked
good quality products to be informed about. Consumers were not bullied, but
they were trapped. In a market dominated by brands, individual consumer choices
were not enough to re-establish a market for independent producers.

What was needed, and what CAMRA provided, was collective
action. A group of people who, by banding together, managed to give the market
enough of a kick to propel it from one kind of outcome, dominated by brands and
low customer information, to another in which better-informed drinkers could
make better-informed decisions. CAMRA solved the lemons problem faced by
independent breweries.

* * *

Malcolm Gladwell’s hugely successful book The Tipping Point explains how word of
mouth works. Gladwell takes his readers to meet a set of “connectors, mavens,
and salesmen”. These are people who, because of a gregarious nature, or an
inclination to collect information, or a natural persuasive ability, carry information
about good and bad products to the rest of us and spark what Gladwell calls
“word-of-mouth epidemics”. But powerful as these connectors are, and engaging
as Gladwell’s book is, we cannot always trust that individuals will provide the
information needed to sustain good products. Word-of-mouth information about a
beer, or about a restaurant, or about a new book, requires a certain density of
people who know about it to transmit the information to the rest of us, and
even though Gladwell shows that a surprisingly small number of people can
manage to be a conduit for a lot of information, a critical mass is still needed
to reach the “tipping point”. In any particular market left to the vagaries of
individual choices there is no guarantee that it will ever be reached.

The market for lemons means that brands can drive out
word-of-mouth products as long as they are “good enough” to make the search for
reliable information too costly. If a branded product can get a foothold in the
market, it takes some customers out of the market for word-of-mouth goods. By
doing so, it increases the cost of word-of-mouth information for all consumers and
so makes the lemons problem a little worse. The effect is a spiral, with each
turn cutting into the word-of-mouth culture that maintains independent producers
and adding to the market share of brand-name companies.

In some cases, word of mouth can keep an independent market
healthy, but in other cases brands drive word-of-mouth goods to the periphery,
where only the most enthusiastic will even hear about them, or even eliminate
them all together. The predictability of brand-name goods can literally dumb
down the market, even if we continue to make good individual choices. Despite
what The Economist says, a victory
for brands does not prove a real “preference” by individual consumers. It may
simply show that the brand is no so bad that it is worth the effort of finding
out about alternatives.

Despite its recent woes, McDonald’s is a brand archetype. McDonald’s
restaurants scream predictability, from the identikit restaurant design to the
employees’ uniforms and scripted dialogue (“would you like fries with that?”)
to the production-line cooking techniques to the global marketing efforts. A
tourist in a new city may never have heard of any of the local restaurants, and may not know their
quality, but certainly does know what the food will be like at McDonald’s. It
may not be great, but it is “good enough”. Food in some tourist areas is
notoriously bad because the repeat business needed to establish a reputation for
quality is just not there. Restaurants that provide good value cannot find a
market for the food they sell. Such areas are prime territory for the
guaranteed predictability of the franchise.

Ron Galloway, director of the new film Why Wal-Mart Works & Why That Makes Some People Crazy, claims
that "138 million people vote with their feet to go to Wal-Mart. And
Americans are pretty smart. And I think Wal-Mart, if Wal-Mart were really doing
something genuinely wrong, the American people would be able to figure it out
and not go." But it has nothing to
do with how smart we are as individuals. Instead, it is simply that in the face
of the economies of scale and large-scale marketing, maintaining knowledge
about alternatives becomes increasingly difficult.

Once you see how the market for lemons works, less obvious
examples are all around. Networking is often a vital step in getting a good job.
The ability of “old boys clubs” and
networks based on common universities and schools has sustained many an insider
group, and outsiders (women, racial minorities) who do not have access to these
networks can be excluded, even when the people doing the hiring have no
intention to discriminate. It simply makes good sense to choose the known over
the unknown. The market for lemons is an argument in favour of affirmative
action: even the most well-intentioned hiring procedure that is based on
information about the individual can leave us with well-connected but only
“good enough” people in good jobs, while potentially excellent candidates
without good connections can be left in the cold.

Getting credit to start a company is another area where
contacts are important. Investors and banks look for real evidence that a loan
can be repaid, and personal recommendations or contacts provide an invaluable
source of such evidence. Those from the wrong side of the track looking for a
loan to start a company may have to look long and hard, no matter how good
their ideas are.

Or how about the market for movies? We have heard a lot
about the increased availability of online review sites and other ways of
finding information at your fingertips. Such developments are real, but let’s
not forget the other side of the story. New technology also allows producers to
“open wide” in many theatres simultaneously following a barrage of publicity,
so making word of mouth information more difficult to get. This provides a way
of promoting a brand-based predictability. The inclusion of bankable stars and
the production of sequels are other ways of emphasizing the reliability of the
product and cutting into the influence of word of mouth.

Any market where there are “acquired tastes” is vulnerable
to being dumbed down by brands. The phrase “acquired tastes” suggests fine
wines and smelly cheeses, but CAMRA shows that the phrase applies just as much
to cheaper products. Groups of enthusiasts help to keep such areas alive, and
play a fundamental role in maintaining variety. At the high end, gourmet groups
may manage to maintain a flow of information so that independent producers
(“boutique” products) can still find a niche without being as militant as
CAMRA. At the other end of the market, it is unlikely at this stage that a real
market for locally-produced soft drinks can be re-established: the cheapness of
the mass-produced product means that any independent variant must be
substantially better to make it worth searching out.

Seen in this light, collective action among consumers
becomes all the more important. And brand-name companies are aware of this. As
the success of consumer campaigns such as those against Nike and Nestlé have
shown, people do take information into account when they make their decisions,
as long as that information is available. But it requires collective action to
make this information available to individual consumers, and to make it part of
how we decide what to buy and what not to buy.

If we continue to trust more and more areas of society to
the supposed power of individual consumer choice, there is no guarantee that we
will end up in a good place. The success of brand-name companies is no evidence
of popularity. There continues to be a need for people to band together. Such
efforts can have an effect, as CAMRA has done, and make us collectively
smarter.

There is an interesting dynamic to the  battle over the next-generation of DVDs. In one corner there is Microsoft, Toshiba, Intel and some others supporting the HD-DVD format. In the other is Sony and most of the Hollywood studios, supporting Blu-ray.

It is clearly in the interests of all the companies to agree on one standard.

"The damage the industry does to itself by not
choosing a format is enormous," said Brad Anderson, vice chairman and
chief executive officer of Best Buy, one of the largest U.S. consumer
electronics and appliances retail chains. "Two incompatible formats is
as much a nightmare as you can make for consumers," he added.

And yet they can’t.

"There’s no question that a format war is not a
good idea but I don’t see what we can do about it except push on and
convince everybody that a revolutionary high-definition disc (Blu-ray)
is better than an evolutionary high-definition disc (HD-DVD)," [a Sony spokesperson] said
during a news conference at the Consumer Electronics Show in Las Vegas.

Ted Schadler of Forrester Research says that for whoever wins it is a pyrrhic victory "Eventually they both lose." The two sides are stuck in a prisoner’s dilemma, where giving way is the worst outcome, so they may end up with a merely kind-of-bad outcome instead.

Usually this is the kind of thing that is good for customers, because competition among companies, after all, is a good thing. But in this case it is not so clear that competition is a good thing, because the other side of the story is one of increasing returns. There is a lot to be gained for consumers in having a single standard. We’d rather all keyboards use QWERTY than have a superflous choice of keyboard layouts, and the same goes for DVD formats. Who wants to buy both HD-DVD and Blu-ray to play high-definition movies and next-generation games? In the absence of a clear standard, it is quite possible that consumers will just stay away in droves.

That could be very bad for the DVD-makers because, as Bill Gates said in an interview with the Daily Princetonian
college newspaper last year "this
is the last physical format there will ever be. Everything’s going to
be streamed directly or on a hard disk."

So what is good for consumers here? Probably an agree-upon standard and competition of other features based on that standard. In the format area at least, competition is not a good thing, but it is not clear that Microsoft, Sony and the rest can find a way out of their dilemma.

Link: Fight between Blu-ray, HD-DVD bad for everyone | InfoWorld | News | 2006-01-09 | By Dan Nystedt and Martyn Williams, IDG News Service.

Link: Guardian Unlimited Technology | Technology | Two tribes go to war.

I’d just like to say that Mark Steyn’s article The war on terror is the real women’s issue in Maclean’s is the worst piece of crap I’ve read in a long time. I think every single line has something wrong with it – a gratuitous insult, a twisted argument, a non sequitur, or just something plain stupid.

I guess it’s one way to get attention, but it is adolescent through and through.

Thanks to This Mag for raising my blood pressure.

Russell Smith in The Globe and Mail writes about California’s new law in California puts lens rangers on notice. Here’s what the new law says

The statute forbids two types of invasion of private space: one literal, one virtual. It makes it an offence to take pictures or sound recordings of anyone "engaging in a personal or familial activity and the physical invasion occurs in a manner that is offensive to a reasonable person," and it also forbids doing so to a person "engaging in a personal or familial activity under circumstances in which the plaintiff had a reasonable expectation of privacy, through the use of a visual or auditory enhancing device, regardless of whether there is a physical trespass."

In other words, not only is standing in the subject’s way or pushing your camera into her car window unacceptable, but so is using a zoom lens 50 metres away from her bedroom.

Smith notes that "U.S. public reaction to the law is overwhelmingly positive" and is sympathetic himself. But he has reservations…

And yet, and yet . . . the people who are thrilled to see their icons protected from the scum are exactly the same people who gobble up the tabloids. They must be; the numbers don’t lie. The only way a magazine can offer $400,000 (U.S.) for the first photo of Madonna’s baby is to have millions of eager readers.

Those readers — that type of reader — seem to form the bulk of the American population right now. It’s the same population that elects Hollywood celebrities to positions in government, the same population that has grown to know or think it knows Lindsay Lohan through her pictures in magazines, and feels sympathy for her when she is assaulted or threatened or humiliated.

It’s a bit like being an animal-lover and eating chicken: We’re not opposed to consuming the final product, we just don’t want to know how it’s produced.

Smith is right, but it reads like he thinks there is a contradiction here and there is none (see previous post for another example). There are two separate choices – one is whether to read the Enquirer (given that it is available) and the other is whether to approve of its methods. Given most people can only actually act on one of the choices — whether to read the Enquirer — it is hardly surprising that the market reflects that preference but not the other.  That’s why the whole idea that the market responds to our preferences is a half-truth at best — it can only respond to a few of those preferences: those that can be expressed by an exchange of money.

Not that I read the tabloids of course. I’ve just heard about them, that’s all.