Kindlenomics

Amazon is trying to reset the price point of eBooks to $9.99--much like Apple did at $.99 for songs. Though Slate bizarrely thinks that ebooks somehow violate the laws of demand, it's easy to see why--Amazon can drive up volume at the lower price, which has two effects:

1) Convince more people to buy a Kindle on the margin, so you increase the number of eBook customers

2) Amazon gets a bigger piece of the eBook market, which they can maintain over time through network effects (you can read Amazon's ebooks anywhere in the cloud, but their books don't play well with other books, and you don't get any DRM rights).

The publishers are stonewalling this move, and so Amazon loses money on most eBooks it sells. With the iBook market starting out at $15, they now have another excuse to avoid passing on savings to customers.

The odd thing here is that this must be the only market in which competition is raising prices. If Amazon didn't have the clout it did in online retail, it would probably be forced to go along with Apple and the publishers at the higher price point as well. As it is, you can expect the average eBook to cost more now that Apple is in the market.

Update: Looks like Amazon has caved in. Apple has taken on a monopoly, and consumers are worse off. It really can't be emphasized enough how much publishers are hurting their readers here. Fortunately, eBooks are going to destroy their gateway status and their industry will (some day) collapse.

Apple v. Amazon

Fights between big name tech giants is always entertaining, much like fights between late-night talk show hosts. In some sense, Apple's new iPad is a direct shot at Amazon's Kindle. It's cheapest version isn't much more expensive than Amazon's most expensive model and does much more beyond books.

But really, the two are playing different games. Apple is really setting up its book store, magazine tie-ins, and exclusive app environment to make purchasing its device more attractive. Amazon has a Kindle app for the iPhone that works on the iPad. The Kindle was a great way to create the eBook market, but ultimately Amazon doesn't care what device you use to read their books. Apple's about the hardware; Amazon does retail.

But if there's anything Apple has shown us these past several years; it's that hardware is where the money is. Apple's iTunes didn't make much money, but was a great boost for iPod sales. The world of digital retail is fiercely competitive, and prices trend towards cost--which is to say zero. The world of consumer electronics has brands and margins.

But whatever tough times Amazon faces in the future, the newspapers are far worse off. They've pinned whatever last hopes they have to this device. But what percent of people will actually buy one, and what percent of them will pony up for a brand new subscription to the NYT? This is mass delusion. If they really want to save their business, they need to destroy privacy, collect data, and put up targeted ads. Whatever they think, advertising--not subscription--has always driven the newspaper industry (newspaper subscriptions in the past just covered the cost of paper and printing); all the internet has done is shown how horribly inefficient advertising is.

Discretionary Spending Freezes

The discussion about Obama's spending freeze has been fairly negative. The freeze excludes defense spending and entitlements--the bulk of the budget--and comes into effect even as the economy will still be hurting.

Still, it's worth pointing out that this idea would have been great to have about nine years ago. The graph to the left shows how non-defense discretionary spending--so excluding Homeland Defense, Veterans Affairs, and war spending--grew by 60 percent between 2000 and 2008. Despite Bush's reputation as a ruthless slash-and-burn conservative, (discretionary, non-defense) government spending exploded under his watch. The states, too, went on a binge--Mitch Daniels estimates that state spending rose by 6 percent annually in the past decade.

Both of these trends are unsustainable. It's not clear what exactly state and federal governments are doing that require their spending to rise faster than people's earnings.

So all else considered, I can't say this sort of cap is a bad idea. It would be even nicer still if we treated defense and entitlements as "real" spending too, but one can't have everything.

Schumer-Hatch on Jobs

Surprisingly, Chuck Shumer (and Hatch!) are showing more initiative than the White House in creating jobs:

Here’s the idea: Starting immediately after enactment, any private-sector employer that hires a worker who had been unemployed for at least 60 days will not have to pay its 6.2 percent Social Security payroll tax on that employee for the duration of 2010. The Social Security trust fund will then be made whole with spending cuts elsewhere in the budget between now and 2015. That’s it. Simple to understand, and easy to explain.

The beauty of this proposal goes beyond its simplicity. Unlike a jobs tax credit of a specific dollar amount, this credit is “front-loaded” in that it provides an incentive for businesses to hire workers earlier in the year — because the tax benefit will be greater. A $60,000 worker hired on Feb. 1 will save a business about $3,400 in taxes, while that same worker hired on May 1 will save it about $2,500.

While this would have been more welcome a couple of years ago, this is welcome now.

There's a strain of thought out there that Republicans are being needlessly partisan in refusing to endorse any major Democrat initiative. Setting aside the issue of whether the Senate should operate on a supermajority or not, Hatch's support on this suggests that Republican votes are available for conservative legislation.

When Numbers Fail

I'm about as pro-numbers as you can get, but even I have to draw the line when and where math fails to solve problems. Healthcare is good example. A lot of the rhetoric coming from White House economists--Orzsag in particular--emphasizes how various methods of technocratic control like comparative effectiveness research can dramatically cut costs without any impact on care. The idea is that government scientists trained in fancy new behavioral methods can figure out "what works" and what doesn't. American healthcare is so expensive because we do too much of the stuff that doesn't work, relative to Europe.

My suspicion is that instead of clear walls between things which "work" and don't, things are more complicated and difficult for the government to figure out. There's a great piece in the New York Review of Books which details how comparative effectiveness studies don't have a great history, partly due to biases of the investigators themselves:

With other experts, I performed a "meta-analysis," i.e., a study bringing together data from multiple clinical trials. We concluded that erythropoietin significantly improved the health of cancer patients and we recommended it to them as their default option. But our analysis and guidelines were wrong. The benefits ultimately were shown to be minor and the risks of treatment sometimes severe, including stroke and heart attack.^[4]

After this failure, I came to realize that I had suffered from a "Pygmalion complex." I had fallen in love with my own work and analytical skills. In behavioral economics, this is called "overconfidence bias," by which we overestimate our ability to analyze information, make accurate estimates, and project outcomes. Experts become intoxicated with their past success and fail to be sufficiently self-critical.

It closes with:

The care of patients is complex, and choices about treatments involve difficult tradeoffs. That the uncertainties can be erased by mandates from experts is a misconceived panacea, a "focusing illusion."

Well worth reading. The departures from a perfect world of rational economic agents are real; but they don't have unambiguous lessons for the optimal balance between markets and government.

Federalize Healthcare?

In light of the possible failure to build healthcare reform at the national level, there are growing pressures to federalize healthcare and turn it into a States issue. This is something Scott Brown is behind as well--he supported Romney's universal healthcare proposal while opposing the (similar) national healthcare plan. But Ezra Klein disagrees:

Size matters. Just as Wal-Mart lowers prices by using their size to demand savings, in other countries, governments wield their massive size and market share to bargain down the costs of health care. America doesn't. It's very simple, and very well understood...

So on average, we overpay by 60 to 70 percent for pharmaceuticals, largely because we, unlike every other country, don't bargain down the costs. We're in fact subsidizing their discounts, as the pharmaceutical companies can raise our prices to lower theirs. In a nationalized system, that would change. In a system with 50 states all on their own, it wouldn't

Well, look at those European countries which have better healthcare due to "scale" issues. Switzerland has fewer than eight million residents. Denmark has fewer than six million. Yet both countries, along with even smaller European countries, manage cheap and well run healthcare systems. The Swiss system is even more free-market than the one America has.

America of course fails to use its scale in curbing health costs, in large part due to regulatory capture. Ezra has no solution to this problem. But moving healthcare into the responsibility of European-sized American states might just induce them to figure out European-style solutions. More importantly, it allows different states to figure out whatever basket of public and private provision best suits their needs.

Yet I'm increasingly worried that this whole healthcare debate has gone nowhere chasing the chimera of "inefficient spending" on healthcare. Yes, Europe spends less on healthcare. But Europe spends less on everything. It spends less on education, and gets better results. Should we revamp our education system along European lines because we are so certain that 20% of health spending is wasted?

Mankiw had a great link up on Baumol's cost disease. The idea is that greater income induces greater spending in sectors which don't benefit from greater efficiency--mainly those which are human-intensive. Like healthcare. In this view, it's no surprise that America spends 30% more or whatever on healthcare--America is 30% richer than everyone else.

This overstates the issue a bit. People tend to over-consume healthcare because they don't pay for it and aren't aware of the costs, which are immediately born by tax-free insurance premiums and government programs, but which ultimately result in lower wages. But the health plan under consideration doesn't really target this issue, except for the (now, all but scuttled) tax on Cadillac insurance plans. Whatever cuts are present would have been needed anyway to stave off looming deficits--now we'll have to figure out how to cut even more "fat" from health spending on a larger base of Welfare State entitlees.

The Real Winner Today was Romney

Virginia, New Jersey, and now Massachusetts. Romney's been a key reason Republicans won all three of these. I'd say he's odds on favorite to win the Republican nomination in 2012; and the Presidency depending almost entirely on how the economy does.

Europe v America

It's a new decade, and time for another wave of Europe v. America comparisons. I have a few points:

It's often mentioned that Europeans work less than Americans, so of course they are poorer. This is important, but there is also a tradeoff between domestic work and office work. In Germany, to take one example, people actually work as much as Americans when domestic and office work are taken together. Labor market rigidities, on top of their effects on youth unemployment, act as barriers to female employment and encourage greater housework. It's not obvious that Europe is "better" in this regard.

One often hears from Yglesias and company, by way of innuendo and suggestion, that Europe is poorer but due to lower inequality provides a better deal for the poorest. But if one thinks of income distributions as bell curves, America's higher mean basically cancels out its higher variance. In real terms, the bottom 10% of the population in both America and Northern European countries earn comparable amounts. They may receive a bit more in government services in Europe, but they also pay more in taxes there due to regressive taxation. I don't have figures for the rest of the income distribution, but mathematically one suspects that everyone else is better off in America. Which is to say: even the Nodic model of Social Democracy (which, due to its free labor markets and welcoming business climate, is much better off than the Continent) does not unambiguously provide a better standard of living for people at any range of the income distribution.

Swedish-Americans earn more than Swedes; German-Americans more than Germans; and so on and so forth. This is about as clear a test as one can get on the effects of national institutions on individual outcomes, and America destroys the competition.