One-Half Cheer for a Weaker Dollar

I spent two days last week in Oslo, Norway, for a conference and naturally wanted to sample one of the country’s fine beers. My pint of Ringes was served cold at Lorry’s, a popular and slightly low-brow pub near the Royal Palace. I nursed it slowly because it cost 61 kronor, which converts to slightly more than $10.

It seems I’m not the only American traveling abroad these days who has found that our once mighty dollars do not go as far as they used to. As this morning’s Investor’s Business Daily reports:

The dollar last week sank to a 26-year low against the British pound and is nearing record lows vs. the euro. Even the lowly Japanese yen has gained some ground against the greenback. 

Analysts say the dollar’s fall is the result of a cyclical shift in the global economy: Growth and interest rates in Europe and Asia are outpacing those in America, drawing capital away from U.S. stocks, bonds and other assets.

Most politicians and many economists believe that a weaker dollar is just what the U.S. economy needs. A depreciated dollar means U.S. exports are more affordable abroad and imports more expensive at home, promoting sales and profits for U.S. exporters and putting downward pressure on the trade deficit. 

Count me on the side of Milton Friedman in believing that exchange rates should float freely without government interference. But excuse me if I can’t work up much enthusiasm for the depreciating dollar. And it isn’t just because I want to pay less for a beer in Oslo.  

A weaker currency cuts like a double-edged sword in our domestic economy. On the downside, it raises prices for millions of American families that buy imported clothing, shoes, food, and consumer electronics.  It raises input costs for U.S. businesses. It puts upward pressure on the price of oil, which is universally quoted in dollars.  In fact, I counted the many ways in which we will all pay for a weaker dollar in an op-ed a few months ago. (Don’t be fooled by the headline written by a distracted copy editor!) 

So pardon me if I don’t lift a hearty toast to the weaker dollar.

Against Software Patents

Over at the American, I’ve got an article on what I regard as one of the biggest threats to the long-term vitality of the software industry: the patentability of software. Last year, we saw a company with no products of its own extort $612 million from Research in Motion, makers of the wildly popular BlackBerry mobile devices. Last month, Vonage, a company that pioneered Internet telephony, was ordered to pay $58 million to Verizon and enjoined from signing up new customers. Vonage is appearing in court today to appeal the decision. Given that Vonage has yet to turn a profit, if the injunction is upheld it’s likely to be a death sentence for the company.

The really frustrating thing about both cases—and numerous other software patent cases in recent years—is that there was no allegation that the defendants’ products were in any way based on the plaintiffs’ technologies. It’s universally agreed that RIM and Vonage developed their technologies independently. Rather, the problem is that the patents in question cover extremely broad concepts: essentially “wireless email” in NTP’s case, and “translating between Internet addresses and phone numbers” in Verizon’s. It’s simply impossible to develop a mobile device that doesn’t check email wirelessly, or an Internet telephony application that doesn’t translate between IP addresses and phone numbers.

It seems to me that these sorts of problems are almost inevitable when you allow patents on software, because software is built out of a very large number of modular components. (A typical software product might have 100,000 lines of code, and just a handful of lines of code could conceivably be considered an “invention”) If you allow a significant number of those components to be patented, it becomes prohibitively expensive for software companies to even find, much less license, all of the patents that might be relevant to their particular software. And indeed, most software companies don’t even try. Many deliberately avoid doing patent searches, because “willful” infringement can carry heightened penalties.

Software patents are a relatively new judicial innovation, and one that has never been explicitly ratified by the Supreme Court. Traditionally, the Supreme Court has held that software is essentially the description of a mathematical algorithm, and that mathematical algorithms are not eligible for patent protection. The Supreme Court opened the door to software patents a crack in 1981 when it held that a machine for curing rubber was not rendered ineligible for patent protection merely because one component of the machine was implemented through software. However, it emphasized that software per se is not eligible for patent protection.

The Court of Appeals for the Federal Circuit, which was created by Congress in 1982 and given jurisdiction over patent appeals, turned this principle on its head. In 1998, they ruled that a software patent merely had to produce “a useful, concrete and tangible result” to avoid the prohibition on patenting mathematical algorithms. Because no one would bother to patent software that didn’t produce a useful result, this effectively gave the patent office carte blanche to approve software patents.

And approve them they have. The patent office set a new record last year by issuing about 40,000 software patents. That represents hundreds of millions of dollars of patent lawyers’ and software engineers’ time that could otherwise have been spent producing useful software rather than filing for patents about it.

Luckily, the Supreme Court has an opportunity to bring this madness to an end in the case of Microsoft v. AT&T. Although the case is primarily about whether companies can be liable for copies of their software that is distributed overseas, the Software Freedom Law Center has filed an amicus brief urging the court to rule that software companies are not liable for overseas software distribution because software isn’t patentable in the first place. I think this argument is a bit of a long shot, since most of the briefs in the case did not focus on the patentability of software, however several justices in oral argument did specifically ask about the question, and the decison could open the door to a subsequent case directly addressing the question.

Since the Middle East Is Under Control, Let’s Rattle Russia’s Cage

Fred Kaplan has a sharp piece on Slate on the recent push to deploy a missile defense system in the Czech Republic and Poland, and the inevitable Russian fits over same.

The only thing I’d add to the Kaplan piece is to observe the ongoing and remarkable refusal on the part of the administration to accept the concept of tradeoffs in its foreign policy. We would like it very much if the Russians would become more amenable to adopting a US-friendly approach on Iran in the Security Council. Fine. But to expect them to do so while we steamroll their interests in Central and Eastern Europe is more than a bit naive.

Getting It Wrong (Again) on Social Security

Yesterday, the Social Security Trustees released their annual report on the programs finances and much of the national news media thought they saw good news. “Extra Year Expected for Retirement Funds,” was a typical headline, with nearly all the media reports focusing on the Trustees’ projection that the Social Security Trust Fund would be exhausted in 2041, a year later than was projected last year.

But, of course, that date is meaningless. The Trust Fund is not a pile of money that can be used to pay Social Security benefits. It is simply an accounting measure of how much money the system owes, a collection of IOUs. No one explained it better than the Clinton administration in its 2000 budget message.

These Trust Fund balances are available to finance future benefit payments…but only in a bookkeeping sense….They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. The existence of large Trust Fund balances, therefore, does not by itself have any impact on the government’s ability to pay benefits.

The important date in the Trustees’ Report is 2017, just 10 years from now. That is when Social Security will begin running a deficit. At that point, Social Security will have to begin redeeming the special issue bonds held by the Trust Fund. Since the federal government has no extra money with which to redeem these bonds (note our ongoing budget deficit), it will have to raise taxes, borrow more, or cut other government spending.

Moreover, the failure to reform Social Security has allowed the program’s financial problems to get worse. The system’s total unfunded liabilities are now $15.6 trillion (in discounted present value terms). That’s $100 billion worse than last year, despite $600 billion in savings from changes in technical assumptions.  And, of course, workers still have no legal, contractual, or property rights to their benefits.

That doesn’t sound much like good news to me.

If Inequality Is Okay, Let’s Redistribute Anyway

In an outstanding post, Alex Tabarrok explains how the changing economic and technological conditions that helped Harry Potter creator J.K. Rowling become a billionaire lead to inequality without apparent injustice.

Matthew Yglesias’s reply puzzled me:

Insofar as this is a large part of the inequality story, it does tend to undercut highly moralized objections to the right [to be] so darn rich. Rowling isn’t doing anything wrong to get so rich. But on the other hand, insofar as this story is right, it also seems to me that the primary pragmatic worries one might have about pro-equality measures likewise tend to melt away. If the very best in a range of fields are just bound to reap enormous windfall earnings under current technological conditions then it seems unlikely that tax measures aimed at limiting the size of those windfalls would significantly deter anyone from doing their work. One doubts Rowling set about down this path because she thought it stood any reasonable chance of making her a billionaire.

I am confused. If Alex’s account “tends to undercut” the moralized objection to wealth inequality generated by superstar effects, then it also tends to undercut a large part of the motivation for wealth-equalizing confiscation and redistribution, namely, so-called “distributive justice.” Despite his misguided insistence in referring to a sum created by millions of voluntary acts of exchange as a “windfall,” Matt has, it seems, conceded that Rowling’s riches have been justly earned–that the process by which all this money got “distributed” to her is fair. So there is no question of exploitation, injustice, cause for redress, etc. Nevertheless, Matt would like us to know that should political elites decide to confiscate a good portion of Rowling’s fortune anyway, despite the fact that she owns it justly, this policy may not actually be self-undermining in the long run. But then, what is the point of this kind of “pro-equality” redistribution once it is agreed that there was no moral objection to the prior distribution? I’m sure Matt has something in mind, and I hope he’ll share it.

In any case, regarding the “pragmatic” case for taxing superstars, in The Winner Takes-All Society, Robert Frank and Philip Cook argue that huge payouts for superstars induce inefficient overinvestment in their fields. The point of taxing superstars, on this account, is precisely to limit entry into superstar fields and to channel human capital investment that will otherwise be wasted in the largely futile attempt to become NBA players or Hollywood screen legends into more socially productive uses. Frank and Cook acknowledge that this may result in a reduced supply of excellence in certain fields, but argue that this loss is more than offset by more mundane economic gains from increased efficiency in the allocation of skills to people. Even if we don’t get the best rock stars, we’ll still have good rock stars, and we’ll have fewer people wasting productive years trying to be rock stars. And lower levels of inequality!

Now, I don’t know about Rowling’s motivations in particular, but Frank and Cook’s argument – the most sophisticated case I’m aware of for raising taxing on superstars – seems to me to undercut Matt’s general point. If Matt would like to change his argument to “Sure, by sticking it to big-money authors we might not have gotten Harry Potter, but we would have gotten offsetting returns from increased output among schoolteachers and lawyers, and a decrease in inequality,” then I’ll be happy to argue against that instead. As it stands, his current argument seems wrong both as a matter of morality and a matter of pragmatism.           

Free Market Has Lifted Millions Out of Poverty

Free market incentives are spectacularly changing lives over much of the world. In the last 25 years, hundreds of millions of people—400 million in China alone—have climbed out of the dire poverty of living on less than $1 per day. It is the largest movement out of poverty in human history. At 10 p.m. EST on Tuesday, April 24, HDNet will be premiering the documentary The Ultimate Resource, which tells the story of what can happen when ordinary people around the world are given the tools to help themselves. Cato senior fellow Johan Norberg, James Tooley, the author of several Cato policy papers, and noted scholars Muhammad Yunus and Hernando de Soto, are featured in the production.

The Chinese Defense Budget: Myths and Reality

About a month ago, I noticed that Heritage Senior Research Fellow John J. Tkacik, Jr. had argued that China’s defense spending equaled $450 billion, closing in on the U.S. defense spending figure. I thought this was bizarre, but didn’t devote a lot of time to figuring out how Mr. Tkacik had come up with such a figure.

But now I see that Heritage president Ed Feulner has taken to the pages of the Chicago Sun-Times to advance Mr. Tkacik’s claim, so it may merit some debunking at this point.

The claim that China’s defense budget amounts to “about what America spends” is absurd. Dr. Feulner is using a macroeconomic tool that gives a completely erroneous assessment of Chinese military spending.

Purchasing power parity is useful as a heuristic for comparing the overall economies of nations, because it accounts for the fact that one dollar—in U.S. currency—buys a different amount of a fixed basket of goods in one country than in another. Think of attempting to buy, say, one dollar’s worth of rice in the United States and one dollar’s worth in China. One could get more rice for a dollar in China, and PPP is a useful way of observing that fact.

However, as the highly respected International Institute for Strategic Studies warns, PPP’s “use for the purpose of [defense] calculations should be treated with caution.” Dr. Feulner does not heed this warning. He starts by taking the highest available estimate of Chinese defense spending—which is too high to begin with—and then blankets the total figure with the PPP conversion rate, yielding a figure of $450 billion. This ignores the fact that much of Chinese spending is dedicated to foreign military hardware—such as Russian airplanes—and other assets to which PPP should not be applied. Accordingly, IISS has begun, this year, applying PPP only to the personnel and other relevant costs of the Chinese military, since the comparison of “one dollar’s worth of soldier” applies relatively better.

Another problem with the argument that China’s military budget is as large as America’s is the question “Where’s All the Stuff?” If China is spending as much on its military as is the United States, where are the aircraft carriers? (America has 12, China 0.) Where are the many fleets of long-range bombers? What about our thousands of nuclear weapons compared to China’s couple hundred? If Dr. Feulner’s estimate held, the Chinese are being reassuringly wasteful with their money.

The attempt on the part of Mr. Tkacik and Dr. Feulner to inject a figure of $450 billion into the debate over Chinese defense spending does a profound disservice to a rational discussion of U.S. China policy. It is a stunning claim that threatens to create a seriously misleading picture of the People’s Liberation Army.