Archives: 05/2012

Federal Agencies Out of Control: Quick Roundup

Today, a Washington Post editorial asks whether the Environment Protection Agency is out of control because one of its officials spoke of  “crucifying” businesspeople who may run afoul of that agency’s regulations.  The short answer is Yes, it is out of control.  Go here for the longer answer.

The Drug Enforcement Agency is also out of control.  Daniel Chong was left in a holding cell for days without food, water, or a toilet.  Agents forgot about him.  Poor Chong attempted suicide because he was so distressed.

Meanwhile the Secret Service is under scrutiny for the security detail that was partying with prostitutes in advance of President Obama’s trip to South America.  The agents involved say they are puzzled by the spotlight since their supervisors were aware of similar conduct in the past and it was no big deal.

Obama Labor Department Won’t Ban Kids’ Farm Chores

Farm families, along with the cause of liberty, won an important battle last week when the Obama administration scrapped plans to prohibit kids from doing a wide range of jobs in agriculture, even on farms belonging to their own family members. The rules would have barred youngsters under 16 from working with animals, storage bins, power-driven equipment, and various other things found on farms; perhaps most significant, they took an exceedingly narrow view of the so-called parental exemption provided by the law, so that (in the rules as proposed last year) kids would have been forbidden to work on an uncle or grandparent’s farm, or any farm less than “wholly” owned by their own parents. The Department of Labor was inundated by upwards of 10,000 comments, overwhelmingly negative, from farmers and ranchers; playing out in press outlets like the Custer County, Neb. Chief, the controversy was mostly ignored by the Eastern press, though NPR did do a report in December.

Commentator Ira Stoll has connected the dots about the Obama administration’s tendency to press ahead on extreme regulatory measures, then back off after a public outcry builds:

Examples include the mandatory automobile back-up camera rule, the ban of all cellphone use, even hands-free, while driving, the ban on 100 watt incandescent light bulbs, the NLRB’s action preventing Boeing from opening a factory in South Carolina, a right-to-work state, and the IRS’s cumbersome Form 1099 requirement as part of Obamacare.

Last fall I noted the same pattern, including retreats on EPA standards on dust, smog, and cross-state air pollution, and a misbegotten rule on lead abatement that could have made it prohibitively expensive to rehabilitate older homes. As I said at the time:

This, then, seems to be the new Obama administration compromise position …: they’ll hold off for now on saddling the economy with at least some potentially ruinous regulations – but they’ll make sure you know they’re not happy about having to take that stand.

More on the Obama administration and regulation here.

Medicare Fraud Posse Cackles as If They Laid an Asteroid

What the media blare:

Levinson Snags $515 Million in Health Care Fraud

More than 100 Charged in Massive Medicare Fraud Busts in 7 Cities in Scams Totaling $452 Mil

What I hear:

Drip … … … . drip … … … … .

Why? As the latter article notes, “authorities have targeted fraud that’s believed to cost the government between $60 billion and $90 billion each year.” So add up those two figures, which include frauds that occurred in multiple years, and you get somewhere between 1.1 percent and 1.6 percent of the amount that Medicare and Medicaid enable criminals to steal from taxpayers in a single year.

Neither article makes it clear how paltry these anti-fraud efforts are. But at least the former article asks:

So what is it about the government’s health care programs that make them such inviting targets for white collar criminals?

I answer that question here, and in this video:

Alabama Gov. Vows to Veto ObamaCare Exchange

According to WSFA-12 News, Alabama legislators are working on legislation to create an ObamaCare Exchange. But:

Governor Robert Bentley [R] will likely veto the bill.

“This legislation is premature.  The federal government has yet to establish clear guidelines for a health insurance exchange,” said Deputy Communications Director Jeremy King, in a statement to WSFA 12 News.  “Also, the federal government has extended some deadlines for putting an exchange together.  Plus, the U.S. Supreme Court has not yet ruled on the constitutionality of the federal health care law.   If Supreme Court justices strike down the law as the Governor hopes they will, there will be no need for such an exchange.  Either way, there is no need to establish an exchange at this point,” the statement went on to say.

“Doing so without clear guidance from Washington would simply be a guessing game.  Also, there would still be time in the 2013 session to set up an exchange if the law is upheld.  If this legislation is approved in the current session, a veto can be expected.”

Full story and video here.

From the Annals of ObamaCare: ‘Illinois Suspends Insurance Exchange Setup’

Here’s the story from WIUS, the NPR affiliate at the University of Illinois Springfield:

A health exchange is one of the main initial components of the Affordable Care Act.

It’s basically a table of insurance plans people who don’t currently have coverage could choose from once the national health care law hits its stride. If it ever does.

The U.S. Supreme Court heard arguments in March challenging the constitutionality of ObamaCare.

“I’ve suspended the talks on the Illinois insurance exchange until the Supreme Court makes its decision, which we expect in June,” Rep. Frank Mautino (D- Spring Valley), who has been leading Illinois’ talks to set up the exchange, said.

“As the negotiator, it’s very difficult to have … businesses – decide how much they’re willing to pay to run an exchange, when the federal law may go away. So I’ve lost a lot of the strength of negotiation,” he said.

Controversial aspects include who’ll run the exchange, how much power insurance companies will get, and who’ll pay for it.

About 50 organizations, including insurance companies, business groups, and health care advocates had been meeting weekly.

Audio is also available here.

Democrats control the executive and legislative branches of government in Illinois.

Postal Reform: A Telling Survey

First-class mail is the USPS’s most profitable product. Thus, the large – and permanent – drop in first-class mail volume has the USPS facing red ink as far as the eye can see. The U.S. Postal Service’s inspector general recently reported its findings from focus group discussions held with high-volume first-class mailers and mail service providers. The feedback is quite telling:

  • Both mailers and customers are turning to electronic alternatives for the obvious reason that it’s cheaper and more efficient than physical mail. The participants estimated that the per-piece cost of sending transactional mail (e.g., billing statements, invoices, etc) is 45 to 50 cents whereas it costs between “pennies” and 13 cents to send mail electronically. The report notes that “the most senior levels of corporate management have already made decisions to move to electronic means as quickly as possible.”
  • The uncertainty caused by congressional dithering over, and mismanagement of, the USPS has created an incentive for mailers to seek alternatives. Participants noted that the USPS “struggles to respond to business setbacks or market changes in a timely manner the way the private corporations can, in part because of legal, regulatory, and congressional constraints.” The constraints include the USPS not being “able to optimize its retail network, close plants, reduce delivery days, or control pricing, like other businesses.”
  • According to the report, “Postal Inspection Service investigations and compliance have left a ‘bad taste’ in the mouths of a large segment of high-volume mailers.” Call me crazy, but when you’re already losing customers, it’s probably not a good idea to irritate the ones that you have left.
  • On the future of first-class mail, the message is pretty clear: “While the advent of 100 percent electronic communication is not imminent, all focus group participants envisioned a point in the future when the continued use of paper communications, and thus mail, will cease to make economic sense.”

Unfortunately, Congress’s view of the future doesn’t extend beyond the next election. See, for example, the postal “reform” bill recently passed in the Senate that I discussed on Tuesday.

Hulu, Pricing Strategies, and the Costs of Piracy

I’ve written on a couple previous occasions about how our approach to copyright policy is badly distorted by wildly inflated estimates of what online piracy “costs” the U.S. economy. The true figure, as most serious analysts admit, is likely unknowable, but the content industries have discovered that no figure is too ludicrous to be parroted with a straight face by well-meaning politicians. The higher the fabricated number, the easier it becomes to claim that even the most expensive and draconian antipiracy measures, however questionably effective, can pass a cost-benefit test. Some recent news involving the video streaming site Hulu reminds me of yet another reason to be wary of those figures.

According to press reports, free access to Hulu content may soon be limited to users who already subscribe to a traditional cable package.  The incumbent cable companies hope this will entice viewers to buy or maintain more profitable cable subscriptions rather than “cutting the cord” and shifting entirely to online viewing. Some may, of course, but others will predictably turn to piracy: Tech reporter Ryan Singel of Wired joked on Twitter that the Pirate Bay was probably purchasing new servers in response to the announcement.  Regardless of whether Hulu ultimately opts for this approach, there’s a more serious general point to be teased out there, however.

Once digital content is produced, the difference in distribution cost between selling a hundred copies and a million is negligible. That creates enormous flexibility in pricing strategies, ranging from the pay-per-view “premium” content model (high price, small but devoted audience) to the free ad-supported model of broadcast television (much smaller profit per viewer, but made up for by a much larger audience). In practice, movies employ all of the above sequentially—or even simultaneously in different markets or formats. This has various benefits for both consumers and the studios, but also makes it that much more difficult to objectively estimate the “losses” attributable to piracy.

To illustrate, let’s imagine television show that initially streams online for free with advertising, garnering a million viewers per episode and earning $1 per viewer in ad revenues, for a total of $1 million. A small number who really dislike ads, or have connections too slow for streaming, let’s say 5,000, download pirate copies anyway—but the vast majority watch legally. After building an audience and generating some good word of mouth, the accountants suggest that it might be more profitable to stop the free streaming and instead sell ad-free episodes for $4, in hopes that enough dedicated fans will pony up to compensate for the predictable drop in viewership once the program is no longer free to watch. The paying audience does indeed drop to 255,000, which still leaves the company slightly better off for the switch, but 100,000 viewers decide to keep up with the show (at least initially) by downloading pirated copies. A subsequent price hike to $10, however, turns out to be a money loser. Now the show has only 80,000 paying viewers, while 150,000 are engaged in piracy.

Undoubtedly that piracy is costing the show’s producers something: If piracy were impossible, some unknown fraction of those who download illegally would be willing to pay the asking price. But just crudely using the actual market price at each stage—even if modified by some constant “displacement rate” to acknowledge that not every illicit download represents a lost sale at that price—yields some perverse results. As the pricing strategy for the show changes, the “cost” of piracy rises from $5,000 to $400,000 (even as revenue rises) to $1.5 million (while revenues drop by $20,000). Obviously, something is wrong here.

It’s no great mystery what: The problem is that the rate of piracy, the price of a digital good, and the “displacement rate” (the percentage of the pirates who’d buy at that price in a world of perfect copyright enforcement) are not independent variables. And, of course, the interdependency runs both ways: Pricing decisions are influenced by the knowledge that we don’t live in a world of perfect enforcement, and you can tell plausible stories according to which this might keep prices higher or lower than they’d be under perfect enforcement, depending on your assumptions about the conditions under which a particular audience will substitute the pirate for the legal good.  

This does not, of course, mean that content producers are somehow at fault when piracy increases after they raise prices (either directly or, as in the Hulu case, indirectly, by tacking on the cost of a cable subscription). They’re at liberty to charge what the please. But it does mean we’ve got to exercise a bit of critical scrutiny when deciding whether the “costs” of piracy justify the “costs” of enforcement.

Returning to our imaginary program, suppose that under perfect enforcement—a zero piracy world—there would be 110,000 paying viewers at $10 per episode, netting the creators an additional $80,000 over what they’d make with their revenue maximizing strategy ($4 per episode) in the world of imperfect enforcement. That’s great for them, if not for consumers, but we haven’t factored in the costs of enforcement. Some of these are likely to be borne by the creators themselves—hiring lawyers to hunt down pirate copies circulating online and the like—but in practice they’re often shifted to taxpayers, in the form of direct enforcement expenditures, or to other parts of the economy, in the form of DMCA compliance costs or innovative services that are deterred entirely. It’s possible that, in this hypothetical scenario, the revenue maximizing strategy for the producers is to charge $10 while externalizing the costs of perfect enforcement, but the socially efficient outcome is to accept imperfect enforcement and let the producers revenue maximize against that background at a $4 price point. 

Obviously, these particular numbers shouldn’t be taken too seriously—I pulled them out of a hat for the purposes of illustration—and I could’ve told an alternative story where perfect enforcement induces the producers to maximize revenue by lowering prices to lure in the highly price sensitive ex-pirates. In that case, you’d have to count the benefit to the producers and to the legal consumers who now enjoy lower prices in assessing whether the enforcement was worth the cost. It’s an empirical question which story would more often match the facts.

The point here is not to argue for more copyright enforcement or less. It’s that we can’t say anything meaningful about the net social costs of piracy—and the costs we should incur to reduce it—without taking into account the fact that those “costs” depend on pricing strategies chosen in partial response to piracy. Probably that’s not possible in practice—but the impracticality of generating a realistic estimate is no reason to take our existing unrealistic estimates seriously.