Relevant and even prescient commentary on news, politics and the economy.

While I’m in a Linking Mood

Read this CalPundit piece, where he talks about the lack of WMD discoveries in Iraq. Reasonable people might be tempted to say that it’s a big country and these things take time. Kevin sagely points out that pre-war we said we knew they had WMD, which should imply that we have some idea where they are. In a postscript, he adds

And if anybody says that it used to be around but since September it’s all been moved to Syria, I’m going to scream.

Warm up your voice and get some lozenges. For that matter, I think it’s already been said.

AB

UPDATE: For a list of times and places Bush said that we knew Saddam had WMD, see Uggabugga here (link via Atrios).

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See Digby

He’s got a great post on the merits of General Clark on either position in the 2004 Democratic presidential ticket. Here’s an excerpt, but read the whole thing:

I believe that the best person to make the argument that Democrats are Americans too is someone who defies the phony liberal stereotype manufactured by GOP Inc. I think that many Americans could have their eyes opened to the true patriotism of the Democratic Party if that case were made by someone who spent more than 35 years maintaining American security. If that someone was so excellent that he began this career by graduating first in his class at West Point and ended it as the Supreme Allied Commander of NATO, the Democrats would have the perfect symbol of patriotic leadership as well as someone who has the demonstrated ability to maneuver the political shoals of the Pentagon and Washington without the taint of partisan politics.

I think Digby is roughly 100% correct here.

AB

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Bechtel

So the NYT has a story on Bechtel winning the first major contract for construction in Iraq. Here’s one paragraph, in it’s entirety:

Administration officials said it was important to give contracts to American corporations, essentially leapfrogging over international groups, as a way to demonstrate to the Iraqi people that the United States is a liberator bringing economic prosperity and democratic institutions to their nation.

I hope, but somehow doubt, that this was a poorly executed paraphrase. In Bechtel’s defense, this wasn’t a no bid contract like the now nixed Haliburton deal, but the bidding was open only to US companies.

AB

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Permalinks FUBAR

The permalinks seem to go down a lot, so that if you follow a link here from another site, you don’t go to the right place. The solution seems to be to republish the archives after every post, but that’s a hassle. Anyone have any tips?

AB

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More on Taxes

Matt Yglesias found the NYT article before I did. As he points out, the article basically says that under any model, whether traditional or “dynamically scored”, the result of the Bush Economic plan is bad for the economy.

Conservatives renamed “Creationism” as “Intelligent Design”. What is “Dynamic Scoring”? It’s just the new name for the old supply-side theories. The dynamic part says that in computing the costs and benefits of a tax cut, you have to factor in the dynamic benefits of the stimulative effects that tax cuts will have on the economy (if this sound just like the old supply-side argument, that’s because it is). In the old days, the supply-siders went a step further and said that the stimulative effects would more than compensate for the lost revenue, thereby reducing deficits–an argument popularized by an aptly surnamed economist, Arthur Laffer (scroll down). See this post to see the Laffer idea in action rather than theory.

Well and good, if tax cuts are stimulative (they are), what economist could disagree with factoring in those benefits? Not me. But if you are going to do a dynamic analysis, be sure it’s complete: factor in the depressing effect that expectations of future deficits (and thus expectations of a combination of future tax increases, inflation, and higher real interest rates) have on the economy. To OMB’s credit, the article makes it look like they did factor in both of these factors. Under no model, whether Keynesian or Rational Expectations (the Dynamically Scored ones) did the net effect come out positive.

If a tax cut, perhaps a small and targeted one, could be enacted without creating expectations of future deficits, that would in fact be good for the economy. I vaguely recall someone proposing something along these lines in 2000. But he was wearing earth tones and had robotic mannerisms so nobody listened.

AB

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Lock-In and Number Portability

What’s the big deal with number portability? Firms create ways to lock consumers in to their products all the time–loyalty programs such as frequent flyer miles are a common example. In the case of cell phones there are two or three sources of lock-in. The first is the physical phone itself: not all brands of phones work with all providers, so switching can involve the cost of a new phone. A second form of lock-in some cellular companies use is one-year contracts; under the terms of these contracts, if you cancel your service (e.g., switching to another company) then you owe your cellular provider $150 (Sprint PCS does this). The third, and probably the strongest, form of lock-in is the lack of number portability. This is particularly strong for business users, where the costs of changing a phone number include new cards and more importantly, potentially lost sales. Note that contracts and free phones are a type of lock-in that expires (at the end of the contract or when the phone breaks/gets lost/is too obsolete), but the non-portable number is a permanent lock-in.

At the same time, there are many cellular firms and the industry seems fiercely competitive. Yet once you have signed on with a given company, they have some monopoly-like power over you (even though they lacked such power before you signed on). How does this work out for consumers? In lock-in markets, most of the competition for consumers occurs up-front. Basically, consumers anticipate that once they choose a particular firm it will be costly for them to switch. So if customers end up a bit unhappy with the service and they call, the attitude of the company will be along the lines of What are you gonna do? Switch? I don’t think so. Still, the industry is competitive, meaning that firms enter until the profits are driven down to the level where the firms on average earn a normal rate of return on capital.

If each firm has market power over its customers, what drives the profits down? The firms know and the customers know that post-sale service won’t be great, and there’s not much firms can do to credibly committ to excellent post-sale service because everybody knows their consumers are locked-in. They could try to develop a great reputation, but that is costly and takes time, and the temptation to cut back on service, reduce price cuts (due to falling technology costs), or spend less on infrastructure will always be there, because doing those things won’t lead the firm’s customers to leave in mass, as would occur in industries without lock-in. So in markets like these, all the action centers around getting the customer, not keeping the customer, which is somewhat automatic. So the competition plays out in the form of up-front goodies: X months free or other special introductory price plans, a free or heavily subsidized phone, a bunch of frequent flyer miles, and so on.

So consumers still benefit from competition in markets with lock-in, but it comes in a big payment up front to compensate consumers for anticipate future crappy service. This is at least better than monopoly markets, where you get crappy service and no up-front goodies (think of your local phone company), bot over the long run, competition without lock-in is beter. First note that if lock-in did not exist, you would lose all or most of the up front goodies–why would companies give you something valuable to become a customer today when you can costlessly keep the stuff and switch tomorrow? What would you get in exchange for this? Faster price decreases, better-staffed call centers, probably more cell towers, and most importantly in my opinion, faster innovation.

Why faster innovation? When all the competition is up-front, the firms just match each others’ up-front goodies, adding minor twists. The day-to-day pressure that a major innovation by a rival could steal 50% of your customers in a matter of months just is not there in the same way it is in competitive markets without lock-in. So on balance, when lock-in is reduced, firms are neither helped nor harmed as they earn a normal rate of profit either way–they spend less on bribing consumers with up front benefits but prices are lower and/or service quality is higher. Consumers appear to get about the same benefit–less up front and more over time. But with lock-in, most consumers are unhappy most of the time; they are only happy when they are choosing a provider from scratch. Without lock-in, most consumers are happy most of the time, which seems like a good thing. Add in the fact that the dynamic competitive pressures, while they do exist even with lock-in, are much stronger without lock-in. The result would be faster innovation, so the policy scales are tipped well in favor of local number portability. Everything I’ve seen on the subject says that the costs to the companies are minimal, so there really is no compelling reason not to do it.

AB

P.S. If this is true then why are the firms so opposed? It’s mostly due to management risk-aversion.

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See CalPundit

My last post on the Tax Cuts is getting (for this site) a fair amound of discussion. Kevin Drum uses an inane Weekly Standard piece to frame his discussion of Republicans, taxes, and income inequality. And, Kevin includes a must-see graph that you should print out and keep in your pocket for future discussions with supply-siders and trickle-downers. Here’s another graph you can keep in your other pocket–make sure to write “Clinton” on the graph and draw a line pointing to the green bars (this graph goes more to the “lower taxes equal higher revenue” Laffer-inspired crowd, but these are basically the same people as the supply-siders and trickle-downers):


AB

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More Tax Cuts

Some say that repeatedly doing the same thing while expecting a different outcome each time is the height of folly. Apparently, when it comes to the economy, the administration wants to do just this. If the first tax cut did nothing for the economy, then the solution must be…more tax cuts! And trust me, if there were a day of the year for me to be sympathetic to tax cuts, today is the day.

The CNN story says that Bush claims his tax cut would “create 1.4 million new jobs by the end of 2004″, and quotes him saying “We need tax relief totaling at least $550 billion to make sure our economy grows”. The election will be just in time to either call Bush on this claim, or reward him for his economic prescience. The version of the tax cut wandering around the Senate is for just $350 billion over ten years. All this while the 2004 projected deficit–without any accounting of war costs–is $300 billion.

Note that dividend tax cuts may have long run beneficial effects (see the links at the top of the sidebar), but they are certainly not a prescription for fiscal stimulus. In fact, dividend tax cuts are pro-cyclical. When times are good and corporate profits are high, low dividend taxes effectively put more money in the hands of investors. During a recession, when corporate profits are low, companies pay little or no dividends. So a dividend tax cut does very little to put more money in the hands of consumers qua investors during a recession. For that matter, eliminating the estate tax doesn’t do much to prop up spending during a recession either.

AB

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