Category Domestic Policy

Cell Phone Unlocking Doesn’t Stifle Innovation

Danny Vinik Leave a comment

Michael Moroney is out with a confusing piece in Roll Call today arguing against allowing consumers to unlock their cell phones and use them on other plans. Earlier this year, the White House sided with a grassroots petition that received more than 114,000 signatures to allow cell phone unlocking. A current bill in Congress proposes to do just that but for the moment, it is still illegal. In his column today, Moroney argues that such regulation allows tech companies to recoup the huge amounts of money they spend towards R&D to create such products:

The DMCA is supposed to prevent digital piracy by making it illegal to disable digital rights management software, and it applies to the device locks that carriers put on cellphones — primarily to prevent phones they sell from being used on other carrier networks. When tech companies spend billions of dollars on research and development, they have to recoup those costs and make a profit to stay on the cutting edge of innovation.

Moroney continues on to note that the exclusivity agreement Apple had with AT&T allowed Steve Jobs’s firm to recoup their investment while AT&T had the ability to sell its customers high-cost data plans. Did Apple really need the exclusivity deal with AT&T to profit off the iPhone? Of course not! It makes a huge profit margin on the product alone. Moroney’s basic argument is that without the ability to agree to such deals, Apple would have had no incentive to invent the iPhone and consumers would be worse off today.

Does anyone actually believe that?

All that exclusivity deal did was force consumers to pay higher data fees, part of which AT&T paid to Apple in the form of subsidies as part of the agreement. Consumers are the main losers. In a world where cell phone unlocking is legal, consumers can shop around for the best data plan and carriers must compete on price. Apple earns less without the exclusivity deal, but it still makes a tidy profit that encourages them to continue investing in new products. Consumers save a bit of money overall and no innovation is lost. This is how intellectual property laws are supposed to function.

Instead, our copyright laws protect the profits of Apple and AT&T at the expense of consumers. The companies’ desire to keep cell phone unlocking illegal is pure rent-seeking. Moroney’s article only helps them get away with it.

A Terrorist Attack from a Plane is More Likely than One from a Bus

Danny Vinik 1 Comment

Matt Yglesias has a good post up on his blog arguing that intelligence agencies should be required to perform cost-benefit analyses of potential security policies before implementing them. Josh Barro wrote a similar column yesterday. Within Yglesias’s post, he notes that buses have no security yet terrorists do not routinely blow them up:

As I’m going to be boarding a flight to Brussels soon, I’ve just had the opportunity to reaquaint myself with the banal aspects of the post-9/11 national security state—liquids out of your bags, full-body scans, etc. The purpose, as ever, is security. After all, if airplanes were no more secure than city buses then we’d see terrorists blowing up airplanes about as often as they blow up city buses.

At any rate, that’s my view. Approximately zero lives per year are saved by airport security measures. Some amount of economic cost is directly inflicted, and then there’s a secondary cost as people substitute dangerous driving for safe flying.

While I wholeheartedly agree that the Department of Transportation should be required to estimate the costs and benefits of new security policies, I don’t agree with the above analogy. Certain security measures may not be worth their costs, but if we reduced airport security to the levels seen on buses, would-be terrorists would have strong incentives to carry out an attack.

First, an airplane can be used as a weapon in a way a bus can’t. If a terrorist were to hijack a bus and attempt to drive it into a major building, there are a number of ways that law enforcement can stop the attack from succeeding. In many situations, police will find out quickly about such an incident and can respond in kind. They can set-up blockades, shut down parts of the city and track the vehicle easily. On an airplane though, law enforcement have few methods to respond. They cannot simply shoot the plane down and sacrifice the Americans on it. There is no way to set up a blockade.

Second, bus riders can text or phone friends to alert the authorities if the attack is not clear. In the air however, passengers cannot easily communicate with friends and family on the ground. Notifying the authorities of the attack is much more difficult from the sky than from the ground.

Third, a terrorist attack from a plane has the potential to be much more deadly than one on a bus.  At the very least, there are more people on a plane than on a bus. But terrorists can also inflict significantly more damage crashing a plane into a tall building or a secure location than they can running a bus into a similar target. Planes can crash into locations that cars and buses cannot even travel to (for example, the White House). This makes a hijacked plane much more dangerous than a hijacked bus.

Fourth, an attack from the sky is more emotionally damaging than one from the ground. We are unfortunately becoming more used to mass shootings and other threats on the ground. Part of the reason that 9/11 scared Americans so much was that it was the first time that we were attacked from the sky. That’s part of what makes drones so scary for Middle Easterners. You can’t see them and don’t know that they’re there – but they can strike at any moment. Before 9/11, we didn’t think twice about such a threat. Afterwards, we are now all alert and aware that we are not immune. A bus bombing would terrify us, but we can see a bus coming from a distance and can attempt to avoid it if it’s heading right at you. If you are so scarred from such an event, you can avoid buses for the rest of your life. You can’t avoid a plane striking your home or office out of nowhere. You don’t see it coming until it’s too late and there’s no way to fully protect yourself. That fear sticks with you for the rest of your life.

For all those reasons, terrorists have greater incentives to hijack a plane than a bus. That’s why Yglesias’s analogy doesn’t work. Now, there are some TSA policies that almost certainly have costs greater than their benefits (banning pocket knives) and Yglesias is right that we need agencies to conduct cost-benefit analyses more often. With specific estimates of the costs and benefits of a proposed policy, politicians will have more confidence in supporting less security. After all, no politician wants to risk advocating for reduced security and then face voters if a terrorist attack does happen. This biases the entire system towards excessive security. At least with a cost-benefit analysis, Congressmen will have specific statistics to show their constituents for why they voted for such a policy. If that alone can reduce the bias in the system, it’s worth a shot.

CPI Is A Technical Fix, Let’s Keep It That Way

Danny Vinik 1 Comment

President Obama unveiled his budget yesterday and liberal groups have responded angrily to the inclusion of Chained-CPI in the proposal. A quick recap: currently Social Security benefits increase each year to keep pace with inflation according to the Consumer Price Index (CPI). The current calculation for inflation does not take into account that when the price of one product increases, people will switch to a lower-priced substitute instead of paying the higher price. The classic example is that when the price of beef rises, people buy more chicken and less meat, so the actual increase in the cost-of-living is not equal to the rise in the price of meat. Chained-CPI takes this into account. Since Chained-CPI is a low measure of inflation, Social Security benefits will grow at a slower rate. Thus, liberals argue that Chained-CPI is a benefit cut.

However, both CPI and chained-CPI estimate inflation for the average person. But Social Security beneficiaries are not average people. Most of them are elderly and much of their consumption comes in the form of health care and housing. Since health care and housing prices have risen faster than the rest of economy, the cost-of-living for seniors has increased at a quicker rate as well. That means that CPI and Chained-CPI both actually underestimate inflation for Social Security beneficiaries. Their benefits should actually rise quicker than inflation.

Nevertheless, much of the discussion right now centers on the fact that Chained-CPI is a benefit cut. The Washington Post‘s Dylan Matthews outlines everything I’ve said above and more, but finishes his piece by saying:

But ultimately, the question of which you prefer likely has more to do with whether you think Social Security benefits need to be pared back to ensure the program’s long-run solvency, or whether you think the elderly need, if anything, a benefit bump. Those are policy questions, not technical ones, and all the debate in the world about chained CPIs and CPI-Es relative methodological merits won’t resolve them.

Slate’s Matt Yglesias has a slightly better take:

As a technical matter, the best way to express this would be to start with the most accurate possible measurement of the price level (I might prefer the PCE deflator) and then inflate it by a fixed amount. But using a measurement of the price level that slightly overstates inflation works too.

If we want to have real benefits increases slowly each year for beneficiaries, then let’s use Yglesias’s technical fix. But, let’s start by getting the level of inflation right. CPI is not correct. Chained-CPI is also not correct. The closest measure right now may be CPI-E, but it’s still experimental and not ready for use.

In the end, I’m with Kevin Drum: let’s budget a small bit of money to research and develop a precise measure of inflation and then implement it. After that, we can start talking about inflating it by a fixed amount (as Yglesias advocates) or pairing benefits back altogether (as many Republicans advocate). First, though, let’s get it right.