Month: August 2003

Today, I happened to see an interview with the CEO of Macrovision. Macrovision is a company that makes the anti-piracy technology you find in DVDs, DVD players, Cable Boxes, Videotapes, and the like. They are the reason you can no longer tape something on Pay Per View to watch later. The CEO cited estimates that the home video industry loses almost $1 Billion each year. He also said that 25% of people responding to their poll said they had tried to copy pre-recorded videos in the last year.

It’s a little harder to copy videotapes and DVDs than it is to copy CDs. A CD can be copied with the tape recorder already in your stereo in as much time as it takes to play the disk, or converted to MP3 tracks on your computer with software you probably already have in even less time. Furthermore, if you own the CD, it is perfectly legal for you to do so. It falls under “fair use.” This has not stopped the music industry from attempting to make such copying impossible. Such attempts have note been well received, and in some cases not very sucessful. The courts have upheld the idea that it is perfectly justified to make a backup of a CD, or a tape for in your car, etc.. Lending this backup temporarily to a friend is a grey area that is unlikely to get you into trouble. Making such tapes for everyone in the neighborhood, or allowing the MP3s you made freely available for download is not, and the RIAA is trying desperately to clamp down on the latter. The movie industry would prefer that the issue of online movie sharing not start. They have the undenyable advantage that, frankly, video data is big. It takes a long time and a big pipe to send a movie over the internet.

All of my discussion thus far has concerned a population called the “casual pirate.” They make copies of things they do not legitimately own for themselves (and maybe some close friends) for personal enjoyment. Maybe because they can’t afford the real thing, or don’t think it’s worth the money; maybe because they can’t find the real thing available legitimately; maybe to complete a collection; in some rare cases, maybe for the challenge of breaking copy protection. All but the last group are effectively thwarted by the most simple of copy protection: make it moderately difficult or complicated, and they move on. Macrovision’s data seems to suggest that half these casual pirates would otherwise rent the videos in question, and almost a third would buy some of them.

Far more dangerous to the software, music, and movie industries is the professional pirate. He makes hundreds or thousands of illegal counterfeit copies and sells them perhaps below retail for a very large profit. This is a very big industry, and it should not shock you that organized crime might be involved. These pirates are not detered by a little bit of copy-protection.

Since circumstances force the movie, music, and software industries to rely on law enforcement personel for the lion’s share of stopping professional pirates, they have no choice but to content themselves with the only small by comparison problem of the casual pirate. This is where Digital Rights Management (DRM) comes into play. The schemes vary wildly in their design and implementation. The bottom line is that the copyright holder wants users to pay for product.

On the surface this is disarmingly fair. Unfortunately, the public has come to expect quality for its entertainment dollar. We are tired of paying $17.98 for an album that turns out to have 2 or 3 good songs and 10 lousy ones. We are tired of spending a lot of money at the movie theatre, when with a little patience we can buy the DVD, watch it on our own sofa, drink our choice of beverage, eat our choice of snack, stop the show to use the bathroom, and we don’t even need to hire a babysitter. We are tired of overhyped films with tired plots, even when the cinematography and special effects are lovely. Fortunately, the movie studios in particular have discovered that there are limits to what audiences will tolerate. They have furthermore discovered that timely, well priced DVDs have kept casual piracy to a minimum.

Want to stop piracy? Really? Give the consumer something quality at a reasonable price.

I had a revelation this morning, as I read about the United States being the only industrialized nation with no legally protected vacation time. Here is where reality smacked me in the face:

“And just last month, before members of the House of Representatives took off on their month-plus vacations, they decided to pile more overtime on working Americans by approving* the White House’s scrapping of 60 years of labor law with a wholesale rewrite of wage and hour regulations, turning anyone who holds a ‘position of responsibility’ into a salaried employee who can be required to work unlimited overtime for no extra pay.”

“Vacations are being downsized by the same forces that brought us soaring work weeks: labor cutbacks, a sense of false urgency created by tech tools, fear and guilt. Managers use the climate of job insecurity to stall, cancel and abbreviate paid leave, while piling on guilt.”

So here you are, the factors that allow some economists to say everything is alright, when anybody who does not live in a box knows there is something very wrong. Combine pointy haired bosses focused on arbitrary short term deadlines, add supervisors focused on making budget figures look good to please executives who are focused on making earnings targets, and liberally sprinkle with congressional rhetoric claiming to help the Working Man while actually helping his employer.

Your boss starts the chain of failure by making you work longer hours, and trying wherever possible to avoid paying you extra for these hours. Congress plans to assist him in that goal by increasing the number of people who can be considered salaried, and allowing “Comp Time.” Don’t be fooled by the lofty talk of how this will help you make doctor’s appointments and teacher conferences. The ability to actually take this time is governed by the same Lumberghian boss who told you at 4:30 on Friday afternoon that he needed you to come in Saturday and maybe Sunday too. Frankly, comp time is a system I saw abused before it was even legal. At least that employer gave the deserved time off within a few weeks; the law in question allows as much as a 13 month delay. In the end, your boss is allowed to work you harder, pay you the same, and promise that at some date in the hazy future you can have some time off. Assuming you remember to claim it, assuming your boss lets you have it, and assuming you still work there. Why exactly should your company hire another worker — who requires training and benefits — when the company can force existing employees work longer hours?

Of course this same boss can’t really afford to let you have a week off — let alone the 4 weeks the President gets, or even the 3 weeks the Chinese get — for a vacation. There’s work to be done, and temporary employees are expensive. He’s already perpetually understaffed because he’d rather make you work more hours than hire anybody. Indeed, he seems unable to quantify the fact that you will be more productive if you are rested, not overworked. Furthermore, as much of a taskmaster as he is, he’s afraid you may use that time off to seek a better job.

In the end, it all comes down to this: a “jobless recovery” depends on labor practices that border on abusive, and a labor force too afraid of potential consequences to call foul.

*I have been unable to find independent confirmation that this bill has passed the House. If it has, it will still require passing the Senate, compromise on any differing passages, and of course signature by the President. Think this is a raw deal? Start writing your Senator.

When I was a kid, my parents had a friend who ran a car leasing/rental business for the local Ford dealership. This was back in the days when insurance companies were first demanding “used parts” for auto body damage repair. One fine day, a new yellow Thunderbird owned by the agency was in a wreck. A few days later, a new green Thunderbird also owned by the agency was stolen. The used parts which showed up at the body shop to repair the yellow Thunderbird were, of course, green. Nobody will ever be able to prove the second car was stolen and parted out to repair the first car, but neither can anyone prove otherwise. You will certainly never convince this man that it was sheer coincidence. He shrugged and laughed that to save a few dollars, the insurance company had bought him an entire new car.

Insurance companies makes things cost more, and not just with foolish financial decisions. Their very existence costs money. They have offices to rent, light, heat, and furnish. They have employees who deserve to be paid. They have regulations to follow and paperwork to file with the state. They have executives who must be paid enough that they don’t begin to think they should get jobs in banking or securities. They have actuarial tables to compile and interpret. Some of them are for profit, siphoning yet more money out of the system. Although some of the insurance company’s revenues are derived from investments, ultimately all this is paid for by the policy holder.

Insurance also drives up costs for virtually every business. Businesses need insurance too: property insurance; liability insurance; benefits such as health insurance for employees; workman’s compensation insurance; unemployment insurance; insurance for business vehicles. Depending on the industry, there may be over a dozen insurance bills to pay. All these expenses must be accounted for when determining how much to charge for products and services in order to make a profit.

Health insurance in particular drives costs up. It actively short circuits any semblance of the market economy in health care. Not only does the patient not pay the doctor, the patient usually doesn’t even pay the people who do. Most of the time, the patient’s employer pays the insurance company that pays the doctor. On the other side of the transaction, health insurance drives up the cost of doing business for doctors. Now, he needs to pay an employee or service that does nothing but submit insurance claims and process insurance checks. Furthermore, his staff has to spend time figuring out what portion of the final bill should be charged to the patient and what should be sent off to the biller. All of this is before time the doctor himself has to spend figuring out what the insurance company is willing to pay for, and any time he may spend on the phone with the insurance company trying to sort things out. FInally, there is little disincentive for the patient to use unnecessary services. There is a fine art to setting co-payments and deductibles low enough that people will seek help for genuine illness and high enough to discourage frivolous doctor visits, services, tests, and treatments that the patient insists upon despite lack of need.

Insurance has become a necessary fact of life in our modern society. Being without insurance can cost more than having insurance. People who do not carry insurance that they need cost everyone else money by not being part of the risk pool. Uninsured motorists cost money when they are in traffic accidents; if they can’t afford insurance they certainly can’t afford to pay for a wreck. People who do not carry homeowners or renters insurance lose everything should disaster strike. Companies without adequate liability insurance go out of business if they are sued, putting employees out of work and jeopardizing intellectual property. People without health insurance tend to wait until small illnesses become serious before seeking care, both losing productivity and turning a hefty bill into a gargantuan one — and more often than we care to think about, costing taxpayer dollars.

Going without insurance is obviously not a solution. However, something has to be done to bring insurance rates down. Insurance reform needs to be a priority in all 50 states. This is not something that can be fixed by slapping some artificial damage caps on jury awards. Indeed, most of the ways that insurance drives costs
up have nothing to do with the courts, let alone tort reform. The first step in insurance reform is not telling big business exactly how much money they can lose in a courtroom, but rather making sure that more insurance dollars are used to cover legitimate claims. Limit the profit motive: Re-mutualize.

Today the FOMC meets. Even before anyone arrived, even before any of the participants got dressed this morning, everyone pretty much knew what at this writing has not been announced: No change in the interest rates that the Fed controls; something about being vigilant about possible future inflationary risks. Everyone knows that these are the things they “must” say, partly because it is what everyone “expects.”

The days of watching news footage of Alan Greenspan crossing the street to the meeting on CNBC and gauging the possibility of rate changes from the size of his briefcase are long, long gone. In time, that story will be treated as some kind of urban legend. These days there is no need for the “briefcase indicator” because all moves are carefully and clearly telegraphed in advance. The seeds of today’s actions are in the comments from the last meeting, in the various public commentary made in public by members of the Fed, in the statements Greenspan last made to Congress. Just as surely, today’s statement will be the seed of the next meeting’s actions.

The Discount rate — the interest rate banks charge one another for overnight loans, for purposes of having the legally required amount of money on hand — sits at 1%. That is the result of June’s quarter of a percent rate cut, which was the latest in a long series of rate cuts since the beginning of the current economic troubles. As I have previously said, I believe there is a point beyond which rate cuts do not help the economy anymore (I think Japan may know something about that). Some critics even think that this cascade of rate cuts has been a borrowing from the future recovery and allowing companies that should have folded to flounder along. Under this theory, Greenspan should have let things get awful for a quarter or two and create a clear bottom which would theoretically have been over by now.

They can’t raise rates today, because that will make them look like fools for having lowered rates at their last meeting. That briefly summarizes all the esoteric reasons. A rate hike today would cause panic in the stock and bond markets, for no better reason than it’s not what they expect. However, the rate cannot linger here at 1% forever. It has to go up at some point. It has to go up because of certain discrepancies in the bond market and the money supply. It has to go up because we are outside the band where low interest rates make banks money. It has to go up because senior citizens are a powerful lobby in Washington that can influence the people who hired the FOMC members, and many of them live off interest. It has to go up because people have already gotten to the point where they don’t buy a new car without some kind of special deal.

And that brings us to the second thing the Fed will say this afternoon: be on the lookout for inflation. Alternatively, they may indulge in some Greenspeak to the effect of “balanced risks” to the economy. Inflation is the official reason to raise interest rates. Higher interest rates theoretically make it more expensive to borrow money, which reduces the amount of money companies spend on big things — Capital Spending. However, inflation encourages people and companies to buy things that they can afford today, because it may be more expensive tomorrow. People and companies buying things stimulates the economy and results in more jobs. So some limited inflation may turn out to be a good thing.

By the end of the year a rate increase seems likely, particularly if there is the faintest hint of the “second half recovery” actually resulting in people having jobs. But don’t expect low finance rates on new cars to instantly vanish. Don’t expect your bank to start paying you more than a pittance in interest. Consider locking in your variable rate mortgage, just because it’s unlikely for rates to be this low again in 5 years. Paying down the credit cards is frankly a good idea in any economy, no matter what the Fed does. But don’t forget, a rate hike means things are getting better.