Dani Rodrik’s blog

For those of you who haven’t seen this, Dani Rodrik has a new (snarky?) blog. Here is a recent sample:
Dani Rodrik’s weblog: It’s front page news in the WSJ, so it must be a big deal:

May 24, 2007
It’s front page news in the WSJ, so it must be a big deal
Frank Levy chides me for overlooking today’s page 1 story in the WSJ on globalization. It’s called “Globalization’s Gains Come with a Price,” and it’s all about how the wage distribution has gotten wider in developing countries, contrary to what a lot of people were expecting. When I read it, my first reaction was, “this is news?” Frank assures me that it is to most WSJ readers.

Always worth the read.

Economic mobility in the I-Cubed Economy

A generally agreed upon “fact” of the US economy is the trade off between economic security and economic mobility. American workers may be less secure than in other countries, but that is the price we pay for greater economic mobility.
Wrong, says a new report by the Economic Mobility Project. As the Wall Street Journal put it starkly — Not Your Father’s Pay: Why Wages Today Are Weaker:

American men in their 30s today are worse off than their fathers’ generation, a reversal from just a decade ago, when sons generally were better off than their fathers, a new study finds.

The project press release elaborates:

According to the report, men who were in their thirties in 1974 had median incomes of about $40,000, while men of the same age in 2004 had median incomes of about $35,000 (adjusted for inflation). Thus, as a group, income for this generation of men is, on average, 12 percent lower than those of their fathers’ generation. While factors other than cash income also contribute to economic mobility, these data challenge the two-century-old presumption that each successive generation will be better off than the one that came before. The findings rely on new analysis of U.S. Census Bureau data.

What about flexibility and mobility. The WSJ notes:

The study suggests that absolute mobility — the rate at which an entire generation’s lot improves relative to previous generations — has declined. But within a particular generation, individuals can still get ahead if relative mobility, the rate at which the rich and poor trade places, remains high. Poor fathers may have rich sons, and vice versa.

As the study describes:

To illustrate the importance of relative mobility, consider three hypothetical societies with identical distributions
of wealthy, poor, and middle-class citizens:
The meritocratic society. Those who work the hardest and have the greatest talent, regardless of
class, gender, race, or other characteristics, have the highest income.
The “fortune cookie” society. Where one ends up bears no relation to talent or energy, and is purely
a matter of luck.
The class-stratified society. Family background is all-important — children end up in the same relative
position as their parents. Mobility between classes is little to nonexistent.
Given a choice between the three, most people would choose to live in a meritocracy, which is, by its
nature, fairer and more just.

However, the report states::

Data on relative mobility suggest that people in the United States have experienced less relative mobility than is commonly believed. . . .
There is little available evidence that the United States has more relative mobility than other advanced nations. If anything, the data seem to suggest the opposite. Using the relationship between parents’ and children’s incomes as an indicator of relative mobility, data show that a number of countries, including Denmark, Norway, Finland, Canada, Sweden, Germany, and France have more relative mobility than does the United States (see Figure 3).

The report offers little guidance as to why this is occurring. According to the WSJ,

Ms. Sawhill said several factors could explain the divergence: a growing share of income going to the highest-paid workers, or to profits; an increased share of labor compensation going toward benefits such as health care; or a decline in the number of wage earners in the typical family.

Let me offer one of my own reasons — the changing nature of work. In part, the I-Cubed Economy is a social network economy. How well you do depends on whom you know as well as what you know and how hard you can work. Those with a broader social network of higher income/wealth connections will do better. And in part, the changing nature of work has disrupted the traditional employment and career ladders (see for example Stephen A. Herzenberg, John A. Alic, and Howard Wial, New Rules for a New Economy,: Employment and Opportunity in Postindustrial America (Twentieth Century Fund, Cornell University Press, 1998). I hope the project will look into these factors more closely.
The report goes conclude with a warning and a sobering thought:

One thing is clear. A society with little or no absolute mobility is one in which for every winner there is a loser. It’s a zero sum game. And a society with little or no relative mobility is one in which class, family background or inherited wealth loom large. Equal opportunity is a mirage. Recalling the three hypothetical societies, it is easy to envision why, for these reasons, high levels of both absolute and relative mobility are desirable. Society should strive for both. But rates of growth in mature economies are often slower than they are in societies that are still developing, and this fact makes a focus on relative mobility of increasing importance.
. . .
While belief in this American Dream remains a unifying tie for an increasingly diverse populace, it is showing signs of wear, with both public perceptions and concrete data suggesting that the nation is a less mobile society than once believed. This is not good: the inherent promise of America is undermined if economic status is, or is seen as, merely a game of chance, with some having the good fortune to live in the best of times and some the bad luck to live in the worst of times. That is not the America heralded in lore and experienced in reality by millions of our predecessors.

The Economic Mobility Project promises more analysis and discussion as to how to reverse this disturbing trend. But we will need concrete action at the end of that analysis. Let’s see if our political system is willing to take that next step – whatever it may turn out to be.

Buyers versus users – and the challenge of design

Some time ago, I posted a piece on how many products are returned simply because people can’t figure out how to use them. This was, I said, an opportunity for improved design.
But,as Shakepeare said, the fault lies not in the stars, but in ourselves. We demand that complexity. As James Surowiecki’s latest column in the New Yorker (Feature Presentation) explains:

You might think, then, that companies could avoid feature creep by just paying attention to what customers really want. But that’s where the trouble begins, because although consumers find overloaded gadgets unmanageable, they also find them attractive. It turns out that when we look at a new product in a store we tend to think that the more features there are, the better. It’s only once we get the product home and try to use it that we realize the virtues of simplicity.

This is presents an extraordinary challenge to designer:

The fact that buyers want bells and whistles but users want something clear and simple creates a peculiar problem for companies. A product that doesn’t have enough features may fail to catch our eye in the store. (A cell phone that doesn’t offer a Bluetooth connection, for instance, may be dismissed as underpowered, even though relatively few Americans use Bluetooth headsets.) But a product with too many features is likely to annoy consumers and generate bad word of mouth, as BMW’s original iDrive system did. Intended to give drivers unprecedented control over navigation, temperature, and entertainment through a single device, it was so hard to use that it has been described as “arguably the biggest corporate disaster” since New Coke.

Great products, like the iPod, rise to that challenge. Others are simply swamped by it — destined to be returned to the store by a buyer turned user who won’t spend more that 20 minutes figuring out how it works.

Financial competitiveness – part 7

According to Alan Murray’s column in today’s Wall Street Journal Wall Street’s Capital ‘Crisis’ Moves to Back Burner, the battle cry has turned into a whine:

last week came the dull denouement. The Treasury announced it was creating yet another study committee…as if the previous three hadn’t been enough. And it named former Securities and Exchange Commission Chairman Arthur Levitt as co-chairman, along with former SEC chief accountant Don Nicolaisen. Mr. Levitt has told anyone who asked that hand-wringing about Wall Street’s competitiveness is, as he delicately puts it, “absolute garbage.”
. . .
At an event sponsored by the Council on Foreign Relations in New York last week, which was held after Mr. Levitt agreed to head the new committee, but before the committee was publicly announced — the former SEC chief feistily attacked most of the major recommendations of the so-called Paulson committee. “The IPO issue is a nonissue,” he declared.

Murray seems to agree with that assessment:

Of course, it was never that much of a crisis to begin with. Wall Street moguls made much of the statistic that only one of the 20 largest IPOs in 2005 occurred in the U.S. But that oft-cited statistic provided a pretty narrow and misleading window on Wall Street’s overall health. Moreover, it was distorted by the fact that some of the largest IPOs were former state-owned enterprises in China and Russia that listed elsewhere for nationalist reasons, and that might have had a hard time meeting U.S. listing standards anyway.
Last week, [Treasury Undersecretary Robert] Steel himself cited a compelling set of numbers showing that the U.S. financial markets remain “second to none.”

I’m glad to hear that folks are backing off the rush to deregulate in the name of competitiveness. However, I hope that there will be continued thought given to ways to improve our financial markets. Two areas — not included in the current discussions — come immediately to mind: how financial markets deal (or don’t deal) with intangibles and whether the short term focus is hurting long-term innovation. A study (or studies) that looked at those two issues would be a huge step forward in assessing the competitiveness of our financial markets in the I-Cubed Economy.

More on copyright

For a cartoon version explaining copyright, see A Fair(y) Use Tale | Stanford Center for Internet and Society, created by Professor Eric Faden of Bucknell University using clips from Disney movies.
No word from Disney yet as to whether they view this as a copyright infringement.
By the way, in further response to Helprin (see earlier posting), as the movie points out, ideas can not be copyrighted — only the specific representation of that idea. So Mr. Helprin’s exact words can be copyrighted — his ideas can’t.

Harmonizing regulations — case of accounting standards

Speaking of harmonization of economic regulations (see yesterday’s posting), here is a good summary of the problems of accounting standards, from the Economist — Speaking in tongues:

International Financial Reporting Standards (IFRS), which aim to harmonise financial reporting in a world of cross-border trade and investment, have made great strides since they were adopted by 7,000 or so listed companies in the European Union in 2005. To date, over 100 countries, from Canada to China, have adopted the rules, or said that they plan to adopt them. The London-based International Accounting Standards Board (IASB) expects that to swell to 150 in the next four years.
Even America, no ardent internationalist, is working with the IASB to narrow the gap between its own accounting standards and IFRS, which foreign companies listed in America could choose by 2009, or possibly sooner. Today such companies must “reconcile” their accounts with American rules—a costly exercise that some believe is driving foreign listings away from the United States.
In late April America’s Securities and Exchange Commission (SEC) unexpectedly floated the idea of giving American, and not just foreign, companies the choice of using IFRS.

But, it is not that simple. A number of countries, including the UK, want to include their own specific version. That is leading some to worry that companies will continue to use different standards in different countries. Not to worry, say others — there is room for countries to do their own thing, as long as they tell everyone what that is:

this, claims David Schmid of PricewaterhouseCoopers, another accountancy firm, is not a problem: “Transparency is the greater goal in accounting, not comparability.” In his view, as long as accounting standards flush out information that faithfully reflects the reality of the underlying business, an investor can do his own sums and either accept or reject management’s judgments.

Such a rule of transparency and flexibility might be a good basis other sets of harmonized regulations. Within the US, we already have such a system – where uniform state regulatory codes are modified to suit local preferences. As the National Conference of Commissioners on Uniform State Laws points out, “Model Acts are designed to serve as guideline legislation, which states can borrow from or adapt to suit their individual needs and conditions.”
I see no reason why this same system couldn’t work on an international level.

Needed — a new trade policy – part 5

In a bipartisan statement — Changing the Global Architecture – WSJ.com — Stu Eizenstat and Grant Aldonas make an important point about the future of our trade system:

Regardless of whether the Doha Round succeeds or fails, the era of traditional global trade rounds that require a consensus of some 150 nations is over. The world economy is changing too rapidly to wait five to seven years only to agree on the lowest common denominator.
After Doha, it will be time for a new approach, one that brings together like-minded countries to develop a range of different agreements, in the form of a “variable geometry” within the WTO. This will allow those governments willing to move forward, and with the most at stake, to take responsibility for reducing barriers rather than forcing them to wait until consensus is achieved among all.
As a start, the EU and U.S. should give developing countries greater access to the trans-Atlantic marketplace. The current arbitrary and often conflicting rules the U.S. and EU impose on their preference programs should be replaced by a single set of rules that assures consistency and the greatest degree of market access.
The EU and the U.S. should also rally like-minded countries to eliminate barriers to trade in products and services over the next 10 years. As reductions are agreed, the benefits would be extended to all WTO members using the existing “most favored nation” principle. If countries stay on the sidelines as free riders, products crucial to their economies should be excluded from the benefits of liberalization. Moreover, the EU and the U.S. should recruit other WTO members to liberalize market access in specific sectors, especially those dominated by new technologies such as nanotechnology. These sectoral accords should be premised on strict adherence to WTO rules.

I have long advocated shifting to a more sectoral approach (see After Doha: What The WTO Is Not Talking About). The trick here, as they warn, is not settling for the lowest common denominator. Trade policy has moved beyond trade. It is harmonization of economic regulation. That calls for harmonizing upward (see Tom Palley’s comments on that — Globalization Lock-in: What Should Be Done?).
But, what is upward? As Dani Rodrik has commented:

For one thing, where does harmonization start and stop? If it is OK to harmonize on labor, does that also make it OK to harmonize patent laws, and vice versa? And what exactly in labor do we harmonize? And for another, what if other countries do not want to harmonize their policy regimes with the U.S., because they feel this would hurt their own development prospects?
It seems to me that a robust international economic regime has got to leave enough room for different countries doing their own things. The push for economic globalization is narrowing that space–both from the left (labor harmonization) and the right (patents). So maybe the solution is to reconfigure the balance between international obligations and domestic policy space–and not to build more railroad tracks until we do so.

Rodrik is right to use patents as a good example. For a good discussion of how this is working with respect to patents, see James Surowiecki’s New Yorker piece Exporting I.P.. We are attempting to export our patent system at the same time we are trying to reform it here at home.
That is a very difficult trick to pull off. And, just as the addition of labor rights to trade deals has highlighted our own lack of complete compliance with ILO standards, our trade offs on patents will set the tone for future negotiations. Yes, everyone needs some room to do there own thing. But standards are standards. We need to make sure we have our own standards right before we start exporting them — realizing that changes will be made in the process. The last thing we need is to come back in a few years and tell our trading partners – “oops we changed our minds.”


Mark Helprin is a great fiction writer (while every talks about Winter’s Tale, I would suggest A Soldier of the Great War as his best). His latest piece of fiction, however, shows up as an op-ed in the New York Times. A Great Idea Lives Forever. Shouldn’t Its Copyright?. Helprin eloquently rails against government confiscation of private property — because copyright expire. He believes in the “natural right” theory of copyrights: intellectual property is the same as real property. Unfortunately, this idea has its fact and logic backward. Copyrights and patents are state-granted monopolies. As Judge Richard Posner (a leading conservative thinker and founder of public choice theory) and William Landes have argued (in The Political Economy of Intellectual Property Law):

Equating intellectual property rights to physical property rights overlooks the much greater governmental involvement in the former domain than in the latter, at least in a mature society in which almost all physical property is privately owned, so that almost all transactions involving such property are private. Government is continuously involved in the creation of intellectual property rights through the issuance of patents, copyrights, and trademarks. Skeptics of government should hesitate to extend a presumption of efficiency to a process by which government grants rights to exclude competition with the holders of the rights. Friedrich Hayek, than whom no stronger defender of property rights can easily be imagined, warned that “a slavish application [to intellectual property] of the concept of property as it has been developed for material things has done a great deal to foster the growth of monopoly and . . . here drastic reforms may be required if competition is to be made to work.”

The conservative Stanford Review has argued that copyright impinges on personal freedom:

Truly vibrant culture requires the freedom to build on, modify, and borrow from others’ work. Copyright makes this process difficult, if not impossible. The creator must apply for permission to use each recognizable source of inspiration, and must change his or her work if denied. Copyright expansion is pushing us toward a sterile, lifeless “culture” where everyone pretends to work in isolation, afraid that others will hurl accusations of theft and sue for damages.

As James Boyle — FT.com / Comment & analysis / Comment – Rocks in the web’s safe harbours has argued (from the left):

When we are dealing with intellectual property, how do we know who is a trespasser and who is a greedy landowner trying to enclose the public right of way? First lesson, analogies to physical property – like the one I just used – are dangerous. Most of these disputes are about whether a new market, enabled by technology, should lie inside or outside the scope of the artificial monopoly conferred by the intellectual property right. Because these rights are created for a purpose – to foster and disseminate science, innovation and culture – there are inevitable “should” questions involved.

So, the real question is why would a good libertarian like Helprin think the state should step in to stifle competition? After a certain point, copyright is no longer about income and royalties, but about the power to exclude others from utilizing the ideas. As has been pointed out on numerous occasions, one of the biggest flaws in the current copyright system is the blocking of new creations, based in part upon derivative works. (See here and here.) I find it highly ironic that Helprin should advocate state intervention to prevent individuals in the future from further disseminating his ideas.
Copyright exists to provide a balance of incentives for creation and dissemination of knowledge. Unlike Helprin, I think our founding fathers got the idea right when the Constitution provided for intellectual property protection “for a certain time.” And when that certain time has expired, ideas should be free — not locked in some golden cage.

Notes on patenting

From the patent wars:
BUSINESS BRIEFING – washingtonpost.com:

Freddie Mac was sued by a Chicago real estate investment firm that says the McLean company violates its patents with the way it sells bonds. In the lawsuit, filed Tuesday in federal court in Washington, Graff/Ross Holdings says Freddie Mac infringes the patents “by using computer systems and methods to conduct electronic bond auctions of fixed income instruments and will continue to do so unless enjoined by this court.”

A Big Stretch – New York Times by Suketu Mehta:

I grew up watching my father stand on his head every morning. He was doing sirsasana, a yoga pose that accounts for his youthful looks well into his 60s. Now he might have to pay a royalty to an American patent holder if he teaches the secrets of his good health to others. The United States government has issued 150 yoga-related copyrights, 134 patents on yoga accessories and 2,315 yoga trademarks. There’s big money in those pretzel twists and contortions — $3 billion a year in America alone.
It’s a mystery to most Indians that anybody can make that much money from the teaching of a knowledge that is not supposed to be bought or sold like sausages. Should an Indian, in retaliation, patent the Heimlich maneuver, so that he can collect every time a waiter saves a customer from choking on a fishbone?
The Indian government is not laughing. It has set up a task force that is cataloging traditional knowledge, including ayurvedic remedies and hundreds of yoga poses, to protect them from being pirated and copyrighted by foreign hucksters. The data will be translated from ancient Sanskrit and Tamil texts, stored digitally and available in five international languages, so that patent offices in other countries can see that yoga didn’t originate in a San Francisco commune.

Stories that have become commonplace as we work through what it means to own ideas in the I-Cubed Economy

Common sense innovation

Sometimes a small procedural change can be a major (and live saving) innovation. Take, for example, this example from today’s New York Times column by David Leonhardt:

I was walking through the intensive care unit of a San Francisco hospital earlier this year when I noticed a jarring sight. Most of the patients in the unit were sitting up in their beds. Some of them were gravely ill, drifting in and out of consciousness, but their mechanical beds were still propped up, much as the bed of an alert patient receiving visitors might be.
For more than a decade, it turns out, medical researchers have known that people on ventilators should generally have their heads elevated. When the patients are lying down, bacteria can easily travel from the stomach, up to the mouth and breathing tube, and ultimately into the lungs, causing pneumonia. When people are propped up, gravity becomes their ally.
But hospitals have had a hard time translating this scientific knowledge into better medical care. Patients frequently need to be put on their backs, to be bathed or to receive treatment, and once they are lying down, doctors and nurses — busy worrying about dozens of other things — don’t always remember to move the bed back up.
“When you have to rely on someone to do it, it’s not going to happen every time,” said Dr. Michael Gropper, the director of critical care medicine at UCSF Medical Center, the hospital I was visiting.
So Dr. Gropper made a new rule. Unless there was a written order from a doctor saying that a patient should be lying down, every patient on a ventilator had to be sitting up.
The rule was one small part of a common-sense campaign to reduce infections in the intensive care unit over the last two years. None of it was cutting-edge science, but it has made a big difference: the incidence of ventilator-associated pneumonia has fallen more than 40 percent since 2005. There are people walking around Northern California this morning who otherwise would not be alive.

This idea is called “nudging”: make the best choice the default choice. I call it common sense innovation — something we need more of.