Cause and Effect

This graph from small business surveys (btyb the National Federation of Independent Businesses) has been going around the blogosphere. Matthew Yglesias and Paul Krugman comment.

Take a close look. See what I see?

The graph is nonsense.

First, the obvious: what exactly is the difference between "poor sales" and "competition from large business?" Isn't the latter just a subset of the former? I have a hard time believing there's a business owner out there saying "Well, I've encountered a lot of competition lately, which is a problem, but my sales haven't gone down." That's why competition's a problem for small businesses: they reduce their sales.

Second, really all problems are sales problems. Any expense that seems too large can be fixed with more sales. No one cares about a high cost of insurance if you're making money left and right nor more than I would care about the savings from generic brands if I made six figures a year.

What the survey really measures is what disappointing economic news is popular. In the late 1990s, during the boom, good labor was hard to come by so labor quality was a concern. During the 80s to the mid 90s, anti-government rhetoric was at its peak so the culprit was regulations. Health care costs dominated the discussions during the 2000s. Now, all the talk is about how people aren't buying things so they focus on sales.

If a business is struggling, the owner will focus first on what's being talked about. There's nothing wrong with that as long as they check it against their own business (reasonable assumption). But the "sales" option pollutes the data. If taxes were lower, wouldn't the sales problem go away? If there were fewer requirements or cheaper insurance, wouldn't that increase your bottom line just like sales would? Essentially this survey asks:

How do you increase X?

X=A-B

1. Increase A
2. Decrease B

It's both!

Update: Russ Roberts and Arnold Kling weigh in.

The Fake Helium Crisis

From MR:

Is it possible that the relative price of helium will rise in nearly unprecedented fashion? Robert Richardson voices his opinion:

[The US government should] Get out of the business and let the free market prevail. The consequence will be a rise in prices. Unfortunately party balloons will be $100 each rather than $3 but we'll have to live with that. We will have to live with those prices eventually anyway.

He notes:

There is no chemical means to make helium. The supplies we have on Earth come from radioactive alpha decay in rocks. Right now it's not commercially viable to recover helium from the air, so we have to rely on extracting it from rocks. But if we do run out altogether, we will have to recover helium from the air and it will cost 10,000 times what it does today.

Apparently the government has a giant store of helium which it built up in the 1920s for dirigible-related emergency reserves and now it's selling it off, flooding the market and depressing the price--that's the intervention Richardson is talking about. This is a problem, but not a long term problem: the goal it so sell it all off by 2015. When the reserves are gone, the price will rise. In fact I bet that people are buying helium now and storing it to sell later, when those reserves are gone. So I'm not terribly concerned about a helium crisis mostly because of a link I followed in the MR article:

On Earth, Helium is found mixed with natural gas, but few producers capture it.

In other words when the price rises, companies will start extracting it. I think we all (squeakily) breathe easy.

Rent Seeking in Everything

It turns out more people like Wal-Mart than I thought. A Wall Street Journal article yesterday exposes that many of the "grassroots" campaigns trying to block local Wal-Marts are actually backed by their competitors. This isn't really a surprise; what's news is that these competitors organize and/or expand the campaigns through a company called Saint Consulting Group, a firm which specializes in making the astrotruf seem genuine.

For the typical anti-Wal-Mart assignment, a Saint manager will drop into town using an assumed name to create or take control of local opposition, according to former Saint employees. They flood local politicians with calls, using multiple phones to make it appear that the calls are coming from different people, the former employees say.

Health Care Profitability

Everyone's talking about how profitable health insurance companies are (notably on tonight's Daily Show) but the secret is they're not that profitable compared to other industries. The large numbers shot around about increased profits are absolute dollars, not relative to their revenue, and tell us nothing about how profitable an industry actually is. Profit margin (which adjusts for revenue) is a much better measure. And health insurance performs quite bad compared other industries. I got the data from Yahoo Finance; here's the most recent quarter.

Note, REIT is healthcare facilities, not health insurance nor hospitals. According to Yahoo, these companies are in finance...basically real estate for health-related services. Healthcare plans (including Aetna, Wellpoint, Universal Americacore, etc) is number 88. Home health care was 55. Hospitals rank 100 (out of 215).

Rank	Industry	Profit Margin
1	Closed-End Fund - Foreign	38.3
2	REIT - Healthcare Facilities	25.2
3	Drug Manufacturers - Major	22.2
4	Publishing - Periodicals	21.8
5	Cooper	20.9
6	Application Software	20.6
7	Cigarettes	19.2
8	Internet Information Providers	18.7
9	Healthcare Information Providers	16.8
10	REIT - Industrial	16.6
11	Agricultural Chemicals	16.4
12	Long Distance Carriers	15.1
13	Networking & Communication Devices	14.4
14	Beverages - Brewers	13.8
15	Personal Products	13.4
16	Oil & Gas Drilling & Exploration	12.8
17	Information & Delivery Services	12.6
18	Beverages - Wineries & Distillers	12.3
19	Air Services, Other	12.3
20	Railroads	12.2
21	Diversified Investments	11.8
22	Gold	11.6
23	Drug Manufacturers - Other	11.1
24	Technical & System Software	10.9
25	Biotechnology	10.7
26	Shipping	10.5
27	Education & Training Services	10.3
28	Medical Instruments & Supplies	10.2
29	Beverages - Soft Drinks	10.1
30	Wireless Communications	9.9
31	Industrial Metals & Minerals	9.9
32	Telecom Services - Domestic	9.6
33	Steel & Iron	9.5
34	REIT - Residential	9.3
35	Processed & Packaged Goods	9.2
36	Electric Utilities	9.2
37	Business Software & Services	9.2
38	Foreign Regional Banks	8.9
39	Personal Services	8.7
40	Semiconductor - Specialized	8.6
41	CATV Systems	8.6
42	Restaurants	8.5
43	Diversified Computer Systems	8.5
44	Regional - Southwest Banks	8.3
45	Diversified Utilities	8.2
46	Cleaning Products	8.1
47	Medical Laboratories & Research	7.9
48	General Entertainment	7.7
49	Gas Utilities	7.7
50	Publishing - Books	7.6
51	Personal Computers	7.6
52	Oil & Gas Equipment & Services	7.4
53	Investment Brokerage - Regional	7.4
54	Toys & Games	7.3
55	Home Health Care	7.2
56	Textile - Apperel Footwear & Accessories	7.0
57	Waste Management	6.9
58	Conglomerates	6.7
59	Accident & Health Insurance	6.7
60	Aerospace/Defence Products & Services	6.6
61	Major Integrated Oil & Gas	6.5
62	Telecom Services - Foreign	6.4
63	Oil & Gas Piplines	6.4
64	Food - Major Diversified	6.4
65	Business Services	6.4
66	Auto Parts Stores	6.2
67	Sporting Activities	5.8
68	Medical Appliances & Equipment	5.8
69	Entertainment - Diversified	5.8
70	Photographic Equipment & Supplies	5.7
71	REIT - Retail	5.6
72	Drug Delivery	5.6
73	Tobacco Products, Other	5.5
74	Diversified Communication Services	5.4
75	Specialty Eateries	5.3
76	Industrial Electrical Equipment	5.3
77	Small Tools & Accessories	5.1
78	Semiconductor - Broad Line	5.1
79	REIT - Office	5.1
80	Pollution & Treatment Controls	5.1
81	Drugs - Generic	5.1
82	Insurance Brokers	5.0
83	Management Services	4.9
84	Research Services	4.7
85	Consumer Services	4.7
86	Confectioners	4.7
87	Information Technology Services	4.4
88	Health Care Plans	4.4
89	Auto Parts Wholesale	4.3
90	Packaging & Containers	4.1
91	Security & Protection Services	3.9
92	Cement	3.9
93	Chemicals - Major Diversified	3.8
94	Industrial Equipment Wholesale	3.7
95	Industrial Equipment & Components	3.7
96	Home Improvement Stores	3.7
97	General Contractors	3.5
98	Aerospace/Defense - Major Diversified	3.5
99	Housewares & Accessories	3.4
100	Hospitals	3.4

I thank Mark Perry who did a table for August of 2009. (Insurance companies dropped by two ranks since then.)

Ryanair: Cheap, Reliable, and Safe

Ryanair ranks in the bottom 10 of 581 companies on ethics (based on social responsibility, environmental awareness, etc), compiled by Geneva-based Covalence. Henry at Crooked Timber notes that Ryanair is unique among its low ranked brethren: it seems to covet its slimly image.

The company prides itself not only on being perceived as having no social conscience, but as having a reputation for screwing its customers as systematically and mercilessly as possible. Which other airline’s CEO would announce that he wanted to charge passengers to use the toilet as a publicity stunt? Clearly, Ryanair thinks that this reputation is a money spinner for them (it is quite deliberately cultivated), and they have indeed made quite a lot of money. But why (if they are right) would a reputation for shafting your customers be a commercial asset for a consumer-oriented business in a relatively competitive sector? The standard economic account doesn’t seem to provide much insight. Help me out here.

There are many sloppy explanations, but three good ones stand out.
Ryanair is trying to attract well-informed consumers who will see the add-on charges beforehand and adjust for it; they end up with a very cheap airfare (it's apparently an inexpensive way to travel) and no surprises. Ill-informed consumers end up footing the bill. This is a nifty argument but I don't see it holding in equilibrium, especially when you're issuing press releases about charging for using the bathroom. Something like that is likely to get out to even the poorly informed consumer.

Ryanair is signalling safety. Since they are inexpensive, the company is showing where they get revenue from thus customers aren't afraid that they got a deal because the firm skimped on safety checks. But it seems that the safety regulations which govern air travel would put customers' mind at ease. At the same time, you could argue the fear is that they cut corners in other ways, such as paying their flight attendants very little which would result in rude service.

Ryanair is signally honesty and reliability. When you travel, there's a lot of stress so when you discover some small fee it seems like a much bigger problem than it is. By outlining all their add-on costs before you pack your bags, they're cutting out uncertainty (and the fear of uncertainty). Yeah, you have to pay to use the bathroom, but since you knew about it ahead of time, it doesn't seem as bad as if you discovered it after drinking six glasses of water. Since everyone knows companies spin the truth in commercials, blatantly not spinning it sends a strong signal that "this is all you will have to deal with."

What I like about this last argument is that it bears a striking resemblance to Domino's "sorry we had horrible pizza but now it's good" campaign. Some commentators laugh at it, replaying old commercials touting the flavor of Domino's "cardboard." But no one really cares; every pizza chain says their pizza is great. But Domino's admitting a lot of people didn't like and now we're fixing it speaks volumes. Down right honesty is often an under appreciated business practice.

Milk, Cheese, and the Myth of Retail Collusion

This week's Economist told the story of falling wholesale milk prices which are bringing EU farmers to call for lower milk production quotas. Some farmers blame supermarkets for the lower prices, noting that they sell milk at about the same price but buy it from farmers at a significantly reduced price.

Falling consumer demand (especially given the recession) isn't the explanation EU farmers give, and it certainly doesn't seem to explain the inconsistency at the supermarket. But the Economist linked them, though they didn't say how. The short version is: it's all about the cheese.

Cheese demand has fallen a lot, especially within the EU. Unlike milk, people buy a lot less cheese when their incomes fall. But cheese is made from milk and in the wholesale market, all cheese is milk (since cheese-makers are buying it to turn into cheese). In other words, grocers who want milk for milk compete with cheese-makers who want milk for cheese. But people want less cheese so there's less demand for wholesale milk.

Just as more cheese-makers bid up the price of milk (and a growing China bids up the price for gas down the street), fewer cheese-makers means there's downward pressure on prices. Grocers, then, are getting their milk on the cheap. But the market for milk-at-the-store changed very little. So we see grocers getting cheap milk, selling it at about the same price, and it's all thanks to consumer demand, not colluding grocers.

Tabarrok At TED

My dissertation chair, Alex Tabarrok, gives an inspiring talk at TED on growth and the future. Watch, won't you?

Fifteen Lawyers On a Dead Man's Chest

Pirates portrayed in popular media were not the kind of heroes we make them out to be today. Like the modern Somali pirates, they disrupted trade and threatened fortunes. They murdered, raped, and stole. They burned ships and killed innocent people. Centuries ago, pirates would occasionally be acting on the behalf of a government, acting as a Crown thug rather than the rugged rogue we think of them as. Perhaps their only endearing quality is that some were made up of sailors dodging the English draft.

Cyber piracy is different story entirely, highlighted by the Pirate Bay Trial. Internet pirates download and/or view copyrighted material without paying for it. Studios argue that they are stealing media and more than one commercial depicts it as the same as swiping a CD from a store. But that's not quite true.

Granted, it is possible that downloading illegally is effectively the same as taking a hard copy. Taking a hard copy is always denying the company revenue, even if you would never buy it because your theft denies someone else from buying that particular CD. But downloading a file copies it, leaving the original in tact. Your consumption of it does not deny someone else from consuming it. The company loses revenue only if you pirated instead of paying for it. If you were never going to buy it (you value it less than the price but more than zero), the studio/actors/retail store/etc lose nothing. There are no distorted incentives and no real theft.

In an ideal world, only those who download for few are those who wouldn't have paid in the first place. But I know of no way to reasonably get to that world for it requires each consumer to honestly determine what they are willing to pay for, act accordingly, and, when appropriate, resist the romantic call of a pirate's life.

What Vegas Can Teach You About the Recession

In last week's EconTalk, economist Allan Meltzer argued one of the main reason for our current financial mess is the Fed's policy of too big to fail. If a large financial institution collapses, it will harm countless other institutions and hamstring the the market as a whole. By preventing disaster and saving these companies, the Fed saves the economy. Knowing that in the worse case scenario someone will help you out, these banks then took riskier chances than they otherwise would. Thus the mess we're in now. In a world of superheroes, there are more extreme athletes.

Some are skeptical of this relationship, made evident by the fact that this is not at the forefront of the popular debate (the much more vague and non-scientific "animal spirits" is). But suppose you went to a conference in Las Vegas and your company agreed to reimburse you for any gambling losses you suffered during the trip. It's obvious that you would gamble more. And you would take bigger risks. Why wouldn't you?

You could point out that the companies are worse off than those that didn't take the housing gamble (such as JP Morgan Chase, Pittsburgh National, Wells Fargo). But they are better off than if the Fed hadn't intervened at all. If the company compensates you only half or a third of what you lost from gambling, you would still gamble more but not as much as full compensation. Regardless, this policy would immediately prove to be a terrible idea. But that's the rule in place at the Fed now.

Economics, the Law, and Treasure Hunting

Last week, deep-sea explorers announced they found the shipwreck of the original HMS Victory which sank in 1744. This is certainly a victory for the decedents of her captain (as the location of the ship demonstrates it sank due to a storm, not mistakes on the captain's part). But that is not the interesting part of the rest of us: it's the treasure.

Well, the legal battle for the treasure is what's interesting as the treasure is mostly large bronze cannons of historic significance. There also might be as much as four tons of gold, but that's just a theory. Due to the decay of the site, we're a long way off from a good estimation of value.

But that hasn't stopped the British government from claiming "dibs," though the site's in international waters. Lost for over 250 years, the government argues they never explicitly gave up sovereignty of the ship and its contents.

If it really is the HMS Victory, "her remains are sovereign immune," the British Ministry of Defense (MOD) said in a statement on its blog Monday.

"The wreck remains the property of the Crown. We have not waived our rights to it. This means that no intrusive action may be taken without the express consent of the United Kingdom."

They also want a cut of what's found, though the exact size is under negotiation (but you can bet it'll be a sizable one).

Safe to say, it creates a mess for the people who found the ship to sort out. It also cuts on their profit margin. This is where law and economics can help. The boringly named field of law and economics uses economics to better form the law so it encourages efficiency.

In this case, the law allowing a country to claim sovereignty on a wreck someone else found makes it less profitable for other people to find and recover wrecks. Thus more ships sit at the bottom of the ocean, slowly decaying into nothing. There are few examples so illustrative of waste as that one. Granted, there's a good argument for claiming sovereignty on a ship that sank last week. It takes time to find wrecks and if somebody just stumbles upon it in the meantime and gets to claim it all, that would have its own unintended consequences on how willing people are to use ships (or even build them in the first place). But that argument doesn't spill over to a quarter of a millennium. This looks a lot more like theft then maintaining sovereignty. I hope the British government aren't looking for any other important ships, of their own sake.

Slipperly Logic

After noting the fall of oil prices, a friend of mine suggests oil companies could have "gotten away" with higher prices longer. When prices rise, it's a conspiracy in the greedy pursuit of profits. When they fall, it's still a greedy pursuit of profits?

Supposedly, prices fall because colluding firms want to assuage calls for regulation and taxes. Anyone even remotely familiar with commercials, advertising low prices, knows how sloppy that argument is. There's no evidence of sustained collusion, because there's no way to enforce such deals. Prices rose due to sudden demand and are falling because this competitive industry is finally catching up.

This is not a new story. From Amity Shlaes' The Forgotten Man. In 1934,

[Harold Ickes] had discovered that at numerous points oil was being extracted clandestinely and illegally, outside his NIRA [National Industrial Recovery Act] production quotas, and sold at prices that undercut the policy to force prices upward. He was outraged and opened a campaign against the oil bootleggers, describing them as possessed of a "sly animal cunning." (p 203)

No wonder oil CEOs are paid so much. It's not fun being the villain no matter what you do.

The Elusive Quest for Price Gouging

Anti-price gouging laws are notoriously vague, a fact Florida reminds us of this week. It issued subpoenas to four gas station companies on the basis of price gouging, or according to Florida state law, "an unjustified increase in price" during a state emergency.

What's "justifiable" in this context is not something laws can determine. If a firm increases its price, that consumers determine if it's reasonable by virtue of their actions (and their continued patronage). If an increase is truly arbitrary, then competitors will keep prices lower to get all the business. This argument doesn't work if there's no competition (and no chance for it) but because Florida issued subpoenas to four companies we don't have that problem here.

Markets are not made up of faceless CEOs and wild-eyed Wall Streeters. Markets are more ephemeral than that. They are composed of the interactions of countless millions, each competing with some to appease others. Markets are ecologies, not dictatorships.

Fallacies of Fallacy

Naming a fallacy is very powerful. It signals that not only is something logically incorrect, but so many get it wrong it's worth naming. But like so many powerful things, it's misused. I found this list of "7 Economic Fallacies" written by Tejvan Richard Pettinger, a teacher at Cherwell College, Oxford. Of the seven, three are not fallacies.

Tax Cuts make people work harder.

When you work you are really swapping one valuable resource (time) for another (money). Cutting taxes (which is the equivalent of a pay raise) could mean the person spends more time to get much more money. It could also mean they spend less time to get the same amount of money. It depends on their preferences. As Pettinger implies by his explanation this is an empirical question, not a fallacy.

A Current Account deficit [also known as the trade deficit] doesn’t matter.

That happens to be true. Many of his explanations for why the trade deficit is a problem happen to have logical fallacies, though. Concerns of an "unbalanced economy" are inconsistent with a lack of concern about trade flows between cities; concerns of capital flows ignore that the current account is the mirror image of the capital flow, by definition; concerns that a current account deficit means more foreign liabilities ignores that the trade deficit is not debt (when two people trade, no debt is created). That Pettinger acknowledges "some economists" don't think the trade deficit matters demonstrates that this is not a fallacy.

Tax Cuts will boost the Economy.

The reasoning behind this supposed fallacy is that of increasing consumption, a straw man since in the strict mathematical sense this won't change anything. (Government spends less and consumption plus investment increases by an equal amount.) The logic behind the argument is in how the funds are spent. Money in the hands of private citizen is more likely to be used more efficiently than money in the hands of political agents (for the normal incentive reasons). Thus tax cuts could easily better efficiency and thus the economy. Granted, Pettinger is correct that borrowing in response to a tax cut does little (it only shifts the spending burden to later generations while crowding out the investments today) but the other way to balance of the budget, cutting spending, won't have such adverse effects.

Popular opinions of economics are filled with blatant nonsense. There are so many, we don't need to the lower the bar and paint differing opinions as something so flawed as a fallacy.

Obama Calls for a Rise in Gas Prices

Barack Obama's latest YouTube ad calls for a windfall tax on so called "big oil," as if they are the reason prices are high. But no matter who market critics blame--the Middle East, spectators, or a handful of companies--their answer will always be incomplete. Oil price rise because of all of us.

This is not merely because so we choose to use oil (making Obama's painting of us as victims all the more absurd). We also choose not to supply oil. And why should we? It's hard. It's complicated. It's takes a lot of start up capital. The rewards have to be pretty high to get us to try. If oil was going for $10,000 a barrel, you see me looking for ways to supply energy.

These current profits do the same job (though on a smaller scale). People are more interested than ever in supplying gas. It takes time to refine it and pump it and find it. But they are looking (which is why we've seen oil futures stumble a bit). But Obama's plan dulls those incentives. Tax profits and people are less willing to enter.

The market reality of oil (or any product) should remind us of one of the great lessons of economics. The surest way to get low prices is to allow people to charge high ones.

Have You Hugged a Spectator Today?

A student once asked me if I thought lower gas prices would help the economy. "Not inherently," I said. "So what should they be?" I responded: "They should be at the price that accurately reflects the conditions of the market."

Economists know genuine growth doesn't come from high wages or cheap oil. It lies in efficiency because that allows us to do more with less. And the best way to get efficiency is to get everyone acting appropriately based on the conditions of the market. Thus the importance of accurate prices.

As Megan McArdle explains, this is where speculators come in. Because they believe gasoline is going to be more expensive, the price of oil today is higher than it would be and the price of oil later is lower than it would be. This allows us to better prepare for the future and adapt more smoothly than we otherwise would.

Speculators aren't "gambling." They aren't even "guessing," as McArdle suggests they are. They're estimating. They're smart people working very hard to get reality right--that's how they get paid--and they've independently agreed that prices are just going to get higher. Thank your spectator because now you'll more smoothly consume gas and you won't be caught off guard by a sudden jump in prices. Now you can plan.

HT: Mike Mills

Think Before you Blame

Richard Bitner appeared on The Daily Show tonight promoting his new book, Confessions of a Subprime Lender. Jon Stewart wondered why the people who have the toughest time paying a mortgage are charged the highest rates. Bitner's reply--that they are riskier--is correct but unsatisfying.

We want it to be higher for them. High payments discourage those who have little chance of paying them back. It not only reduces default risk, it generates the incentive for banks to offer these loans in the first place.

America's financial system is not perfect, but it makes a lot more sense than it appears when you take a moment to think about it.

The Ethics of Greed

The Economist reports this week that CompartamosBanco, a Mexican bank, is making a killing in micro finance. Trail blazed by Nobel Peace Prize winners Muhammad Yunus and his Grameen Bank, micro credit loans very small amounts (a few hundred dollars) to entrepreneurs in developing countries. Usually done by nonprofits, CompartamosBanco is a notable exception.

Lending to those in developing countries is expensive because the social, legal, and physical infrastructure is so lacking. The Mexican bank spends about a $152 a year per client. No wonder its interest rates run 79%--usury to most developed countries. But the customers gladly accept the rate. CompartamosBanco has nearly one million borrowers--a far cry from Grameen Bank's seven million but impressive nonetheless.

CompartamosBanco's success encourages new entrants risking their own money (seven new competitors in Mexico alone) while Grameen continues to rely on subsidies and donations. As the economy of scales takes into effect, interest rates fall (seven years ago it used to be 115%) and yet more people rise out of poverty. Not only is this yet another example of how profit seeking helps us all, it reminds us of one of the strange lessons of economics: the only way to get low prices is to allow people to charge high ones.

Why Banks Hate Foreclosures

In the mess of the sub-prime collapse, you occasionally hear that the banks purposely lent to people they knew couldn't pay back the loan. This why they get the loan money and keep the house. Seems like a pretty good deal. Why don't banks do this all the time?

Banks are a business--they don't really want the house, they want the money. You can't pay your workers with bits of a home. You can't use it to invest. You can really only use it to live in, but all the management staff has a place to live already. Homes are what economists call "illiquid" assets--assets that can't turn into other things easily. Banks prefer liquid assets such as bonds, futures contracts, stocks, and cold hard cash.

Can't the bank just sell the house it forecloses? That is what they try to do, but each day it takes costs the bank money in the form of lost opportunities. CNN reported that people who gave up the home to the bank tend to trash the home. They rip out piping, steal toilets, take out cabinetry, lay claim to fixtures, and punch holes in the wall. One family grabbed a pair of decorative columns from a home. Homes like these have to sold at a discount or the bank pays to fix them up. And then they have to pay to keep the house from accumulating additional damage while it sells. It all adds up to time and money down the hole in the floor where the toilet used to be. And banks don't like it.

Reward Those Who Know

Rep. Patrick McHenry (R-North Carolina) asked CEOs dragged into Congress today of Paulson Credit Opportunities Fund, which made billions betting the housing market would plummet. McHenry spoke in distaste of this success.

The congressman should think before he speaks. If Paulson has a unique insight in the housing market, don't we want his firm to act on it? By rewarding people who act on accurate information, countless others have a reason to search for problems before they become disasters. Offers of $1,000 for every mistake found leads to very accurate textbooks.

Contracts Are Not Jails

About five months ago, I signed a nine-month lease with my landlord. Since that time his relatively quiet one-and-a-half-year-old has morphed into a louder two-year-old, my landlord got an additional dog, the wiring in the house is now in noticeably poor shape, and my evolving requirements have exceeded the small space I live in. These are all relatively slight annoyances, but enough to make me want to move. But I have to wait until May, when my lease runs out. No big deal. I see myself in an unfortunate situation of partly my own doing. But not according to Bob Sullivan because I'm "in jail."

For the record, jail is where you go when people take you by force and hold you there. You do not volunteer to go there. Yet Sullivan paradoxically announces that Americans are in "cell phone jail" because they face stiff penalties if they end their contract early. This phrase is utter nonsense. Contracts are not jails, but promises both parties agree to. In this case, the customer loses flexibility and gains lower prices or peace of mind (not having to keep track of your minutes is valuable to many).

Granted, some people later regret their decision. Cell phone companies change prices. Coverage wasn't what was hoped for. For people to pay for something they don't want is undesirable. But when the contract (usually two years) is up, people can switch at no charge. Most don't. Now if many people made a stink about their provider and switched en masse we'd see lower fees, better coverage, and other improvements Sullivan claims can't exist because Americans are prisoners. But people are generally happy with their service, a fact we forget in the heat of the moment because we focus on the few times it doesn't work and not how often it does.

If we were truly prisoners, why would any cell phone company try to please us at all? Why not just cut costs down to nothing, sell people toy phones, and charge them $1,000 a month? It's because we're customers who tie our own hands for a time but will refuse to do it again the moment we feel we are truly "jailed."

HT: Jason Youngberg