Reason Foundation

DirecTV's Viacom Gambit

Posted on July 12, 2012, 6:17pm | Steven Titch

I suppose there’s something to be said for the fact that two days into DirecTV’s shutdown of 17 Viacom programming channels (26 if you count the HD feeds) no congressman, senator or FCC chairman has come forth demanding that DirecTV reinstate them to protect consumers’ “right” to watch SpongeBob SquarePants.

Yes, it’s another one of those dust-ups between studios and cable/satellite companies over the cost of carrying programming. Two weeks ago, DirecTV competitor Dish Network dropped AMC, IFC and WE TV. As with AMC and Dish, Viacom wants a bigger payment—in this case 30 percent more—from DirecTV to carry its channel line-up, which includes Comedy Central, MTV and Nickelodeon. DirecTV, balked, wanting to keep its own prices down. Hence, as of yesterday, those channels are not available pending a resolution.

As I have said in the past, Washington should let both these disputes play out. For starters, despite some consumer complaints, demographics might be in DirecTV's favor. True, Viacom has some popular channels with popular shows. But they all skew to younger age groups that are turning to their tablets and smartphones for viewing entertainment. At the same time, satellite TV service likely skews toward homeowners, a slightly older demographic. It could be that DirecTV’s research and the math shows dropping Viacom will not cost them too many subscribers.

This is the new reality of TV viewing. If you are willing to wait a few days, you can download most of Comedy Central’s latest episodes for free (although John Bergmayer at Public Knowledge reports that, in a move related to the DirecTV dispute, Comedy Central has pulled The Daily Show episodes from its site, although they are still available at Hulu).

What’s more, in a decision that should raise eyebrows all around, AMC said it will allow Dish subscribers to watch the season premiere of its hit series Breaking Bad online this Sunday, simultaneous with the broadcast/cablecast. This decision should be the final coffin nail for the regulatory claim of “cable programming bottleneck.” Obviously, studios have other means of reaching their audience, and are willing to use them when they have to.

Meanwhile, a Michigan user, commenting on the DirecTV-Viacom fight, told the MLive web site that “I love [DirecTV] compared to everyone else. I get local channels, I get sports channels. I wouldn't have chosen if it was a problem.”

Now if Congress or the FCC steps up and requires that satellite and cable companies carry programming on behalf of Hollywood, the irony would be rich. Recall that just a few years ago, Congress and the FCC were pushing for a la carte regulation that would require cable companies to reduce total channel packaging and let consumers essentially pick  the ones they want. Even the Parents Television Council is glomming onto this, as reported in the Washington Post, although not precisely from a libertarian perspective.

“The contract negotiation between DirecTV and Viacom is the latest startling example of failure in the marketplace through forced product bundling,” said PTC President Tim Winter in a statement calling on Congress and the FCC to examine the issue. “The easy answer is to allow consumers to pick and pay for the cable channels they want,” he said.

Winter’s mistake is that he views DirecTV’s challenge to Viacom as marketplace failure. Quite the contrary, it is a sure sign of a functional marketplace when one party feels it has the leverage to say no to a supplier’s aggressive price increase. And while I would be against a ruling forcing cable and satellite companies to construct a la carte alternatives, market evolution may soon be taking us there, but perhaps not the way activists imagined.

I’ll hazard a guess to say that today’s viewer paradigm isn’t so much “I never watch such-and-such a channel” than “I only watch one show on such-and-such a channel.” When Dish cuts off AMC and DirecTV cuts off Comedy Channel et al, they are banking that their customers won’t miss the station, just a handful of shows that they will be motivated enough to find elsewhere, if they haven’t done so already.

It might take a pencil and paper, but there is enough price transparency for a budget-minded video consumer to calculate the best balance between multichannel TV program platforms like satellite and cable, pay-per-view video, free and paid digital downloads and DVD rentals. The cable cord (or satellite link) may be difficult to cut completely, but the $200-a-month bill packed with multiple premium channel packages is endangered. The video consumer of the near-future might still keep cable or satellite for ESPN for Monday Night Football, but turn to Netflix for Game of Thrones, iTunes forBreaking Bad, and the bargain DVD bin for a season box set of Dora the Explorer videos. DirecTV and Dish Network are confronting these economics by confronting studios on their distribution strategy. The studios, for their part, may find they can’t aggressively exploit other digital channels and keep raising rates for multichannel operators.

While disputes like this are messy for consumers in the short term, the resolution will be a consumer win because it will force multichannel operators and the studios to adapt to actual changes in consumer behavior, not a policymaker’s construct of competitive supply chain. Washington would be wise to stay out.

Yes, Anyone Can Be a Reporter

Posted on June 26, 2012, 8:33pm | Steven Titch

In his syndicated column yesterday, Leonard Pitts, Jr. bemoaned the decision by the New Orleans Times-Picayune to cut back its print edition to three days a week, and attacked the sentiment, most recently expressed by former Alaska Gov. Sarah Palin, who might herself been quoting Matt Drudge, that the Internet allows "every citizen to be a reporter and take on the powers that be."

Pitts immediately attacks the comment on the basis of its source, Palin. Then he wanders further from the point by conjuring the truly unpleasant conditions under which reporters, Picayune staffers no doubt among them, labored to ensure news got out in the weeks following Hurricane Katrina's devastation of the Gulf Coast.

One night I had the distinct honor of sleeping in an RV in the parking lot of the Sun Herald in Gulfport, Miss., part of an army of journalists who had descended on the beleaguered city to help its reporters get this story told. The locals wore donated clothes and subsisted on snack food. They worked from a broken building in a broken city where the rotten egg smell of natural gas lingered in the air and homes had been reduced to debris fields, to produce their paper. Shattered, cut off from the rest of the world, people in the Biloxi-Gulfport region received those jerry-rigged newspapers, those bulletins from the outside world, the way a starving man receives food.

Yet nothing in this rather self-important prose tells us what's so irreplaceable about printed newspapers as a platform for news delivery. Instead, we get a straw man.

Palin's sin-and she is hardly alone in this-is to consider professional reporters easily replaceable by so-called citizen journalists like Drudge. Granted, bloggers occasionally originate news. Still, I can't envision Matt Drudge standing his ground in a flooded city to report and inform.

One can say the same thing about Bill Maher, Keith Olbermann or Wolf Blitzer. Yet, come the next disaster, there's no reason not to expect the same dedication from a handful of individuals who are driven to place themselves in the middle of an adverse, if not outright dangerous, event and document what is happening. Only this time they have the cheap video cameras, battery operated laptops and cellphones with wireless Internet connections. The news will get out.

What Pitts actually is lamenting is the end of the monopoly of institutional media. Big media won't go away, and will certainly carve out a large space on the Internet, but it's losing the ability to define news and confer legitimacy on a newsgathering enterprise. Pitts equates the loss of newspapers with the loss of skilled reporting. This fallacy needs to be called out because it fuels the contention , voiced by FCC Chairman Julius Genachowski, Sen. John Kerry, and former Connecticut Gov. Jodi Rell, among other political leaders, that the government should prop up failing newspapers so they can compete against Internet news outlets. To his credit, Pitts never goes this far, but his arguments contain an unspoken invitation for others to do so.

At the end of his column Pitts says he doubts that "citizen journalists" have the credibility, knowledge or training of their newspaper or broadcast counterparts. Here, it helps to remember that we journalists did not truly join the professional class until the 1970s. Carl Bernstein, one-half of the reporting team that inspired a generation of j-school recruits, didn't finish college. Peter Jennings, perhaps the best Middle East TV correspondent of his time, was a high school drop-out. What they did have, was that unique talent to sniff out news and follow a story where it led them.

My first boss at my first salaried reporting job, as old school a newspaper editor you would find, would give job applicants a convoluted press release to rewrite. The aim was not to test copy editing, speed, grammar or style, but to see if his prospective staffer could pull out the actual lead. More than anything, he valued and appreciated a reporter's nose for news. To him this was the innate journalistic talent; everything else could be taught.

Newspaper companies don't define news or reporters. News is timely, topical, compelling and significant. A reporter is anyone who can mine a topic-from something sweeping as global economy trends to as parochial as local city government-and communicate information that meets this criteria. And, yes, anyone can be one. 

We Must Take UN’s Internet Grab Seriously

Posted on June 21, 2012, 5:06pm | Steven Titch

Thanks to our friends Jerry Brito and Eli Dourado at George Mason University's Mercatus Center, and the anonymous individual who leaked a key planning document for the International Telecommunication Union's World Conference on International Telecommunications (WCIT) on Jerry and Eli's inspired WCITLeaks.org site, we now have a clearer view of what a handful of regimes hope to accomplish at WCIT, scheduled for December in Dubai, U.A.E.

Although there is some danger of oversimplification, essentially a number of member states in the ITU, an arm of the United Nations, are pushing for an international treaty that will give their governments a much more powerful role in the architecture of the Internet and economics of the cross-border interconnection. Dispensing with the fancy words, it represents a desperate, last ditch effort by several authoritarian nations to regain control of their national telecommunications infrastructure and operations

A little history may help. Until the 1990s, the U.S. was the only country where telephone companies were owned by private investors. Even then, from AT&T and GTE on down, they were government-sanctioned monopolies. Just about everywhere else, including western democracies such as the U.K, France and Germany, the phone company was a state-owned monopoly. Its president generally reported to the Minster of Telecommunications.

Since most phone companies were large state agencies, the ITU, as a UN organization, could wield a lot of clout in terms of telecom standards, policy and governance--and indeed that was the case for much of the last half of the 20th century. That changed, for nations as much as the ITU, with the advent of privatization and the introduction of wireless technology. In a policy change that directly connects to these very issues here, just about every country in the world embarked on full or partial telecom privatization and, moreover, allowed at least one private company to build wireless telecom infrastructure. As ITU membership was reserved for governments, not enterprises, the ITU's political influence as a global standards and policy agency has since diminished greatly. Add to that concurrent emergence of the Internet, which changed the fundamental architecture and cost of public communications from a capital-intensive hierarchical mechanism to inexpensive peer-to-peer connections and the stage was set for today's environment where every smartphone owner is a reporter and videographer. Telecommunications, once part of the commanding heights of government control, was decentralized down to street level.

There's no going back. Even authoritarian regimes understand this. Fifty years ago, when a third-world dictatorship faced civil strife, it could control real-time information by shutting off its international telephone gateway switch. Not so today. So much commerce, banking, transportation and logistics depends on up-to-the-second cross-border data flow that no country, save for truly isolated regimes such as North Korea, can afford to cut themselves off the global Internet, even for one day.

That's why it's no surprise that the authoritarian regimes of China and Russia, supported by even more despotic states such as Iran, are spearheading the UN/ITU effort. Their politically repressive regimes can't function with the Internet, but their economic regimes, tied as they are to world trade, can't function without it. That's why attempts at Internet control have to be more nuanced and cloaked in diplomacy. 

As we see in the leaked documents, their agenda is masked as concerns about computer security and virus and malware detection, or in arguments about how nation-states have a historically justifiable regulatory responsibility for setting technical standards for IP-to-IP connections. But dig deeper and you find their proposed solutions would give them the power to read emails, record browser habits and extort fees from web sites and services such as Google, Facebook and Twitter (if they aren't going to block them completely).

In the long run, it is doomed to fail. As an organism, the Internet defies top-down control. Every time a country attempts to impede certain types of Internet communications, via firewalls, filters, or outright domain name blocks, individuals create workarounds. It's not that difficult.

That simple fact might engender complacency among netizens here in the U.S. And besides, speaking out against ominous plots by UN agencies makes us sound too much like the nutty neighbor with the backyard bunker.

But there are serious risks to what the ITU and the UN are attempting. Even if only gets part of what it wants, the ITU's Internet grab stands to seriously damage the global free and open Internet.

First, as a multi-lateral "international" agreement, the ITU plan will give repressive regimes cover for Internet clampdowns. Even if the U.S. does not sign on, all it will take is buy-in a few other Western governments, who might just see the treaty as convenient (see the U.K.'s recent Home Office ideas), to allow the more egregious dictatorships in the world to take repressive action.  

The U.S. should be leading all democratic governments in speaking out against the ITU plan. A weak-willed "I'm-OK-you're-OK" approach, or worse, a non-judgmental relativism that suggests American ideas of Internet freedom should defer to a more repressive country's "national culture," are simply not acceptable.  

It seeks to displace multi-stakeholder development. The collaborative culture of the Internet, driven by consensus and undergirded with a commitment to open standards and platforms, is the ITU's primary target. When a nation-states make rules for phone networks, they can specify equipment, favor their domestic manufacturers, create cumbersome compliance rules, and ban possession of non-compliant devices all with the force of heavy-handed law. This is hardly far-fetched. Ethiopia has made Internet phone calls (i.e. Skype) illegal.

It seeks to normalize government regulation of the Internet. For more than 30 years, deregulation has been the predominant policy toward the Internet. This trend has managed to hold on despite numerous attempts at censorship, "neutrality" regulation and price controls. The most common proposition we hear runs to the effect of the Internet has become so important that it needs regulation. Frankly, the Internet has survived and thrived since its beginning without top-down state regulation. Worldwide access continues to grow. By and large, international data networks operate reliably and inexpensively. If anything, the burden of proof for regulation of the 'Net should be ever higher. Why, exactly, do we need an international regulatory regime for the Internet? So far those who would impose one haven't said so. And sorry to say, because citizens are taking to the streets with their iPhones and demanding basic freedoms is not an acceptable reason.

Five Reasons the DoJ’s Investigation of Data Caps is Misguided

Posted on June 20, 2012, 5:33pm | Steven Titch

Count me among those who are rolling their eyes as the Department of Justice initiates an investigation into whether cable companies are using data caps to strong-arm so-called "over-the-top" on-demand video providers like Netflix, Walmart's Vudu and Amazon.com and YouTube.

The Wall Street Journal reported last week that DoJ investigators "are taking a particularly close look at the data caps that pay-TV providers like Comcast and AT&T Inc. have used to deal with surging video traffic on the Internet. The companies say the limits are needed to stop heavy users from overwhelming their networks."

Internet video providers like Netflix have expressed concern that the limits are aimed at stopping consumers from dropping cable television and switching to online video providers. They also worry that cable companies will give priority to their own online video offerings on their networks to stop subscribers from leaving.

Here are five reasons why the current anticompetitive sturm und drang is an absurd waste of time and might end up leading to more harm than good.

Cable companies set data caps high, really high. Comcast, for example, currently sets its residential data limit at 250 gigabytes (GB). Searching around the 'Net, I've found that a rule of thumb is 1 GB equals 1 hour of video, although quality, frame rate and resolution may affect this measure.  However, this 1 hour = 1 GB tracks with my own household downloading, which varies between YouTube and iTunes downloads, and Netflix HD.

Also, despite the use of the word "caps," residential Internet users are not cut off when they reach the 250 GB threshold. Comcast customers are just charged $10 for another 50 GBs, that is, another 50 hours of video.

The idea of a threshold is not unreasonable. Video delivery requires greater network management to address issues such as latency and error correction, adding costs to network operation. The alternative is for service providers to raise the base price of "unlimited downloads" for all users, essentially spreading the cost of a small percentage of high-volume users across the entire subscriber population. That in itself raises fairness questions. It's a simple trade-off, do we want higher prices across the board, or should the top tier users bear the costs they are responsible for imposing?    

The pay-per-view market is crowded, and cable has a right to compete. Consumers have a fair degree of choice among pay-per-view providers. Cable companies, along with Amazon, Vudu, Cinema Now and Apple's iTunes all have solid selections in terms of recent film releases and TV episodes. These virtual rentals generally cost $5 to $7 for a 24- to 48-hour period. Most also offer viewers an option to buy a digital copy. While Netflix's on-demand menu lacks the timeliness of the others, it compensates in terms of depth, and thousands of titles are available for a relatively low $8 per month subscription fee. Then there's Google's YouTube, the largest server of Internet video, which is trying to expand off the desktop PC and onto the living room big-screen by funding development of new "channels." Although the first fruits of this venture, channels such as The Nerdist seems a bit, come across as a bit, well nerdy, we should know by now not to discount anything Google attempts.

The point is that cable is not somehow shutting down "low-cost" access to video, as the DoJ claims. In truth, alternatives to cable pay-per-view can be less expensive and more varied. 

"Cutting the cable cord" involves a value proposition. Like telephone service before it, household video delivery no longer depends solely on a single hard-wired monopoly infrastructure. For someone not particularly interested in watching TV news, reality shows and real-time sports events, it is possible to do away with cable TV entirely and get one's video fix through DVDs, digital downloads via wireless service providers. Or one could even chose the lowest-priced cable tier, essentially local channels, with Internet access.

But the landline telephone analogy has limits. Wireless service is replacing wireline because it offers much more value than the old home phone. For starters, wireless makes communications truly personal: your phone is associated with you, not a geographic location like your home office. Today's wireless phones also are as much information appliances as they are communications tools.

True, cable companies don't get much love from consumers, but there's still something to be said for watching the NBA playoffs on a 50-inch HD big screen. And contrary to what the DoJ thinks, there is no consumer "right" or entitlement to this service at below-market rates. Saying so--and assigning the social cost on one segment of the value chain, namely the infrastructure owners, stands to create all sorts of problems. For example, why hold the cable company responsible for low-cost video and not the TV manufacturers? Why shouldn't all DVDs rentals be priced at $1 rather than $3 for "new releases?" Why should Apple's iTunes be permitted to charge extra for TV episodes delivered "free" the night before? 

The answer is that there are costs and trade-offs associated with each. An Amazon customer may be able to buy all of season one of Game of Thrones for the cost of one month's subscription to HBO, but she must wait almost a year for the opportunity to do so. In this model, the cable company leverages timeliness, HBO is protects its distribution partners, yet, in the the long run, the programming is available to those who don't want to pay the cable premium. It's difficult to see where consumer rights are being violated.

Wireless is the wild card.  As alluded to above, wireless service may yet be a substitute for cable connections. Spectrum scarcity, however, makes wireless connections more expensive, and therefore usage caps are much lower (unless you're piggybacking on a household WiFi supported to a cable modem). But this is just one more reason to speed ahead with spectrum re-allocation.  

Here's where current policy works at cross-purposes. Fostering greater consumer choice is a laudable goal. But that goal can be achieved faster and more cost-effectively if policy is aimed at increasing market mechanisms - which spectrum auctions, unencumbered by conditions, will do. It beats creating cumbersome regime of subsidized service and mandating prices, which, at the end of the day, is nothing but raiding the wallets of average users to pay the cost of heavy bandwidth consumers.

The TV game is changing. Looking at the current video landscape, I have trouble seeing the cable companies as having any sort of advantageous position right now. Their big competitive differentiator, wide scope of programming, is becoming commoditized. Television audiences are fragmenting, which means even the most popular shows draw lower ratings than in the past. oard. DVRs, DVDs and iTunes allow audiences to avoid advertising, which means the one-time stalwart business model that supported free content since the beginning of broadcasting is changing.  

Truth be told, no one really knows exactly how TV programming content and delivery will change over the next ten years--only that it will. As broadband data capacity and management becomes more germane to video delivery, bandwidth tiers may yet be an important to pay for it and keep content free. At the same time, there is enormous potential for unintended consequences if unwise policy courses are taken. The worse thing right now is for any government agency to start fumbling around with mandates, regulations and directives on broadband video entertainment, whether they address pricing, platforms or business models.    

Let Parent's Decide: What a Concept!

Posted on June 5, 2012, 2:05pm | Steven Titch

Facebook founder Mark Zuckerberg wants to lift the minimum age restriction for social networking, which Facebook's terms of service, in line with the Children's Online Privacy Protection Act, currently sets at 13.

The immediate reaction in Congress, of course, was outrage followed by an interrogatory letter to Zuckerberg from Reps. Ed Markey and Joe Barton, Washington's self-appointed bi-partisan tag team for online in loco parentis (just Google "Barton Markey Internet"), demanding he explain himself.

But given the growth of social media, the time is ripe to revisit these age restrictions, and even to ask whether they are working at all. Research indicates that there are 7.5 million Facebook users under 13, most of whom are there with their parents knowledge and/or assistance. This itself begs the question as to how effective COPPA's age restrictions are.

Last year, a team lead by danah boyd, senior researcher at Microsoft and a research assistant director in the Media, Culture and Communication Department at New York University New York University, found that:

• 55 percent of parents of 12-year-olds know their children have Facebook accounts, with 82 percent of those knowing when their kids signed up, and 76 percent assisting them in the process.
• 36 percent of all parents surveyed (1,007 U.S. parents with children 10 to 14 living with them, from July 5 through 14) said their kids joined Facebook before turning 13, and 68 percent of those also helped their children create their accounts on the social network.
• 53 percent of parents think Facebook has a minimum age requirement, while 35 percent believe it is only a recommendation.
• 78 percent think violating the minimum-age limits for online services is acceptable.

(H/T to David Cohen at AllFacebook.com for bullet points)

This last point is telling. Given the unenforceable age rule, many kids' first lesson about the Internet is that rules and regulations can be safely flouted with a wink from Mom or Dad. This is not the best grounding for dealing with weightier ethical questions about online behavior that will pop up down the line--from cyberbullying to Internet piracy. Unfortunately, the government loves setting arbitrary age points--for drinking, driving, voting, marriage and Facebook membership--when in nature, maturity is not neatly so age-specific. But in light of the pervasiveness of online media at this point in time, age 13 may be too old for children to be officially introduced to the mechanisms of social networking. Certainly many parents think so. I'll only say in response to concerns about privacy and information collection, it's no secret how social media sites work. Parents have all they need to make an informed decision about the degree their kids use social media--and ultimately have the most influence and control.

Reasonable parents may disagree, and what might be suitable for your 11- or 12-year old may not be suitable for mine. The difference is that Facebook is willing to respect your position as a parent, while the government is not.

Federal Public School Food Police Fine Utah School $15k for Leaving Vending Machine Plugged in During Lunch.

Posted on May 17, 2012, 1:05pm | Lisa Snell

As "The Blaze" reports: 

A Utah high school is learning the hard way that the government is serious about nudging students away from food it doesn't want them to consume. Davis High School in the Salt Lake City area is having to fork over a whopping $15,000 in fines to the Feds because it accidentally sold soda through a vending machine during lunch.

Federal law requires the school to turn off its soda machines during the lunch period, which is 47 minutes a day. And Davis High school did turn off the machines in the lunch room. However, the school didn't realize that there was another machine in the school bookstore that wasn't being turned off. And when the food police realized it, the school was hit with a $0.75 fine per student for the duration of the offense. 

And this is especially unfair because all the evidence suggests that soda and snack bans in schools don't work. As the Washington Post and many others have reported:

Jennifer Van Hook and Claire Altman looked at a sample of 20,000 students who began kindergarten in 1998, and checked in on their height and weight in fifth and eighth grade. They couldn't find any significant link between higher obesity rates and schools that allowed vending machines selling snacks and soda. "The results suggest that the sale of competitive foods [which compete with traditional school foods, such as soda and snacks] in school is unassociated with weight gain among middle school children," they write.

Policies that limit the availability of candy bars, chips and soda have become popular in recent years; 23 states place some kind of restriction on what foods can be sold in schools. Why does this study find that such policies don't necessarily reduce childhood obesity? A lot of factors could be at play. Students that don't have access to soda in schools tend to increase their consumption of sugary drinks at home, a 2011 study in the Archives of Pediatric and Adolescent Medicine found.

In addition, it turns out that like everyone else school kids are good at developing black markets when soda and snacks are banned. As this article explains: LA school district lunch program spawns thriving junk food black market. 

New John Stossel Special: No They Can't! Why Government Fails But Individuals Succeed

Posted on April 6, 2012, 2:12pm | Lisa Snell

I'll be on the new John Stossel documentary "No They Can't: Why Government Fails But Individuals Succeed." The program will air tonight at 10 PM EST & 7 PM PST and the same time Saturday night.  For more information go here and read on below:

Politicians say, "Yes, we can!" and claim that they solve our problems.

When the mortgage market crashed, the president said their new law, Dodd-Frank, would create a "new financial system" so such things would never happen again.

After 9/11, Senator Tom Daschle declared "you can't professionalize if you don't federalize!" The Senate voted 100-0 to create the TSA to run airport security.

Politicians' promises are endless. They say they'll: create jobs, "make college affordable for all," protect the disabled, give disadvantaged kids a head start and invest in "cutting-edge innovation."

But they can't achieve what they promise.

· Billionaire Mark Cuban and other job-creators explain why government's rules now prevent the job creation that was once America's hallmark

· Dodd-Frank, instead of stopping fraud, added layers to already incomprehensible banking laws. Stossel shows how simple rules in the Cayman Islands not only stop fraud, but they also create prosperity

· While the TSA creates long lines, misses actual terrorists and angers passengers, screeners working for a private company at one big airport work faster, more cheerfully and find more contraband. We show how the private company does it

· Did you know that the University of Missouri is proud to have a "leisure resort" on campus? Naomi Riley, author of "The Faculty Lounges: And Other Reasons Why You Won't Get the College Education You Pay For," explains how government aid led to massive tuition hikes

· Since the Americans With Disabilities Act took effect, fewer disabled people have been able to work

· Lisa Snell from the Reason Foundation explains how the government's own research found that Head Start did not help poor kids. Government's response? Spend even more

Government grows, despite its repeated failure.

The Risks of Misapplied Privacy Regulation

Posted on April 3, 2012, 3:15pm | Steven Titch

Reason.org has just posted my commentary on the five reasons why Federal Trade Commission's proposals to regulate the collection and use of consumer information on the Web will do more harm than good.

As I note, the digital economy runs on information. Any regulations that impede the collection and processing of any information will affect its efficiency. Given the overall success of the Web and the popularity of search and social media, there's every reason to believe that consumers have been able to balance their demand for content, entertainment and information services with the privacy policies these services have.

But there's more to it than that. Technology simply doesn't lend itself to the top-down mandates. Notions of privacy are highly subjective. Online, there is an adaptive dynamic constantly at work. Certainly web sites have pushed the boundaries of privacy sometimes. But only when the boundaries are tested do we find out where the consensus lies.

Legislative and regulatory directives pre-empt experimentation. Consumer needs are best addressed when best practices are allowed to bubble up through trial-and-error. When the economic and functional development of European Web media, which labors under the sweeping top-down European Union Privacy Directive, is contrasted with the dynamism of the U.S. Web media sector which has been relatively free of privacy regulation - the difference is profound.

An analysis of the web advertising market undertaken by researchers at the University of Toronto found that after the Privacy Directive was passed, online advertising effectiveness decreased on average by around 65 percent in Europe relative to the rest of the world. Even when the researchers controlled for possible differences in ad responsiveness and between Europeans and Americans, this disparity manifested itself. The authors go on to conclude that these findings will have a "striking impact" on the $8 billion spent each year on digital advertising: namely that European sites will see far less ad revenue than counterparts outside Europe.

Other points I explore in the commentary are:

• How free services go away and paywalls go up
• How consumers push back when they perceive that their privacy is being violated
• How Web advertising lives or dies by the willingness of consumers to participate
• How greater information availability is a social good

The full commentary can be found here.

States Spurning Film Tax Credits, CO Pursuing Them

Posted on February 15, 2012, 12:49pm | Harris Kenny

Last week I wrote about how the fight over film tax credits resumed in Colorado in the form of House Bill 12-1286 sponsored by state Reps. Tom Massey (R-Poncha Springs) and Mark Ferrandino (D-Denver). HB 1286 can be evaluated from two angles:

• First, the impact the bill might have on the state's film tax credit (or movie production incentive) fund. In its current form HB 1286 would significantly expand the size and scope of the state's film tax credit fund.
• Second, the bill would establish a new government secured loan guarantee for film, television and media producers. This expansion, though not unprecedented nationally, would be a dramatic change for the state of Colorado.

I address the first concern in my latest commentary for Colorado Peak Politics entitled, "Picture This: Film Tax Credits Demonstrably Wasteful, Ineffective." Here's an excerpt from the piece:

Ironically, as Colorado attempts the most aggressive expansion of this program yet, many states are going in the opposite direction. 2010 is widely considered the peak year for states paying out aggregate dollars for film tax credits. Last summer The Economist described this trend bluntly saying, “After a decade of escalation, a stupid trend may have peaked.”

Over the last few years states like Washington and Arizona have phased out their programs, and others refused to appropriate them money. Meanwhile groups like the Center on Budget and Policy Priorities and the Tax Foundation have effectively discredited film tax credits through comprehensive national studies. The details are especially grisly when honing in on specific states.

Let’s start with the “high flyers”: Michigan, New Mexico and Louisiana. For years film tax credit proponents cited these states as success stories. A 2008 New York Times article critical of film tax credits (considered contrarian at the time) has proven prescient. Author Michael Cieply wrote, “(S)tates are moving to rein in their largess that has allowed producers to be reimbursed for all manner of expenditures, whether the salaries of stars, the rental of studio space or meals for the crew.”

I will address the second concern (government secured loan guarantees for filmmakers) in a forthcoming op-ed. In the meantime, check out the full piece available online here. For more on film tax credits in Colorado, see my Denver Business Journal op-ed here; and my previous blog posts here and here.

Fight Over Film Tax Credits Renewed in Colorado

Posted on February 11, 2012, 5:09pm | Harris Kenny

This week the ongoing fight over film tax credits (or movie production incentives) was renewed in Colorado.

State Reps. Nancy Todd (D-Aurora) and Tom Massey (R-Poncha Springs) sponsored House Joint Resolution 12-1010. HJR 12-1010 essentially lays out the argument that Colorado’s film, television, and video gaming industry deserves preferential treatment over every other industry in the state, and concludes by proclaiming:

(1) That we, the members of the Sixty-eighth General Assembly, hereby recognize the film, television, and video gaming industry in Colorado as an integral part of Colorado's economic future; and

(2) That, in appreciation of the efforts of the Colorado Innovators of New Entertainment, Media, and Arts (CINEMA), we hereby declare February 8, 2012, to be Colorado CINEMA Day.

The resolution itself won’t have an impact beyond creating Colorado CINEMA Day, however some of the resolution language is also used in a separate piece of legislation.

The anticipated complementary film tax credit legislation was introduced in the form of House Bill 12-1286. Rep. Tom Massey (R-Poncha Springs) and Rep. Mark Ferrandino (D-Denver) co-sponsored the bill, which was assigned to the House Economic and Business Development Committee. So, is HB 12-1286 that different than similar legislation that Rep. Massey has proposed over the last eight years? Actually, yes – this bill would represent a dramatic increase in the role of government in Colorado’s film, television, and video gaming industry. Here are highlights of what the bill would do in its current form:

• Create a loan guarantee program for production activities;
• Create the Colorado Office of Film, Television and Media operational account cash fund; 
• Make a $3 million appropriation from the general fund to the Colorado Office of Film, Television and Media operational account cash fund;
• Increase the amount of the incentive from 10% up to 20% of the total amount of the production company’s qualified local expenditures; 
• Raise the required percentage of staff for in-state production activities be Colorado residents from 25% up to 50%;
• Increase the amount of qualified local expenditures for a production company that does not originate the film production activities in Colorado to $1 million (except television commercials);
• Reduce the payments allowed for each employee or contract from $3 million to $1 million;
• Move the Colorado Office of Film, Television and Media to the Office of Economic Development and require the Colorado Economic Development Commission to approve all conditional approvals of the incentives; and
• Require a production company that has received conditional approval for an incentive to retain a certified public accountant licensed to practice in Colorado to conduct an audit of financial documents that detail the expenses incurred in the course of film production activities in Colorado, and require said accountant certify to the office that the requirements were met.

The aforementioned adjustments to the existing film tax credit program speak for themselves, however the creation a government-run loan guarantee program for film, television and media would represent a major policy change in Colorado.

Melanie Asmar of Westword magazine recently summed up the loan guarantee program in an interview with Donald Zuckerman, director of the state’s Office of Film, Television and Media:

No other state offers a similar loan deal, Zuckerman says: "They don't realize it would be a benefit." But as a producer himself, he says he understands the business and what it takes to catch a moviemaker's eye.

The details of the loan-guarantee proposal are complicated, but Zuckerman says he's figured out a way to "virtually assure that the money will be paid back to the bank." To start, Zuckerman's office would review a script to make sure it's "commercial" enough to make money. The office would also require that the movie feature at least one celebrity and that a good company be hired to sell the film. Once profits roll in, the filmmakers would have to pay back the percentage that the state guarantees first.

"Let's say Alec Baldwin does a movie and the movie is a thriller," he posits. "Even if the movie turns out not to be good, it will get licensed for television all over the world," thus earning enough money to at least pay back the state's part of the loan.

There are in fact comparable programs in New Mexico and Manitoba (Canada) for example, and there was another program in Texas that’s no longer listed among incentives so it likely expired via sunset clause. 

Overall, HB 12-1286 appears to be far more aggressive than anticipated making it difficult to predict how legislators will respond. However if the Joint Budget Committee’s response to the requested $3 million appropriation is any indicator, this bill is expected to receive a cool reception. As I wrote in a blog post this past December:

When (the Joint Budget Committee) reached the economic development portion of [Governor] Hickenlooper's budget, it's fair say they gave his proposal to increase subsidies for filmmakers a lukewarm review. Ed Sealover of the Denver Business Journal reports, "both Republican Sen. Kent Lambert and Democratic Rep. Claire Levy — who are about as far apart on the ideological spectrum as any two legislators — questioned where there are better uses for the money." Lambert, citing a Federal Reserve Bank of Boston study [available online here] asked, "Is that the best use for that big chunk of money, or is it better to spend it out into other areas?"

For more on film tax credits, see my Denver Business Journal op-ed here, and previous posts here, here, and here.

Protesting the Cancellation of Freedom Watch?

Posted on February 10, 2012, 4:36pm | Adrian Moore

I am a HUGE fan of Freedom Watch and Judge Napolitano's journalism and commentary.  So I am bitterly disappointed that Fox Business chose to cancel it. My colleague Matt shares my disappointment.

I have to say I find it odd, though, that over at Lew Rockwell they are calling for all to "convey your outrage at this matter" to Fox.  I think I get what they are driving at--Use your voice as a customer to tell the supplier you want them to keep providing the product.  That is smart.   I just would not talk about "outrage" but instead about demand or desire, just because the left so often uses "outrage" and a token for using populist pressure, rather than market pressure, to change decisions.

As much as I like Freedom Watch and the Judge, and hope he lands a new and equally effective gig, the fact is that Freedom Watch did not have good ratings.  So Fox Business's decision is the market in action--they don't need shows that are wildly popular with a small audience, they need shows that draw bigger audiences and thus bigger ad revenue. 

So rather than expressing outrage, all us fans of the Judge ought to be asking--why wasn't his audience bigger? And how can we change that?

Google Tests the Privacy Paradox

Posted on January 26, 2012, 3:43pm | Steven Titch

This week Google announced that it is grouping 60 of its Web services, such as Gmail, the Google+ social network, YouTube and Google Calendar, under a single privacy policy that would allow the company to share user data between any of those services. These changes will be effective March 1.

Although we have yet to see it play out in practice, this likely means that if you use Google services, the videos you play on YouTube may automatically be posted to your Google+ page. If you've logged an appointment in your Google calendar, Google may correlate the appointment time with your current location and local traffic conditions and send you an email advising you that you risk being late.

At the same time, if you've called in sick with the intention of going fishing, that visit to the nearby state park might show up your Google+ page, too.

The policy, however, will not include Google's search engine, Google's Chrome web browser, Google Wallet or Google Books.

The decision quickly touched off discussion as to whether Google was pushing the collection and manipulation too far. The Federal Trade Commission is already on its back over data sharing and web tracking. With this latest decision, although it's not that far from how Facebook, Hotmail and Foursquare work, just more streamlined, Google, some say, is all but flouting user and regulatory concerns.

But let's not rush to condemn this move. I, for one, want to see what happens because Google is boldly putting the privacy paradox to the test.

Going by my own Google search, the term "privacy paradox" has been kicked around for almost ten years. Boiled down, it describes the repeated finding that while individuals express a high degree of concern for privacy protection online, few, in practice, take advantage of privacy safeguards when they are offered.

This apparent contradictory behavior has been noted in a number of studies, including a noted 2007 paper in the Journal of Consumer Affairs.  A 2005 Pew Internet Study, cited at the time by Forbes, found that that 54 percent believe that Web sites invade their privacy when they track behavior. But the same study showed that 64 percent were willing to give up personal information to get access to a Web site.

In the marketplace, when search engines like Google began facing vocal pushback from users and regulators on its tracking of user search histories, one of Google's competitors, Ask.com, tried to differentiate itself by unveiling AskEraser. Just like it sounds, the tool allows users to opt out of search tracking. As Forbes reported, users shrugged and AskEraser did nothing for Ask's market share, while Google's continued to grow.

Contrary to the first hysterical media reports, Google is not recording your whole digital life. There indeed is an opt-out: you don't have to be part of the Google service ecosystem, which is far from the only game in town. Remember, browsing and search are outside this program. Everything else is available from other sources. Moreover, data is only shared if you're logged in under your Google username. Otherwise you can look at all the YouTube videos and Google maps you want without anyone being the wiser.

I'll admit the biggest outcry may come over the policy with regard to Android phones. Since you're technically logged into your phone all the time, it seems tougher to opt out. But there are other devices aside from Android, even from Verizon, so consumer will have alternatives without having to change service providers. Nonetheless, given the popularity of the combination of mobility and social networking, seen not only in Google and Facebook, but in Twitter, Yelp! and Foursquare, it is arguable that a majority of users are not as concerned about their privacy as advocates of more restrictive regulations believe.   

And arguable is the operative word. There indeed may be enough significant user backlash that Google backs off. In the last six months we've seen at least two instances of rapid market correction--Netflix's decision not to go through with structurally separating mail and online video rental accounts and Bank of America's reversal of its plan to charge online banking fees. Both occurred before the government could step in a provide its own (and no doubt clumsy) remedy.

Then again, there's a significant body of research that suggests that, in spite of their own complaints, users may opt to accept greater benefits and convenience in exchange for more disclosure about their habits. With this mind, it will serve consumers best if companies like Google are allowed to experiment with the privacy paradox to find where actual boundaries are, rather than hamstringing potential innovation by pre-emptively and blindly setting them.

Is the Cost of Internet Piracy Overhyped?

Posted on January 24, 2012, 2:55pm | Steven Titch

"Any other musicians notice that ever since they shut down MegaUpload, the money has just been POURING in?"

So tweeted independent songwriter and recording artist Jonathan Coulton yesterday, in what might be the most succinct challenge to the federal government's claim that Megaupload.com, the file sharing service facing federal charges of intentionally pirating content, has cost singers, actors, writers and producers $500 million in lost revenues and royalties.

Coulton's comment, which was followed by a more in-depth blog, both spotlighted at TechDirt, contributed to the ongoing debate over the accuracy of the half-billion-dollar number. In addition to the due process concerns raised by the government's abrupt shutdown of the Megaupload site, more and more commentators are challenging industry assertions about the amount of losses piracy creates. Actor Wil Wheaton, for example, said Hollywood loses more money through "creative accounting" than it does through piracy.

Coulton himself, who does not have a label but sells recordings via the Web, believes the cost of piracy is overstated:

Is it really as dire as all that? It's an emergency is it? Tim (O'Reilly) points out that he and a lot of other content creators have been happily coexisting with piracy all this time, and I'm certainly one of them. Make good stuff, then make it easy for people to buy it. There's your anti-piracy plan [emphasis Coulton's]. The big content companies are TERRIBLE at doing both of these things, so it's no wonder they're not doing so well in the current environment. And right now everyone's fighting to control distribution channels, which is why I can't watch Star Wars on Netflix or iTunes. It's fine if you want to have that fight, but don't yell and scream about how you're losing business to piracy when your stuff isn't even available in the box I have on top of my TV. A lot of us have figured out how to do this.

So if you can stand me sounding a little crazy, listen: where is the proof that piracy causes economic harm to anyone? Looking at the music business, yes profits have gone down ever since Napster, but has anyone effectively demonstrated the causal link between that and piracy? There are many alternate theories (people buying songs and not whole albums, music sucking more, niches and indie acts becoming more viable, etc.). The Swiss government did a study and determined that unauthorized downloading (which 1/3 of their citizens do) does not create any loss in revenue for the entertainment industry.

Elsewhere, the Cato Institute's Julian Sanchez also questions whether the true economic cost of piracy warrants such an overbearing legislative response.

...I remain a bit amazed that it’s become an indisputable premise in Washington that there’s an enormous piracy problem, that it’s having a devastating  impact on U.S. content industries, and that some kind of aggressive new legislation is needed tout suite to stanch the bleeding. Despite the fact that the Government Accountability Office recently concluded that it is “difficult, if not impossible, to quantify the net effect of counterfeiting and piracy on the economy as a whole,” our legislative class has somehow determined that—among all the dire challenges now facing the United States—this is an urgent priority. Obviously, there’s quite a lot of copyrighted material circulating on the Internet without authorization, and other things equal, one would like to see less of it. But does the best available evidence show that this is inflicting such catastrophic economic harm—that it is depressing so much output, and destroying so many jobs—that Congress has no option but to Do Something immediately? Bearing the GAO’s warning in mind, the data we do have doesn’t remotely seem to justify the DEFCON One rhetoric that now appears to be obligatory on the Hill.

No one is saying copyright and intellectual property shouldn't be protected. However, a time out may be in order. The two bills designed to combat Internet piracy, Protect Intellectual Property Online Act (PIPA) and the Stop Online Piracy Act (SOPA) are sweeping and may constitute the use of a bazooka to kill if not a fly, maybe a very large cockroach. 

The Virtual Jackboot

Posted on January 20, 2012, 2:55pm | Steven Titch

Americans got a preview of what life would be like under the U.S. Senate's Protect Intellectual Property Act (PIPA) when the Department of Justice and the FBI yesterday shut down Megaupload.com and arrested its founder and six other executives on charges of illegally sharing copyrighted material.

The move comes in the middle of a vociferous debate on PIPA and its House counterpart, the Stop Online Piracy Act (SOPA) and provides more fuel for opponents who argue that the bills threaten to undermine legal, legitimate mechanisms that are integral to the Internet technological and social utility (See my commentary posted yesterday afternoon).

PIPA supporters have argued that worries about Internet censorship and user disruption are exaggerated and the bill's real goal is to target shadowy "rogue" sites that deal in counterfeit merchandise and pirated video downloads. Yesterday we found out just who the Feds thinks these rogue sites are.

Megaupload.com is a major commercial file-sharing site used by millions of consumers and businesses in the course of daily business. Users park large files that can then be shared among friends, family or professional workgroups. It competes directly with other such services such as Dropbox and RapidUpload. Megaupload claims to have about 50 million daily visits and even DoJ notes that at one point it was estimated to be the 13th most frequently visited site on the Internet.

Can infringing material be found on Megaupload? No doubt it can. But infringing material can also be found on YouTube and just about every other file-sharing site. The courts have held that these sites are not liable for infringement as long as they honor cease and desist notices to take down offending content.

The DoJ's indictment rests on the claim that Megaupload.com first and foremost was in the business of piracy. The seven executives arrested yesterday (a group that did not include the company's CEO, Swizz Beatz, the husband of singer Alicia Keyes) are being charged with racketeering. The indictment claims that Megaupload.com robbed artists, musicians and authors of $500 million, and that the site is actually a front for a worldwide conspiracy.

These charges might yet be true, but the supposition shouldn't trump due process. That it did brings the precise concerns of PIPA and SOPA critics into high relief. In addition to the arrest, the Feds have forced Megaupload.com to shut down, essentially seizing not only private property of Megaupload, but the documents, photos, videos and artwork of millions of legitimate users--some of it crucial to their livelihoods--on what amounts to a thin pretext that could be applied to any file-sharing site. Anonymous, the loosely knit "hacktivist" group, made its feelings known with its retaliatory DDoS attacks on DoJ, FBI, MPAA and RIAA sites yesterday, but I think there's more blowback to come. A significant number of average Americans lost time, money and digital property yesterday in what they perceive as a massive overreach by a DoJ that is already under fire for its blundering tactics (Fast and Furious, the Black Friday poker site shutdowns). I'll bet the phones were ringing off the hook in many Congressional offices this morning.

Moreover, the charges may not stick. By all accounts, Megaupload is gearing up for a fight. As its lead attorney notes, case law, including the YouTube decision, favors the company. Plus there's the fact there are no copyright judgments currently against it. It reportedly has also been working to iron out copyright issues with rightsholders, and has garnered support from a cross-section of artists and performers--the very community that the government alleges Megaupload has been ripping off. But even it wins, it might be a Phyrric victory, because by the time the legal dust settles, Megaupload may well be out of business. Elsewhere, Dropbox and RapidUpload execs must be sweating.

The takeaway from all this is that SOPA and PIPA will codify these DoJ tactics. And with the Megaupload siezure sitting out there as Exhibit A, no one can take the Feds at their word that they will exercise any restraint or discretion in their definition of a "rogue" site.  

The best hope is that Megaupload turns out to be the egg that make the omelet. The good news out of this week of contentious debate is that is that Senate Majority Leader Harry Reid has pulled the Tuesday PIPA vote from the floor calendar. In the lower chamber, House Judiciary Committee Chairman Lamar Smith said his panel won't take up "there is wider agreement on a solution."

Looks like the good guys might just win one.

Here's Mike Riggs take on Reason.com's Hit and Run.

The Internet On Strike

Posted on January 18, 2012, 10:39am | Anthony Randazzo

In protest of the Congressional consideration of SOPA, the Stop Online Piracy Act, hundreds of websites (if not more) are "blacking out" today. Some of the biggest websites to go on strike include Google, Wikipedia (English), Reddit, Mozilla/Firefox, and Wordpress. The blackout will last for 24 hours on January 18 for most websites, so I've included screen shots below in case you're reading this after the fact. (See a full list of sites on strike here.)

The protest has already done quite a bit to bring awareness to the danger that is the ideas contained in SOPA. Google's website "End Piracy, Not Liberty" has a great summarization PDF of issues int he debate. In short, the House and Senate are considering legislation that would give the federal government the power to take down any website it wants without notice if it determines that site contains copyrighted material. Among other things it can fine search engines, like Google and Bing, for including links to copyright violating material. 

The ideas in the legislation are a significant threat to free speech, would result in substantial censoring of legal material, and would alter the nature of the Internet as we know it. Some have said such overtures are extreme and that SOPA critics are taking the argument too far. While history would suggest that once the federal government gets its claws in something like this the end result is always vindication of the critics, there is a more concrete reason why claims this would alter the nature of the Internet are not overblown.

The foundation of the Internet is the freedom for an individual to seek out and find information/content and also to share information/content. Search engines are tools to do the searching, doors to the Internet. Web domains are the tools to do the sharing. By threatening to fine Google for other people violating copyright, this will necessary force Google to over compensate in restricting its search functions. The necessary result is the capacity for individuals to access content is restricted. 

Were this restriction to come from Google just shutting itself down because its staff wanted to all just take their money and become professional surfers, this would be disappointing but not unjust. We have no claim over the staff at Google and, other than contracts they've signed, they don't "owe" "us" the provision of their free services, as much as we've come to depend on them. But that is substantially different than the U.S. government forcibly stepping in and dictating terms to Google for how it can operate and necessitating it restrict access. 

Google shutting down would alter the nature of the Internet. Google getting restricted would alter the nature of the Internet. It is as simple as that.

Then there is the due process issue underlying all of this for the sharing aspect of the Internet. The original version of SOPA would allow websites to be taken down on the mere accusation of copyright violation. It would also assume guilt before innocence. So if I have a blog and someone goes into the comments on my blog and writes the words to a popular song they could be in violation of copyright. If I get 1,000 comments a day on my blog (dreaming, yes) it is highly possible I could miss the violation. SOPA would theoretically allow the government to just shut down my blog, take over the domain, and force me into a complicated appeals process to get the site access back. Due process would suggest a notification given and opportunity for the content to be removed. I didn't put it there, I can take it off without shuttering the whole site. Only persistent law breakers who ignore warnings should fear their domain being taken away, and even then the content should be targeted first and foremost. 

Amended versions of SOPA promise to only go onto blogs and remove the content, instead of taking down the whole site. But this "fix" would still involve the government intruding into private property without warrant and without notice. 

We should not forget that there really is a lot of copyright violation on the Internet. The problem that SOPA is trying to tackle is not fake. So the legislation can not be dismissed out of hand for lack of cause. It is more that SOPA is an unjust solution to the problem. Just as tearing the engine out of a car for speeding would be excessive response, so too is SOPA an excessive response. But the problem of pirated music and video content remains in the wake of SOPA. A possibly more just solution could be the ideas in the OPEN Act, alternative legislation that would still give the government power to restrict websites, but it would move the power to the Federal Trade Commission and remove the power of private copyright holders to demand instant removal of content without investigation.

See below for some video commentary on SOPA, particularly pointing out another metaphor to describe the nature of the problem: The Internet is a road. Google, Bing, etc. are the construction crew. Some people drive safely on the road, others speed. What the road is used for should not be blamed on search engines. You go after the speeders. Even if they are fast and hard to catch, the government can't just get lazy and force the construction crews to make the road more narrow. This makes it a challenge for legal drivers to use the road system just as much as the speeders. 

• Peter Suderman on Freedom Watch discussing the terms of SOPA (Jan. 17, 2011)
• Anthony Randazzo on Freedom Watch discussing the nature of SOPA (Jan. 12, 2012)
• Anthony Randazzo on Internet Freedom (Nov. 17, 2011)

Strike Screen Shots

Mozilla/Firefox

Google

Reddit

Wikipedia

Wordpress

Michigan Lawmakers Continue Efforts to Rein in Film Subsidies

Posted on January 5, 2012, 2:28pm | Harris Kenny

Michigan lawmakers continue their efforts to rein in the state’s generous film tax credit (or movie production incentive) program, with the latest victory coming in the form of passing Senate Bill (SB) 569 into law on December 21, 2011. (Tip of the hat to I. Harry David for posting about this on the Tax Foundation’s Tax Policy Blog yesterday here).

Governor Rick Snyder explained the bill in the following accompanying press release:

(SB 569) replaces film credits that are currently hidden in the tax code with a $25 million budget appropriation for the new Film and Digital Media Production Assistance Program, which the Michigan Film Office will run. To qualify for funding, an eligible production company must have direct production expenditures and/or Michigan personnel expenditures of at least $100,000.

Under the new legislation, the Michigan Film Office must also create a publicly available performance dashboard, which will include specific measures including the amount of each incentive dispersed for each state-certified qualified production.

Jarrett Skorup of the Mackinac Center, a Michigan-based free market think tank, expressed the frustrations of many who would like to the program ended entirely (see here). Indeed, direct taxpayer subsidy of politically popular private industry is basically indefensible. However, SB 569 does represent an important step towards getting politicians out of the business of picking winners and losers in private industry.

All things considered, film tax credit policy in Michigan has undergone a dramatic about face over the last four years. As I explained in a Denver Business Journal op-ed this past August (available here):

In 2008, Michigan adopted some of the most aggressive film incentives in the country, offering unlimited credits for 30-50 percent of personal expenditures while in the state making the movie, credits for up to 42 percent of production expenditures and 25 percent of infrastructure investments.

A fall 2010 report by the state’s Senate fiscal agency found Michigan is losing tens of millions of dollars on the movies and “will never be able to make the credit ‘pay for itself’ from a State revenue standpoint, even when the credit generates additional private activity that would not have otherwise occurred.”

Saying the program doesn’t “pay for itself” is an understatement. In 2009-10, Michigan taxpayers spent a projected $100 million to generate $59.5 million in movie company activity, a loss of $40.5 million.

During negotiations for the FY 2012 budget the House, Senate, and Governor's office wrangled over how much to cut the budget for film tax credits, finally settling on $25 million. Some lawmakers are pushing the debate further. During the debate over SB 569 State Rep. Tom McMillin, R- Rochester Hills, offered an amendment that would have required assessments of film tax credits to include the "negative impact of the tax monies taken from businesses and citizens." Rep. McMillin’s amendment failed, but transparency measures like this cannot be overlooked when one considers where the state was as recently as 2008.

In the long run Michigan lawmakers should follow the example of states like Washington, whose lawmakers decided last year to eliminate their film tax credit program entirely.

For other recent developments in state film tax credit policy, see my previous posts here (Colorado), here (Massachusetts), and here (New Jersey and New York).

Will the Web Make NC-17 Safe for Marketing?

Posted on January 5, 2012, 12:45pm | Steven Titch

One of the more critically praised films this year has been Shame, which has been in limited release around the country since December.  Although it’s an independent production, the film is being distributed by 20th Century Fox, a major studio, and stars Michael Fassbender, an actor who appears to be in the middle of his breakout moment.

The film is also rated NC-17.

Until recently, the Motion Picture Association of America’s NC-17 rating, which restricts admission to theatergoers 18 and older, was the box office kiss of death. Not only did NC-17 carry the notoriety of its predecessor, the X rating, it seriously hampered a film’s marketing. Boys Don’t Cry, The Cooler and Clerks are among the well-known examples of acclaimed films that were cut to win the more commercially acceptable R rating, in spite of protest from their filmmakers and actors that the cuts diminished the power and the point of the scenes in question.

But most newspapers and local TV stations won’t carry ads for NC-17 movies. Some theater chains, such as Cinemark, won't exhibit them. Major retailers like Wal-Mart nor video rental chains like Blockbuster won’t stock NC-17-rated DVDs.

In Hollywood, art and commerce have always been in tense balance. That balance may shifting as the Web becomes a larger factor in advertising. For example, a newspaper’s policy against advertising NC-17 movies is meaningless if a theater chain no longer uses newspaper advertising at all. AMC, the second biggest chain in the country, has been cutting back on print advertising since 2009. Last June, the company documented its shift from print to Web in a quarterly filing with the SEC. Regal Entertainment Group, another chain, reportedly is following suit.

Meanwhile, consumers are buying and renting fewer DVDs from brick-and-mortar outfits, choosing to buy or rent online or simply watch on demand. Netflix, for example, makes Lust, Caution, a 2007 NC-17 feature directed by Academy Award winner Ang Lee, available both by mail and streaming.  

Film promotion and advertising is a great example of the way the Web has become a significant marketing vehicle. Shame, albeit a grim, downbeat story of a sex addict and his troubled sister, not only opened to favorable reviews, it had one of the most impressive box office debuts for an NC-17 movie, averaging $36,118 per screen in a tight release in ten theaters in six cities the weekend of Dec. 2-4. By comparison, that weekend’s box office leader, Twilight Saga: Breaking Dawn Part 1, averaged just $4,087 per screen. The Muppets, second place in total gross, averaged $3,222.

Now in wider release, Shame has made $2 million as of Jan. 3, and currently ranks eighth among the 26 NC-17 films released since 1990.

As for Web-based marketing, Shame has its own site at FoxSearchlight.com. Shame has a fan page on Facebook. "Shame" delivers several movie-related links on the first page of a Google search, pretty impressive when you consider the title is a fairly common keyword (somewhere John Bradshaw’s eating his heart out).

You can find trailers for Shame at iTunes and Internet Movie Database (imdb.com), both mainstream sites for film previews. You don’t have to look too hard to find the “red band” trailer, which is played in theaters only in front of R-rated movies. Studios and exhibitors also can reach audiences through sites like Yahoo and Flixster, as well as through social networking, email and Twitter. These alternatives counter the limitations of advertising policies of old media.

They also decrease the clout of the MPAA Ratings Board, which has been accused of ratings bias against smaller, independent features aimed at adult audiences. Probably the best evidence of this is presented in the documentary This Film is Not Been Rated. Well aware that an NC-17 rating can kill a film at the box office, the ratings board has not been adverse to using it as a club to tone down films which its members subjectively find either morally or tastefully questionable.

While the shortcomings of the MPAA’s rating system have been discussed at length in many forums, I’ve always thought the most unfortunate aspect was that the MPAA never tried to counter the stigma of NC-17 as meaning “dirty movie.” Unlike the Electronic Software Association, which devised the MA rating for video games while successfully communicating that the market can—and should—accommodate products designed exclusively for adults, the MPAA never tried to engage the media outlets, retailers and video rental companies that openly equated NC-17 with porn.
 
That Web-based marketing can chip away at this perception will prove much better for audiences and filmmakers. Most NC-17 movies are not aimed at mainstream moviegoers anyway. If Shame continues to find its audience—and draws more attention in the form of several Academy Award nominations, which many critics believe it will—studios may be less inclined to make compromising cuts on the MPAA’s whim out of fear of losing box office revenues. And this means a little more weight on the “art” side of art-commerce balance.

Mass. AG Coakley Prosecuting $4.7M Fraud in Film Tax Credit Program

Posted on December 13, 2011, 2:21pm | Harris Kenny

Tomorrow Los Angeles-based movie director Daniel Adams is scheduled for a probable cause hearing in Boston Municipal Court after being arraigned in connection with fraudulently submitting film tax credit, or movie production incentive, applications claiming inflated expenses for two films made in Massachusetts.

Attorney General (AG) Martha Coakley alleges that Adams’s actions resulted in an overpayment of more than $4.7 million in taxpayer money through the Commonwealth’s film tax credit program. Specifically, Adams was charged with two counts on the charges of Making a False Claim against the Commonwealth and two counts of Larceny of Over $250.

The investigation began in March 2010 when an investigator at the Massachusetts Department of Revenue (DOR) spotted suspicious tax returns. Further investigation by the AG’s office and DOR allege that Adams began defrauding taxpayers as early as 2006.

Allegedly Adams’s first film, The Golden Boys (originally named Chatham), was reported to DOR as costing more than $6.7 million and granted him a tax credit payment of more than $1.6 million. Investigators allege the film only cost $2.3 million. Prosecutors are seeking a return of $1.1 million for The Golden Boys.

Allegedly Adams’s second film, The Lightkeepers, allegedly was reported to DOR as costing $17 million and granted him a tax credit payment of $4.2 million. Spending for this film is even more suspect. For example, prosecutors allege Adams paid actor Richard Dreyfuss $2.5 million, when in fact he was only paid $400,000. Prosecutors are seeking a return of $3.6 million for The Lightkeepers.

Moviegoers may be seeking a return for the cost of their tickets as well. Neither film fared well on the popular movie review aggregator website RottenTomatoes.com, with the films receiving paltry 27 percent and 37 percent audience approval ratings respectively.

According to DOR, the Commonwealth has a generous film tax credit program:

The Massachusetts film tax incentives, as amended in July 2007, are composed of a tax credit equal to 25% of a film’s production cost, 25% of a film’s payroll costs and an exemption from sales tax for film productions. The tax credits can be used to reduce the production company’s tax liability, and to the extent that the tax credits exceed that tax liability, production companies may receive cash refunds from the Department of Revenue equal to 90% of the amount of the tax credit remaining.

The tax credits may also be transferred or sold by production companies to third parties, who can use the tax credits to reduce their Massachusetts corporate, insurance, financial institutions, or personal income tax liabilities.

In some cases, sales to third parties are direct sales from the production company to such third parties. In other cases the credit may be sold to tax credit brokers, who in turn may resell the credits to Massachusetts taxpayers who use the credits to reduce their state tax payments.

Meanwhile the entire program’s efficacy has been called into question. In 2010 the Commonwealth spent $14.6 million in taxpayer money to support 83 individual productions that eventually generated a measly $0.8 million in new state revenue that partially offset the tax credits. In 2009 the Commonwealth spent $82.4 million in taxpayer money to support 86 individual productions that generated a trifling $10.4 million in new state revenue that partially offset the cost of the tax credits.

Film tax credit enabling legislation TIR 06-1 was passed by the Massachusetts legislature and signed by then Governor Mitt Romney in 2005 effective January 1, 2006. The program was later amended through TIR 07-15.

For more on film tax credits, see my Denver Business Journal op-ed here and my previous blog post here.

CO Gov. Hickenlooper's $3M Film Subsidy Proposal Gets Lukewarm Reviews

Posted on December 9, 2011, 8:13am | Harris Kenny

On November 1 Colorado Governor John Hickenlooper submitted his proposed State budget request for FY 2012-13 requesting a total of $20.09 billion, of which $7.39 billion is from the general fund. Hickenlooper's request represents growth rates of 1.7% (342.6 million) in total funds and 3.2% (227.1 million) in the General Fund.

Yesterday the Colorado Joint Budget Committee (JBC) discussed, among other things, Hickenlooper's request that $3 million in taxpayer money be diverted from revenues for transfer into the Gaming Fund for distribution to the Office of Film, Television, and Media. The funds would be dedicated to "allow for increased incentives (read: subsidies) to attract additional film production activity and create jobs."

For those unfamiliar, in most states the executive branch initiates the main appropriation bill for the ongoing operations of state government. Colorado, however, has a strong legislative budget process. The General Assembly's permanent fiscal and budget review agency, the six-member JBC, writes the annual appropriations bill - called the Long Bill - for the operations of state government. There is one chairman, majority, and minority member from each house of the Colorado legislature. JBC also has a full-time seventeen-person support staff.

When JBC reached the economic development portion of Hickenlooper's budget, it's fair say they gave his proposal to increase subsidies for filmmakers a lukewarm review. Ed Sealover of the Denver Business Journal reports, "both Republican Sen. Kent Lambert and Democratic Rep. Claire Levy — who are about as far apart on the ideological spectrum as any two legislators — questioned where there are better uses for the money." Lambert, citing a Federal Reserve Bank of Boston study [available online here] asked, "Is that the best use for that big chunk of money, or is it better to spend it out into other areas?"

This isn't a new debate in Colorado. Various film incentive (or movie production incentive) bills have been proposed by State Rep. Tom Massey for the last seven years, with his latest attempt coming last year in the form of a 10-cent "user fee" on movie tickets that would have generated revenue for the incentive program. This bill was later amended to allow voluntary donations to the state's film incentive fund.

At the end of the day, the JBC members are right to question this policy decision. Film incentives are bad economic policy. As I explained in a Denver Business Journal op-ed this summer:

Colorado can and should create an environment that lures new businesses and brings sustainable job growth. But with a $450 million state budget deficit in 2012 expected, handouts to Hollywood are not the answer.

Instead, lawmakers should eliminate the subsidies and regulations that favor industries, creating level playing fields.

By generating an economic environment that encourages competition and entrepreneurship, Colorado will be able to attract companies interested in bringing long-term jobs to the state, and not just movie companies looking to fleece taxpayers and leave town.

For more research on film tax credits in Colorado, see my previous posts here, here, and here.

Is Bulldozing Foreclosed Homes the Path to Urban Prosperity?

Posted on October 27, 2011, 7:41am | Samuel Staley

The New York Times' on-line forum "Room for Debate" (October 26, 2011) takes on the practice of banks handing over foreclosed homes to cities so they can be bulldozed. On the one hand, this seems like a rationale practice: vacant homes depress property values of nearby homes, making the neighborhoods harder to revitalize. But, the downside is that cities could be cutting off their nose to spite their face by destroying economically valuable assets. If banks want to unload the houses, they should sell them at a market-clearing price or undertake the costs of razing them instead of shifting it to the publc sector of land banks. I weigh in on the discussion here.

There's Wisdom in the Willingness to Back Down

Posted on October 13, 2011, 2:15pm | Steven Titch

The big news in new media and entertainment this week has been Netflix's decision to back away from its plan to split the company into separate DVD rent-by-mail and video streaming operations.

The plan would have required some 12 million Netflix customers who use both the mail and streaming services to create two accounts, manage two rental queues and pay two monthly subscription fees. Netflix would keep its name on its increasingly popular Internet streaming service, which has attracted 10 million subscribers on its own, according to its own guidance. The new rent-by-mail company, picking up on what Netflix started, would have been called Quikster.

After facing a deluge of protests via email, blogs and social networking sites, not to mention a loss of 1 million subscribers in the third quarter, Netflix walked back the decision, and its CEO, Reed Hastings, sent an apologetic email to all account holders.

Full disclosure: I am a Netflix user and still a fan of the service, despite the price increase that preceded the aborted separation. I still believe I get considerable value for the service, and, deep down, I knew the combination of unlimited mail rentals and unlimited streaming for $23 a month (less for those who opted to have fewer disks at one time) wasn't going to last. The economics no longer added up.

Still, I thought it was premature for Netflix to throw over the mail business. Its streaming service does not have the depth in terms of titles to go by itself. And besides, DVDs is sometimes more preferable to streaming, particularly if you have a Blu-ray player or a less than optimal Internet connection.

While the media is doing its best to pile on Netflix for the blunder, I'd rather focus on the speed at which Netflix responded. Even though it is by far the leader in DVD mail rentals, it knew that wouldn;t last if it didn't keep customers satisfied.

Netflix is only the latest in a number of examples that demonstrate how businesses grasp the the imperative of self-correction, especially in high-tech. For another look to Research in Motion's BlackBerry PlayBook. The tablet computer opened to poor reviews, mainly because it had far less built-in functionality and applications, such as email, calendar and contact management,  compared to competitors. Its original plan was to add these features piece-meal.

On websites, blogs and bulletin boards, RIM got an earful from its fanatically loyal customer base, which also punished the company in the marketplace by not showing up at the sales counter. In September RIM reported that it had shipped just 200,000 PlayBooks in the preceding 90 days. By comparison, Apple sells 200,000 iPads in a little over 2 days, according to Pocket-lint, a site covering smartphones and tablets.

In a second article, Pocket-Lint also reported:

In a conference call following the company's latest earning report, that saw revenue down 15 per cent and profits down by 47 per cent compared to the previous quarter, the company told those listening that rather than trickle out small updates it would, instead, be opting ones which will have a bigger impact in the future.  

The update, due in October, would include the long promised native email, calendar, and contacts as well as the Android App Player and BlackBerry Balance; all previously promised for the "summer."

RIM has also promised improved BlackBerry Bridge support, enhanced web browsing, and the launch of a BlackBerry Video store that would offer over 10,000 films and TV shows playable on users TVs via the HDMI out socket on the RIM tablet. 

Other examples of the private sector's rapid self-correction after consumer outcry have been well documented. They include Facebook's retreat from more aggressive information-sharing and Google's agreement to remove pictures of individuals and private residences from StreetView upon request and to be less intrusive with the application in general.

Critics of "corporate America" should at least keep in mind the speed at which the private sector can move to address consumer pushback. Save for the BlackBerry PlayBook example, all of the instances above prompted someone, somewhere to call for government intervention to "fix" the problem. In each case it turns out the problem was addressed before the first government committee or task force could convene. (Still, the Congress and the FTC continue to harass Google, Facebook and Netflix for various activities they vaguely perceive as anti-consumer).

On the other hand, sometimes we wish that that government would react as quickly and pro-actively to citizen feedback. Certainly the mid-term elections of 2010 delivered a strong message that most Americans wanted Washington to rethink its strategy to re-energize the economy through bailouts, subsidies, repeated ineffective stimuli and quantitative easing, along with its increasing intrusiveness in American life, from issues as big as health care and school choice to as everyday as the light bulbs we use and the information we choose to share on line.

Another lesson in this is that despite the unrest that Netflix and other companies have stirred up among its customer base, by acting quickly, they all have managed to retain their customer goodwill. Although sometimes our culture sees apology as weakness, there can be an upside to the admission of a mistake and a commitment to move a new direction. Smart companies are aware of the price of arrogance. Would that governments were, too.

Film Tax Breaks Draw Ire on Both Sides of the Hudson River

Posted on September 20, 2011, 6:20pm | Harris Kenny

Film tax breaks (or movie production incentives) are an especially odious form of crony capitalism that has come under fire on both sides of the Hudson River this week.

Earlier today Bill Hammond of the New York Daily News published a disparaging piece entitled "Hollywood on the Hudson: New York gilds the silver screen with generous tax breaks," writing:

In what might be Albany's wackiest form of corporate welfare, the state heavily subsidizes movies and prime-time television shows produced in New York - to the tune of $420 million a year for the next five years.

That's a whopping $2.1 billion that could have been used to close deficits, fund schools or health care or provide tax cuts to everyone. Instead, it's adding to the already hefty profits of such media giants as Time Warner, Disney and News Corp.

This isn't about nurturing struggling artists. A lot of the handouts go to major productions with big-name stars that don't need government handouts to thrive.

Hammond later quotes Josh Barro of the Manhattan Institute, who is also critical of these programs, Barro says, “It’s no surprise these programs are a success. Congratulations, you handed out a bunch of free money and you found people to take it.” Hammond’s piece concludes:

What is clear is that New York has gotten sucked into a bidding war, with states and cities around the world competing to offer Hollywood studios the sweetest deals.

Shooting movies and TV shows is a "uniquely mobile" business, says Patricia Swinney Kaufman, chief of the state film and TV office. "Decisions are made almost daily about where another production will go," Kaufman says. "One of the most important driving factors is whether or not there will be an incentive and how that will impact the bottom line."

This is a situation that "Boardwalk Empire" chief gangster Nucky Thompson would appreciate: The government paying him to make money.

Frankly, subsidizing a great actor like Buscemi isn't so painful. But could we rethink "Gossip Girl"?

Meanwhile taxpayers in neighboring New Jersey are having a similar conversation. It all started last Wednesday when the story broke that the Garden State is awarding $420,000 in tax credits to 495 Productions for producing the inaugural season of MTV’s “Jersey Shore.” Critics have derided the tax break as the “Snooki-subsidy” in honor of a character on the show played by Nicole Polizzi. Jarrett Renshaw, Statehouse Bureau Reporter for NJ.com, reports:

Gov. Chris Christie said today he has not ruled out vetoing a controversial tax credit awarded last week to the hit MTV television show “Jersey Shore.” …

Christie spokesman Michael Drewniak said last week that the governor could not veto the actions of the Economic Development Authority because the action was “non-discretionary.”

But today, Christie said Drewniak was mistaken and that his office has yet to review the minutes of the authority meeting to determine whether a veto is warranted.

“When we get the minutes, staff will review them and make recommendations about whether to veto, and I will make the final decision, as we do with all minutes,” said Christie, who has been highly critical of the show’s representation of the Garden State and the film tax credit.

These stories aren't a surprise. Ongoing budget woes are forcing state and local governments to re-evaluate allocation of scarce taxpayer money to fund priorities like law enforcement and education. Last year, policymakers in 17 states explored curbing or eliminating their film tax break programs. For example, Washington State terminated it's film tax break program, while Michigan and New Mexico both dramatically limited their programs. 

For more on film tax breaks, see my Denver Business Journal op-ed entitled “Don’t give handouts to Hollywood,” here; and several blog posts available here and here.

College Students Don't Care for Grade Point Average Socialism

Posted on August 31, 2011, 9:35pm | Adam Summers

It is no secret that most college campuses are breeding grounds for left-wing thinking, and that the professed desires of students, faculty, and administrators alike for tolerance and diversity end where those values are most important: the tolerance and diversity of thoughts and ideas.

It seems that in matters that hit closer to home, however, even liberal college students do not care for socialist/redistributionist policies when it comes to things they have earned, such as their grades.

In a clever, yet simple, experiment to expose the implications and consequences of socialism (not to mention liberal cognitive dissonance), recent college graduate and Exposing Leftists co-founder Oliver Darcy asked college students at the University of California, Merced, whether or not they would favor redistributing grade points from the highest-earning students to those most in need on the low end, the same way they tended to support the redistribution of wealth through tax policies.

Darcy discussed this thought experiment recently on the FOX News Channel with "FOX & Friends" co-anchor Gretchen Carlson.

As one student offered, "If I do give GPA points to students that don't deserve it, it just isn't fair. I work for what I have." When another student was asked why he needed that 4.0 GPA, he responded, simply, "Cuz I earned it."

And that is precisely the point. Free-market proponents oftentimes stick to arguing that free-market capitalism is a more efficient and prospoerous system than socialism. That is certainly true, but they should not ignore the even more important moral argument that it is simply wrong and unjust to forcibly take the wealth or property from one person and give it to another, no matter how well-intentioned the theft may be.

See the full GPA redistribution raw video here. Additional man-on-the-street-style interviews illuminating various issues — such as whether affirmative action should be applied to basketball teams and whether conservatives should be banned from radio and TV — can be found on the Exposing Leftists Web site.

Atlas Shrugged Box Office Mojo

Posted on April 17, 2011, 9:17am | Samuel Staley

Atlas Shrugged Part I rolled out in limited release to 300 movie theaters over the weekend, and the early estimates of revenues might be a sign of encouragement. According to the web site Box Office Mojo, Friday's revenues (Saturday's results weren't in when this post was written) clocked in at a mere $683,000. That's not very encouraging until these numbers are broken down per theater: Atlas Shrugged earned $2,277 per theater, comparable to the major film releases Rio ($2,666) and Scream 4 ($2,421). The Conspirator opened up with revenues of $1,542 per theater.

Given that the marketing was largely internent and word of mouth--that's the only way I knew it was showing in my home town--this doesn't seem to me to be a bad start. Also, initial reports indicated taht the movie would only be shown in 11 cities to start, so, fortunately, the actual distribution was much wider than I expected. We'll have to see if Saturday and Sunday revenues are as strong.

Oh, and for the record, I thought it was a good movie, better than the reviews, and much better than merely "competent."

For more on Reason's coverage of the making of the movie, see Brian Doherty's excellent article in the May 2011 issue and Reason.tv's interviews from behind the scenes.

Complaints About "Tax Havens" Are Misguided

Posted on April 4, 2011, 5:32pm | David Godow

There's nothing like policy "reform" proposals that basically amount to doubling down on a bad idea. That's what UMass-Amherst professor Nancy Folbre's corporate tax avoidance piece on NYTimes.com amounts to.  The gist: the U.S. should try harder to tax the income that American companies receive from their overseas operations. Such a policy, ostensibly meant to discourage businesses from "offshoring" jobs and profits, would simply further discourage investment in the U.S. and worsen the problems with our existing system.

Folbre is essentially advocating moving the U.S. farther towards a "worldwide" system of corporate taxation, wherein all a company's profits -- no matter where they're earned -- are taxed by Washington. Others support a more "territorial" system, where businesses only pay tax on the share of profits earned within the U.S. The current system is somewhere in between; it ostensibly taxes all corporate income from anywhere, but allows businesses to defer those payments until the profits are brought back home.

The problem is that worldwide systems, which often result in higher taxes for companies that operate abroad, have proven increasingly uncompetitive. Successful entrepreneurs aren't job-creating automatons that will happily pay the government however much it thinks is appropriate. They're individuals that respond to incentives, just like anyone. And like citizens themselves, corporations facing an uncompetitive tax system will pack up and move.

Tax advocates like Professor Folbre want to short-circuit this system of tax competition, which encourages companies to invest in low-tax jurisdictions. Rather than growing tax revenue by attracting new business to the U.S. through a competitive business environment, they want to increase taxes by revoking the deferral for taxation of overseas income and instituting new regulations to punish "tax avoidance."

The problem is we've already tried tightening the screws on corporations -- it didn't work. As Scott Hodge noted last week, " After a number of U.S. firms reincorporated offshore during the 1990s and early 2000s, U.S. lawmakers chose not to address the underlying causes of these defections-our high tax rates and the world-wide tax system. Instead, they enacted legislation that effectively made it illegal for companies to move offshore. Today, U.S. firms may not be moving their headquarters offshore, they are either getting purchased by foreign companies (see Anheuser Busch) or they are simply choosing to leave their profits abroad-at least $1 trillion by some estimates. "

Meanwhile, the rest of the world has embraced tax competition. Great Britain, Japan and Canada will (or have already) cut their corporate tax rates this year, though Japan's move may be postponed following the recent earthquake. This will leave the U.S. with the highest corporate tax rate in the developed world -- not a place we want to be as jobs and economic growth dominate the political agenda. Trying to "improve" our broken corporate tax system with bigger tax bills and more regulations is a non-starter.