advertising

Surviving in an ad-supported world

PNRJ cognitive science, core principles, critique of neoclassical economics, public policy , , , , , , , ,

Apr 21 JDN 2460423

Advertising is as old as money—perhaps even older. Scams have likewise been a part of human society since time immemorial.

But I think it’s fair to say that recently, since the dawn of the Internet at least, both advertising and scams have been proliferating, far beyond what they used to be.

We live in an ad-supported world.

News sites are full of ads. Search engines are full of ads. Even shopping sites are full of ads now; we literally came here planning to buy something, but that wasn’t good enough for you; you want us to also buy something else. Most of the ads are for legitimate products; but some are for scams. (And then there’s multi-level marketing, which is somewhere in between: technically not a scam.)

We’re so accustomed to getting spam emails, phone calls, and texts full of ads and scams that we just accept it as a part of our lives. But these are not something people had to live with even 50 years ago. This is a new, fresh Hell we have wrought for ourselves as a civilization.

AI promises to make this problem even worse. AI still isn’t very good at doing anything particularly useful; you can’t actually trust it to drive a truck or diagnose an X-ray. (There are people working on this sort of thing, but they haven’t yet succeeded.) But it’s already pretty good at making spam texts and phone calls. It’s already pretty good at catfishing people. AI isn’t smart enough to really help us, but it is smart enough to hurt us, especially those of us who are most vulnerable.

I think that this causes a great deal more damage to our society than is commonly understood.

It’s not just that ads are annoying (though they are), or that they undermine our attention span (though they do), or that they exploit the vulnerable (though they do).

I believe that an ad-supported world is a world where trust goes to die.

When the vast majority of your interactions with other people involve those people trying to get your money, some of them by outright fraud—but none of them really honestly—you have no choice but to ratchet down your sense of trust. It begins to feel as this financial transactions are the only form of interaction there is in the world.

But in fact most people can be trusted, and should be trusted—you are missing out on a great deal of what makes life worth living if you do not know how to trust.

The question is whom you trust. You should trust people you know, people you interact with personally and directly. Even strangers are more trustworthy than any corporation will ever be. And never are corporations more dishonest than when they are sending out ads.


The more the world fills with ads, the less room it has for trust.

Is there any way to stem this tide? Or are we simply doomed to live in the cyberpunk dystopia our forebears warned about, where everything is for sale and all available real estate is used for advertising?

Ads and scams only exist because they are profitable; so our goal should be to make them no longer profitable.

Here is one very simple piece of financial advice that will help protect you. Indeed, I believe it can protect so well, that if everyone followed it consistently, we would stem the tide.

Only give money to people you have sought out yourself.

Only buy things you already knew you wanted.

Yes, of course you must buy things. We live in a capitalist society. You can’t survive without buying things. But this is how buying things should work:

You check your fridge and see you are out of milk. So you put “milk” on your grocery list, you go to the grocery store, you find some milk that looks good, and you buy it.

Or, your car is getting old and expensive to maintain, and you decide you need a new one. You run the numbers on your income and expenses, and come up with a budget for a new car. You go to the dealership, they help you pick out a car that fits your needs and your budget, and you buy it.

Your tennis shoes are getting frayed, and it’s time to replace them. You go online and search for “tennis shoes”, looking up sizes and styles until you find a pair that suits you. You order that pair.

You should be the one to decide that you need a thing, and then you should go out looking for it.

It’s okay to get help searching, or even listen to some sales pitches, as long as the whole thing was your idea from the start.

But if someone calls you, texts you, or emails you, asking for your money for something?

Don’t give them a cent.

Just don’t. Don’t do it. Even if it sounds like a good product. Even if it is a good product. If the product they are selling sounds so great that you decide you actually want to buy it, go look for it on your own. Shop around. If you can, go out of your way to buy it from a competing company.

Your attention is valuable. Don’t reward them for stealing it.

This applies to donations, too. Donation asks aren’t as awful as ads, let alone scams, but they are pretty obnoxious, and they only send those things out because people respond to them. If we all stopped responding, they’d stop sending.

Yes, you absolutely should give money to charity. But you should seek out the charities to donate to. You should use trusted sources (like GiveWell and Charity Navigator) to vet them for their reliability, transparency, and cost-effectiveness.

If you just receive junk mail asking you for donations, feel free to take out any little gifts they gave you (it’s often return address labels, for some reason), and then recycle the rest.

Don’t give to the ones who ask for it. Give to the ones who will use it the best.

Reward the charities that do good, not the charities that advertise well.

This is the rule to follow:

If someone contacts you—if they initiate the contact—refuse to give them any money. Ever.

Does this rule seem too strict? It is quite strict, in fact. It requires you to pass up many seemingly-appealing opportunities, and the more ads there are, the more opportunities you’ll need to pass up.

There may even be a few exceptions; no great harm befalls us if we buy Girl Scout cookies or donate to the ASPCA because the former knocked on our doors and the latter showed us TV ads. (Then again, you could just donate to feminist and animal rights charities without any ads or sales pitches.)

But in general, we live in a society that is absolutely inundated with people accosting us and trying to take our money, and they’re only ever going to stop trying to get our money if we stop giving it to them. They will not stop it out of the goodness of their hearts—no, not even the charities, who at least do have some goodness in their hearts. (And certainly not the scammers, who have none.)

They will only stop if it stops working.

So we need to make it stop working. We need to draw this line.

Trust the people around you, who have earned it. Do not trust anyone who seeks you out asking for money.

Telemarketing calls? Hang up. Spam emails? Delete. Junk mail? Recycle. TV ads? Mute and ignore.

And then, perhaps, future generations won’t have to live in an ad-supported world.

Adversarial design

PNRJ core principles, critique of neoclassical economics, current events, futurism, politics, public policy , , , , , , , , , , ,

Feb 4 JDN 2460346

Have you noticed how Amazon feels a lot worse lately? Years ago, it was extremely convenient: You’d just search for what you want, it would give you good search results, you could buy what you want and be done. But now you have to slog through “sponsored results” and a bunch of random crap made by no-name companies in China before you can get to what you actually want.

Temu is even worse, and has been from the start: You can’t buy anything on Temu without first being inundated in ads. It’s honestly such an awful experience, I don’t understand why anyone is willing to buy anything from Temu.

#WelcomeToCyberpunk, I guess.

Even some video games have become like this: The free-to-play or “freemium” business model seems to be taking off, where you don’t pay money for the game itself, but then have to deal with ads inside the game trying to sell you additional content, because that’s where the developers actually make their money. And now AAA firms like EA and Ubisoft are talking about going to a subscription-based model where you don’t even own your games anymore. (Fortunately there’s been a lot of backlash against that; I hope it persists.)

Why is this happening? Isn’t capitalism supposed to make life better for consumers? Isn’t competition supposed to make products and services supposed to improve over time?

Well, first of all, these markets are clearly not as competitive as they should be. Amazon has a disturbingly large market share, and while the video game market is more competitive, it’s still dominated by a few very large firms (like EA and Ubisoft).

But I think there’s a deeper problem here, one which may be specific to media content.

What I mean by “media content” here is fairly broad: I would include art, music, writing, journalism, film, and video games.

What all of these things have in common is that they are not physical products (they’re not like a car or a phone that is a single physical object), but they are also not really services either (they aren’t something you just do as an action and it’s done, like a haircut, a surgery, or a legal defense).

Another way of thinking about this is that media content can be copied with zero marginal cost.

Because it can be copied with zero marginal cost, media content can’t simply be made and sold the way that conventional products and services are. There are a few different ways it can be monetized.


The most innocuous way is commission or patronage, where someone pays someone else to create a work because they want that work. This is totally unproblematic. You want a piece of art, you pay an artist, they make it for you; great. Maybe you share copies with the world, maybe you don’t; whatever. It’s good either way.

Unfortunately, it’s hard to sustain most artists and innovators on that model alone. (In a sense I’m using a patronage model, because I have a Patreon. But I’m not making anywhere near enough to live on that way.)

The second way is intellectual property, which I have written about before, and surely will again. If you can enforce limits on who is allowed to copy a work, then you can make a work and sell it for profit without fear of being undercut by someone else who simply copies it and sells it for cheaper. A detailed discussion of that is beyond the scope of this post, but you can read those previous posts, and I can give you the TLDR version: Some degree of intellectual property is probably necessary, but in our current society, it has clearly been taken much too far. I think artists and authors deserve to be able to copyright (or maybe copyleft) their work—but probably not for 70 years after their death.

And then there is a third way, the most insidious way: advertising. If you embed advertisements for other products and services within your content, you can then sell those ad slots for profit. This is how newspapers stay afloat, mainly; subscriptions have never been the majority of their revenue. It’s how TV was supported before cable and streaming—and cable usually has ads too, and streaming is starting to.

There is something fundamentally different about advertising as a service. Whereas most products and services you encounter in a capitalist society are made for you, designed for you to use, advertising it made at you, designed to manipulate you.

I’ve heard it put well this way:

If you’re not paying, you aren’t the customer; you’re the product.

Monetizing content by advertising effectively makes your readers (or viewers, players, etc.) into the product instead of the customer.

I call this effect adversarial design.

I chose this term because it not only conveys the right sense of being an adversary: it also includes the word ‘ad’ and the same Latin root ‘advertere‘ as ‘advertising’.

When a company designs a car or a phone, they want it to appeal to customers—they want you to like it. Yes, they want to take your money; but it’s a mutually beneficial exchange. They get money, you get a product; you’re both happier.

When a company designs an ad, they want it to affect customers—they want you to do what it says, whether you like it or not. And they wouldn’t be doing it if they thought you would buy it anyway—so they are basically trying to make you do something you wouldn’t otherwise have done.

In other words, when designing a product, corporations want to be your friend.

When designing an ad, they become your enemy.

You would absolutely prefer not to have ads. You don’t want your attention taken in this way. But they way that these corporations make money—disgustingly huge sums of money—is by forcing those ads in your face anyway.

Yes, to be fair, there might be some kinds of ads that aren’t too bad. Simple, informative, unobtrusive ads that inform you that something is available you might not otherwise have known about. Movie trailers are like this; people often enjoy watching movie trailers, and they want to see what movies are going to come out next. That’s fine. I have no objection to that.

But it should be clear to anyone who has, um, used the Internet in the past decade that we have gone far, far beyond that sort of advertising. Ads have become aggressive, manipulative, aggravating, and—above all—utterly ubiquitous. You can’t escape them. They’re everywhere. Even when you use ad-block software (which I highly recommend, particularly Adblock Plus—which is free), you still can’t completely escape them.

That’s another thing that should make it pretty clear that there’s something wrong with ads: People are willing to make efforts or even pay money to make ads go away.

Whenever there is a game I like that’s ad-supported but you can pay to make the ads go away, I always feel like I’m being extorted, even if what I have to pay would have been a totally reasonable price for the game. Come on, just sell me the game. Don’t give me the game for free and then make me pay to make it not unpleasant. Don’t add anti-features.

This is clearly not a problem that market competition alone will solve. Even in highly competitive markets, advertising is still ubiquitous, aggressive and manipulative. In fact, competition may even make it worse—a true monopoly wouldn’t need to advertise very much.

Consider Coke and Pepsi ads; they’re actually relatively pleasant, aren’t they? Because all they’re trying to do is remind you and make you thirsty so you’ll buy more of the product you were already buying. They aren’t really trying to get you to buy something you wouldn’t have otherwise. They know that their duopoly is solid, and only a true Black Swan event would unseat their hegemony.

And have you ever seen an ad for your gas company? I don’t think I have—probably because I didn’t have a choice in who my gas company was; there was only one that covered my area. So why bother advertising to me?

If competition won’t fix this, what will? Is there some regulation we could impose that would make advertising less obtrusive? People have tried, without much success. I think imposing an advertising tax would help, but even that might not do enough.

What I really think we need right now is to recognize the problem and invest in solving it. Right now we have megacorporations which are thoroughly (literally) invested in making advertising more obtrusive and more ubiquitous. We need other institutions—maybe government, maybe civil society more generally—that are similarly invested in counteracting it.


Otherwise, it’s only going to get worse.

Is privacy dead?

PNRJ futurism, market failure, public policy , , , , , , , , , , , , , ,

May 9 JDN 2459342

It is the year 2021, and while we don’t yet have flying cars or human-level artificial intelligence, our society is in many ways quite similar to what cyberpunk fiction predicted it would be. We are constantly connected to the Internet, even linking devices in our homes to the Web when that is largely pointless or actively dangerous. Oligopolies of fewer and fewer multinational corporations that are more and more powerful have taken over most of our markets, from mass media to computer operating systems, from finance to retail.

One of the many dire predictions of cyberpunk fiction is that constant Internet connectivity will effectively destroy privacy. There is reason to think that this is in fact happening: We have televisions that listen to our conversations, webcams that can be hacked, sometimes invisibly, and the operating system that runs the majority of personal and business computers is built around constantly tracking its users.

The concentration of oligopoly power and the decline of privacy are not unconnected. It’s the oligopoly power of corporations like Microsoft and Google and Facebook that allows them to present us with absurdly long and virtually unreadable license agreements as an ultimatum: “Sign away your rights, or else you can’t use our product. And remember, we’re the only ones who make this product and it’s increasingly necessary for your basic functioning in society!” This is of course exactly as cyberpunk fiction warned us it would be.

Giving up our private information to a handful of powerful corporations would be bad enough if that information were securely held only by them. But it isn’t. There have been dozens of major data breaches of major corporations, and there will surely be many more. In an average year, several billion data records are exposed through data breaches. Each person produces many data records, so it’s difficult to say exactly how many people have had their data stolen; but it isn’t implausible to say that if you are highly active on the Internet, at least some of your data has been stolen in one breach or another. Corporations have strong incentives to collect and use your data—data brokerage is a hundred-billion-dollar industry—but very weak incentives to protect it from prying eyes. The FTC does impose fines for negligence in the event of a major data breach, but as usual the scale of the fines simply doesn’t match the scale of the corporations responsible. $575 million sounds like a lot of money, but for a corporation with $28 billion in assets it’s a slap on the wrist. It would be equivalent to fining me about $500 (about what I’d get for driving without a passenger in the carpool lane). Yeah, I’d feel that; it would be unpleasant and inconvenient. But it’s certainly not going to change my life. And typically these fines only impact shareholders, and don’t even pass through to the people who made the decisions: The man who was CEO of Equifax when it suffered its catastrophic data breach retired with a $90 million pension.

While most people seem either blissfully unaware or fatalistically resigned to its inevitability, a few people have praised the trend of reduced privacy, usually by claiming that it will result in increased transparency. Yet, ironically, a world with less privacy can actually mean a world with less transparency as well: When you don’t know what information you reveal will be stolen and misused, you will constantly endeavor to protect all your information, even things that you would normally not hesitate to reveal. When even your face and name can be used to track you, you’ll be more hesitant to reveal them. Cyberpunk fiction predicted this too: Most characters in cyberpunk stories are known by their hacker handles, not their real given names.

There is some good news, however. People are finally beginning to notice that they have been pressured into giving away their privacy rights, and demanding to get them back. The United Nations has recently passed resolutions defending digital privacy, governments have taken action against the worst privacy violations with increasing frequency, courts are ruling in favor of stricter protections, think tanks are demanding stricter regulations, and even corporate policies are beginning to change. While the major corporations all want to take your data, there are now many smaller businesses and nonprofit organizations that will sell you tools to help protect it.

This does not mean we can be complacent: The war is far from won. But it does mean that there is some hope left; we don’t simply have to surrender and accept a world where anyone with enough money can know whatever they want about anyone else. We don’t need to accept what the CEO of Sun Microsystems infamously said: “You have zero privacy anyway. Get over it.”

I think the best answer to the decline of privacy is to address the underlying incentives that make it so lucrative. Why is data brokering such a profitable industry? Because ad targeting is such a profitable industry. So profitable, indeed, that huge corporations like Facebook and Google make almost all of their money that way, and the useful services they provide to users are offered for free simply as an enticement to get them to look at more targeted advertising.

Selling advertising is hardly new—we’ve been doing it for literally millennia, as Roman gladiators were often paid to hawk products. It has been the primary source of revenue for most forms of media, from newspapers to radio stations to TV networks, since those media have existed. What has changed is that ad targeting is now a lucrative business: In the 1850s, that newspaper being sold by barking boys on the street likely had ads in it, but they were the same ads for every single reader. Now when you log in to CNN.com or nytimes.com, the ads on that page are specific only to you, based on any information that these media giants have been able to glean from your past Internet activity. If you do try to protect your online privacy with various tools, a quick-and-dirty way to check if it’s working is to see if websites give you ads for things you know you’d never buy.

In fact, I consider it a very welcome recent development that video streaming is finally a way to watch TV shows by actually paying for them instead of having someone else pay for the right to shove ads in my face. I can’t remember the last time I heard a TV ad jingle, and I’m very happy about that fact. Having to spend 15 minutes of each hour of watching TV to watch commercials may not seem so bad—in fact, many people may feel that they’d rather do that than pay the money to avoid it. But think about it this way: If it weren’t worth at least that much to the corporations buying those ads, they wouldn’t do it. And if a corporation expects to get $X from you that you wouldn’t have otherwise paid, that means they’re getting you to spend that much that you otherwise wouldn’t have—meaning that they’re getting you to buy something you didn’t need. Perhaps it’s better after all to spend that $X on getting entertainment that doesn’t try to get you to buy things you don’t need.

Indeed, I think there is an opportunity to restructure the whole Internet this way. What we need is a software company—maybe a nonprofit organization, maybe a for-profit business—that is set up to let us make micropayments for online content in lieu of having our data collected or being force-fed advertising.

How big would these payments need to be? Well, Facebook has about 2.8 billion users and takes in revenue of about $80 billion per year, so the average user would have to pay about $29 a year for the use of Facebook, Instagram, and WhatsApp. That’s about $2.50 per month, or $0.08 per day.

The New York Times is already losing its ad-supported business model; less than $400 million of its $1.8 billion revenue last year was from ads, the rest being primarily from subscriptions. But smaller media outlets have a much harder time gaining subscribers; often people just want to read a single article and aren’t willing to pay for a whole month or year of the periodical. If we could somehow charge for individual articles, how much would we have to charge? Well, a typical webpage has an ad clickthrough rate of 1%, while a typical cost-per-click rate is about $0.60, so ads on the average webpage makes its owners a whopping $0.006. That’s not even a single cent. So if this new micropayment system allowed you to pay one cent to read an article without the annoyance of ads or the pressure to buy something you don’t need, would you pay it? I would. In fact, I’d pay five cents. They could quintuple their revenue!

The main problem is that we currently don’t have an efficient way to make payments that small. Processing a credit card transaction typically costs at least $0.05, so a five-cent transaction would yield literally zero revenue for the website. I’d have to pay ten cents to give the website five, and I admit I might not always want to do that—I’d also definitely be uncomfortable with half the money going to credit card companies.

So what’s needed is software to bundle the payments at each end: In a single credit card transaction, you add say $20 of tokens to an account. Each token might be worth $0.01, or even less if we want. These tokens can then be spent at participating websites to pay for access. The websites can then collect all the tokens they’ve received over say a month, bundle them together, and sell them back to the company that originally sold them to you, for slightly less than what you paid for them. These bundled transactions could actually be quite large in many cases—thousands or millions of dollars—and thus processing fees would be a very small fraction. For smaller sites there could be a minimum amount of tokens they must collect—perhaps also $20 or so—before they can sell them back. Note that if you’ve bought $20 in tokens and you are paying $0.05 per view, you can read 400 articles before you run out of tokens and have to buy more. And they don’t all have to be from the same source, as they would with a traditional subscription; you can read articles from any outlet that participates in the token system.

There are a number of technical issues to be resolved here: How to keep the tokens secure, how to guarantee that once a user purchases access to an article they will continue to have access to it, ideally even if they clear their cache, delete all cookies, or login from another computer. I can’t literally set up this website today, and even if I could, I don’t know how I’d attract a critical mass of both users and participating websites (it’s a major network externality problem). But it seems well within the purview of what the tech industry has done in the past—indeed, it’s quite comparable to the impressive (and unsettling) infrastructure that has been laid down to support ad-targeting and data brokerage.

How would such a system help protect privacy? If micropayments for content became the dominant model of funding online content, most people wouldn’t spend much time looking at online ads, and ad targeting would be much less profitable. Data brokerage, in turn, would become less lucrative, because there would be fewer ways to use that data to make profits. With the incentives to take our data thus reduced, it would be easier to enforce regulations protecting our privacy. Those fines might actually be enough to make it no longer worth the while to take sensitive data, and corporations might stop pressuring people to give it up.

No, privacy isn’t dead. But it’s dying. If we want to save it, we have a lot of work to do.

Sincerity inflation

PNRJ cognitive science, core principles, ethics, personal , , , , , , , ,

Aug 30 JDN 2459092

What is the most saccharine, empty, insincere way to end a letter? “Sincerely”.

Whence such irony? Well, we’ve all been using it for so long that we barely notice it anymore. It’s just the standard way to end a letter now.

This process is not unlike inflation: As more and more dollars get spent, the value of a dollar decreases, and as a word or phrase gets used more and more, its meaning weakens.

It’s hardly just the word “Sincerely” itself that has thus inflated. Indeed, almost any sincere expression of caring often feels empty. We routinely ask strangers “How are you?” when we don’t actually care how they are.

I felt this quite vividly when I was applying to GiveWell (alas, they decided not to hire me). I was trying to express how much I care about GiveWell’s mission to maximize the effectiveness of charity at saving lives, and it was quite hard to find the words. I kept find myself saying things that anyone could say, whether they really cared or not. Fighting global poverty is nothing less than my calling in life—but how could I say that without sounding obsequious or hyperbolic? Anyone can say that they care about global poverty—and if you asked them, hardly anyone would say that they don’t care at all about saving African children from malaria—but how many people actually give money to the Against Malaria Foundation?

Or think about how uncomfortable it can feel to tell a friend that you care about them. I’ve seen quite a few posts on social media that are sort of scattershot attempts at this: “I love you all!” Since that is obviously not true—you do not in fact love all 286 of your Facebook friends—it has plausible deniability. But you secretly hope that the ones you really do care about will see its truth.

Where is this ‘sincerity inflation’ coming from? It can’t really be from overuse of sincerity in ordinary conversation—the question is precisely why such conversation is so rare.

But there is a clear source of excessive sincerity, and it is all around us: Advertising.

Every product is the “best”. They will all “change your life”. You “need” every single one. Every corporation “supports family”. Every product will provide “better living”. The product could be a toothbrush or an automobile; the ads are never really about the product. They are about how the corporation will make your family happy.

Consider the following hilarious subversion by the Steak-umms Twitter account (which is a candle in the darkness of these sad times; they have lots of really great posts about Coronavirus and critical thinking).

Kevin Farzard (who I know almost nothing about, but gather he’s a comedian?) wrote this on Twitter: “I just want one brand to tell me that we are not in this together and their health is our lowest priority”

Steak-umms diligently responded: “Kevin we are not in this together and your health is our lowest priority”

Why is this amusing? Because every other corporation—whose executives surely care less about public health than whatever noble creature runs the Steak-umms Twitter feed—has been saying the opposite: “We are all in this together and your health is our highest priority.”

We are so inundated with this saccharine sincerity by advertisers that we learn to tune it out—we have to, or else we’d go crazy and/or bankrupt. But this has an unfortunate side effect: We tune out expressions of caring when they come from other human beings as well.

Therefore let us endeavor to change this, to express our feelings clearly and plainly to those around us, while continuing to shield ourselves from the bullshit of corporations. (I choose that word carefully: These aren’t lies, they’re bullshit. They aren’t false so much as they are utterly detached from truth.) Part of this means endeavoring to be accepting and supportive when others express their feelings to us, not retreating into the comfort of dismissal or sarcasm. Restoring the value of our sincerity will require a concerted effort from many people acting at once.

For this project to succeed, we must learn to make a sharp distinction between the institutions that are trying to extract profits from us and the people who have relationships with us. This is not to say that human beings cannot lie or be manipulative; of course they can. Trust is necessary for all human relationships, but there is such a thing as too much trust. There is a right amount to trust others you do not know, and it is neither complete distrust nor complete trust. Higher levels of trust must be earned.

But at least human beings are not systematically designed to be amoral and manipulative—which corporations are. A corporation exists to do one thing: Maximize profit for its shareholders. Whatever else a corporation is doing, it is in service of that one ultimate end. Corporations can do many good things; but they sort of do it by accident, along the way toward their goal of maximizing profit. And when those good things stop being profitable, they stop doing them. Keep these facts in mind, and you may have an easier time ignoring everything that corporations say without training yourself to tune out all expressions of sincerity.

Then, perhaps one day it won’t feel so uncomfortable to tell people that we care about them.

Coase, extortion, and pay-to-skip

PNRJ critique of neoclassical economics, ethics, public policy , , , , , , , , ,

Feb 9 JDN 2458889

The Coase Theorem states that under perfect property rights, perfect information, perfect contract enforcement, and negligible transaction costs, Pareto efficiency can be achieved even when there are large externalities. It was designed as an argument against Pigovian taxation, which tries to use taxes to create incentives against externalities such as pollution.

The usual argument against the Coase Theorem is that transaction costs are rarely negligible and contracts are often unenforceable, so the Pareto-efficient solution to externalities that it provides is unrealistic. (In fact, Coase himself agreed with this critique, and instead argued that regulation of externalities needs to be done on a case-by-case basis with attention to the detailed context.)

Yet this is not the real problem with the Coase Theorem. The real problem is the criterion of Pareto-efficiency: An arrangement can be Pareto-efficient without being fair, just, or even economically efficient in any real sense.

As a reminder, Pareto efficiency simply says that no person can be made better off without making some other person worse off. It doesn’t say anything about how well off people are relative to one another—inequality—or how they got what they have—justice. It doesn’t even really entail economic efficiency: Supposing that the marginal utility of wealth is always positive, if one man claims all the wealth in the world and lends it out to everyone else at interest, that does seem to be Pareto-efficient—we can’t make anyone else better off without taking something from His Majesty the Supreme Emperor—but it clearly isn’t economically efficient in any desirable sense.

And this is what’s wrong with the Coase Theorem: The kind of Pareto efficiency it generates allows for—indeed, in many cases demands—what we would ordinarily call extortion.

What is extortion, after all?

If a member of the mafia comes to your house and says, “What a nice place you’ve got here; what a shame if anything happened to it!” and then demands you pay him $500 a month, that’s extortion. He has the power to inflict a negative externality on you, and he promises not to as long as you pay him. (Here, the contract enforcement actually comes from the reciprocity in the indefinitely iterated game, and doesn’t require an outside enforcer.)

Extortion is when one party has the power to create a negative externality upon another (e.g. burn your house down, punch you in the face). They make a deal: They won’t create that negative externality, provided that you compensate them (pay them money). Is this Pareto efficient? Absolutely! They’re as well off as they would be if they hurt you, and you’re better off. But is this how we want to run a society? I don’t think so.

In the cyberpunk future in which we now live, there is a market emerging that fits the requirements of the Coase Theorem as well as any which has ever existed; and sure enough, in the absence of adequate regulation it is turning to extortion.

I am referring of course to the market for online advertisements. Perfect property rights? Not quite, but that intellectual property enforcement is very strong. Perfect contract enforcement? Not perfect, but highly reliable, like any mature market in a First World country. Perfect information and negligible transaction costs? As close as humanity has ever come.

What’s the externality? People don’t like seeing ads. Ads are annoying, distracting, and unpleasant. But businesses benefit from showing people ads (or at least think they do), and seek rents by trying to post more ads than their competition. I proposed a Pigouvian solution: Tax advertising.

What’s the Coase solution? Let people pay to skip ads. And indeed there are now sites that do this.

Note that there is a vital difference between this and, say, YouTube Premium. With YouTube Premium, you’re actually paying for the opportunity to use an ad-free version of the service. So instead of advertisers paying Google to run ads on the content you watch, you’re simply paying for the content you watch. That’s great. I have no objection to that. In fact, I strongly prefer it to the ad-supported model. Paying for content makes you the customer. Accepting ads in return for free content makes you the product.

No, I’m talking about businesses posting ads, and then offering you the chance to pay them to get rid of those ads. (Maybe a cut would go to the content provider, but that’s not really important here.) The key is that the people who make the ads get the chance to get revenue from you paying to skip them.

In Coase terms, that sounds great! Instead of me having to put you through a miserable ad that probably won’t lead you to buying anything anyway, you just pay me $0.25 or something directly. I’m better off, you’re better off, everyone’s happy.

But in fact, everyone is not happy, because here’s what I can do: I can go out of my way to make the ads as obnoxious as possible, so that you have no choice but to pay me to skip them. I’m not the first one to make this point: It’s the subject of an SMBC comic and a major plot point in a Black Mirror episode.

This is precisely the same process as extortion: Threaten a negative externality, demand compensation in return for not doing so.

I think what Coase missed in his original argument is that negative externalities aren’t always by-products of otherwise productive activities. We often—nay, usually—have the power to inflict negative externalities upon other people with no productive purpose. If externalities were always by-products, negotiation as Coase imagined it could allow us to achieve the productive benefit without the externality cost. But when externalities can be generated independently, they are a means of extracting rent from those too weak to resist you.

What’s the solution to this problem? It’s boring: We have to tax and regulate externalities after all.

What do we mean by “obesity”?

PNRJ development economics, public policy , , , , , , , , , , , , , , , , ,

Nov 25 JDN 2458448

I thought this topic would be particularly appropriate for the week of Thanksgiving, since as a matter of public ritual, this time every year, we eat too much and don’t get enough exercise.

No doubt you have heard the term “obesity epidemic”: It’s not just used by WebMD or mainstream news; it’s also used by the American Heart Association, the Center for Disease Control, the World Health Organization, and sometimes even published in peer-reviewed journal articles.

This is kind of weird, because the formal meaning of the term “epidemic” clearly does not apply here. I feel uncomfortable going against public health officials in what is clearly their area of expertise rather than my own, but everything I’ve ever read about the official definition of the word “epidemic” requires it to be an infectious disease. You can’t “catch” obesity. Hanging out with people who are obese may slightly raise your risk of obesity, but not in the way that hanging out with people with influenza gives you influenza. It’s not caused by bacteria or viruses. Eating food touched by a fat person won’t cause you to catch the fat. Therefore, whatever else it is, this is not an epidemic. (I guess sometimes we use the term more metaphorically, “an epidemic of bankruptcies” or an “epidemic of video game consumption”; but I feel like the WHO and CDC of all people should be more careful.)

Indeed, before we decide what exactly this is, I think we should first ask ourselves a deeper question: What do we mean by “obesity”?

The standard definition of “obesity” relies upon the body mass index (BMI), a very crude measure that simply takes your body mass and divides by the square of your height. It’s easy to measure, but that’s basically its only redeeming quality.

Anyone who has studied dimensional analysis should immediately see a problem here: That isn’t a unit of density. It’s a unit of… density-length? If you take the exact same individual and scale them up by 10%, their BMI will increase by 10%. Do we really intend to say that simply being larger makes you obese, for the exact same ratios of muscle, fat, and bone?

Because of this, the taller you are, the more likely your BMI is going to register as “obese”, holding constant your actual level of health and fitness. And worldwide, average height has been increasing. This isn’t enough to account for the entire trend in rising BMI, but it reduces it substantially; average height has increased by about 10% since the 1950s, which is enough to raise our average BMI by about 2 points of the 5-point observed increase.

And of course BMI doesn’t say anything about your actual ratios of fat and muscle; all it says is how many total kilograms are in your body. As a result, there is a systematic bias against athletes in the calculation of BMI—and any health measure that is biased against athletes is clearly doing something wrong. All those doctors telling us to exercise more may not realize it, but if we actually took their advice, our BMIs would very likely get higher, not lower—especially for men, especially for strength-building exercise.

It’s also quite clear that our standards for “healthy weight” are distorted by social norms. Feminists have been talking about this for years; most women will never look like supermodels no matter how much weight they lose—and eating disorders are much more dangerous than being even 50 pounds overweight. We’re starting to figure out that similar principles hold for men: A six-pack of abs doesn’t actually mean you’re healthy; it means you are dangerously depleted of fatty acids.

To compensate for this, it seems like the most sensible methodology would be to figure out empirically what sort of weight is most strongly correlated with good health and long lifespan—what BMI maximizes your expected QALY.

You might think that this is what public health officials did when defining what is currently categorized as “normal weight”—but you would be wrong. They used social norms and general intuition, and as a result, our standards for “normal weight” are systematically miscalibrated.

In fact, the empirical evidence is quite clear: The people with the highest expected QALY are those who are classified as “overweight”, with BMI between 25 and 30. Those of “normal weight” (20 to 25) fare slightly worse, followed by those classified as “obese class I” (30 to 35)—but we don’t actually see large effects until either “underweight” (18.5-20) or “obese class II” (35 to 40). And the really severe drops in life and health expectancy don’t happen until “obese class III” (>40); and we see the same severe drops at “very underweight” (<18.5).
With that in mind, consider that the global average BMI increased from 21.7 in men and 21.4 in women in 1975 to 24.2 in men and 24.4 in women in 2014. That is, the world average increased from the low end of “normal weight” which is actually too light, to the high end of “normal weight” which is probably optimal. The global prevalence of “morbid obesity”, the kind that actually has severely detrimental effects on health, is only 0.64% in men and 1.6% in men. Even including “severe obesity”, the kind that has a noticeable but not dramatic effect on health, is only 2.3% in men and 5.0% in women. That’s your epidemic? Reporting often says things like “2/3 of American adults are overweight or obese”; but all that “overweight” proportion should be utterly disregarded, since it is beneficial to health. The actual prevalence of obesity in the US—even including class I obesity which is not very harmful—is less than 40%.

If obesity were the health crisis it were made out to be, we should expect that global life expectancy is decreasing, or at the very least not increasing. On the contrary, it is rapidly increasing: In 1955, global life expectancy was only 55 years, while it is now over 70.

Worldwide, the countries with the highest obesity rates are those with the longest life expectancy, because both of these things are strongly correlated with high levels of economic development. But it may not just be that: Smoking reduces obesity while also reducing lifespan, and a lot of those countries with very high obesity (including the US) have very low rates of smoking.

There’s some evidence that within the set of rich, highly-developed countries, obesity rates are positively correlated with lower life expectancy, but these effects are much smaller than the effects of high development itself. Going from the highest obesity in the world (the US, of course) to the lowest among all highly-developed countries (Japan) requires reducing the obesity rate by 34 percentage points but only increases life expectancy by about 5 years. You’d get the same increase by raising overall economic development from the level of Turkey to the level of Greece, about 10 points on the 100-point HDI scale.

 

Now, am I saying that we should all be 400 pounds? No, there does come a point where excess weight is clearly detrimental to health. But this threshold is considerably higher than you have probably been led to believe. If you are 15 or 20 pounds “overweight” by what our society (or even your doctor!) tells you, you are probably actually at the optimal weight for your body type. If you are 30 or 40 pounds “overweight”, you may want to try to lose some weight, but don’t make yourself suffer to achieve it. Only if you are 50 pounds or more “overweight” should you really be considering drastic action. If you do try to lose weight, be realistic about your goal: Losing 5% to 10% of your initial weight is a roaring success.

There are also reasons to be particularly concerned about obesity and lack of exercise in children, which is why Michelle Obama’s “Let’s Move!” campaign was a good thing.

And yes, exercise more! Don’t do it to try to lose weight (exercise does not actually cause much weight loss). Just do it. Exercise has so many health benefits it’s honestly kind of ridiculous.

But why am I complaining about this, anyway? Even if we cause some people to worry more about eating less than is strictly necessary, what’s the harm in that? At least we’re getting people to exercise, and Thanksgiving was already ruined by politics anyway.

Well, here’s the thing: I don’t think this obesity panic is actually making us any less obese.

The United States is the most obese country in the world—and you can’t so much as call up Facebook or step into a subway car in the US without someone telling you that you’re too fat and you need to lose weight. The people who really are obese and may need medical help losing weight are the ones most likely to be publicly shamed and harassed for their weight—and there’s no evidence that this actually does anything to reduce their weight. People who experience shaming and harassment for their weight are actually less likely to achieve sustained weight loss.

Teenagers—both boys and girls—who are perceived to be “overweight” are at substantially elevated risk of depression and suicide. People who more fully internalize feelings of shame about their weight have higher blood pressure and higher triglicerides, though once you control for other factors the effect is not huge. There’s even evidence that fat shaming by medical professionals leads to worse treatment outcomes among obese patients.

If we want to actually reduce obesity—and this makes sense, at least for the upper-tail obesity of BMI above 35—then we should be looking at what sort of interventions are actually effective at doing that. Medicine has an important role to play of course, but I actually think economics might be stronger here (though I suppose I would, wouldn’t I?).

Number 1: Stop subsidizing meat and feed grains. There is now quite clear evidence that direct and indirect government subsidies for meat production are a contributing factor in our high fat consumption and thus high obesity rate, though obviously other factors matter too. If you’re worried about farmers, subsidize vegetables instead, or pay for active labor market programs that will train those farmers to work in new industries. This thing we do where we try to save the job instead of the worker is fundamentally idiotic and destructive. Jobs are supposed to be destroyed; that’s what technological improvement is. If you stop destroying jobs, you will stop economic growth.

Number 2: Restrict advertising of high-sugar, high-fat foods, especially to children. Food advertising is particularly effective, because it draws on such primal impulses, and children are particularly vulnerable (as the APA has publicly reported on, including specifically for food advertising). Corporations like McDonald’s and Kellogg’s know quite well what they’re doing when they advertise high-fat, high-sugar foods to kids and get them into the habit of eating them early.

Number 3: Find policies to promote exercise. Despite its small effects on weight loss, exercise has enormous effects on health. Indeed, the fact that people who successfully lose weight show long-term benefits even if they put the weight back on suggests to me that really what they gained was a habit of exercise. We need to find ways to integrate exercise into our daily lives more. The one big thing that our ancestors did do better than we do is constantly exercise—be it hunting, gathering, or farming. Standing desks and treadmill desks may seem weird, but there is evidence that they actually improve health. Right now they are quite expensive, so most people don’t buy them. If we subsidized them, they would be cheaper; if they were cheaper, more people would buy them; if more people bought them, they would seem less weird. Eventually, it could become normative to walk on a treadmill while you work and sitting might seem weird. Even a quite large subsidy could be worthwhile: say we had to spend $500 per person per year to buy every single adult a treadmill desk each year. That comes to about $80 billion per year, which is less than one fourth what we’re currently spending on diabetes or heart disease, so we’d break even if we simply managed to reduce those two conditions by 13%. Add in all the other benefits for depression, chronic pain, sleep, sexual function, and so on, and the quality of life improvement could be quite substantial.

What about a tax on political contributions?

PNRJ ethics, market failure, public policy, Uncategorized , , , , , ,

Jan 7, JDN 2458126

In my previous post, I argued that an advertising tax could reduce advertising, raise revenue, and produce almost no real economic distortion. Now I’m going to generalize this idea to an even bolder proposal: What if we tax political contributions?

Donations to political campaigns are very similar to advertising. A contest function framework also makes a lot of sense: Increased spending improves your odds of winning, but it doesn’t actually produce any real goods.

Suppose there’s some benefit B that I get if a given politician wins an election. That benefit could include direct benefits to me, as well as altruistic benefits to other citizens I care about, or even my concern for the world as a whole. But presumably, I do benefit in some fashion from my favored politician winning—otherwise, why are they my favored politician?

In this very simple model, let’s assume that there are only two parties and two donors (obviously in the real world there are more parties and vastly more donors; but it doesn’t fundamentally change the argument). Say I will donate x and the other side will donate y.

Assuming that donations are all that matter, the probability my party will win the election is x/(x+y).

Fortunately that isn’t the case. A lot of things matter, some that should (policy platforms, experience, qualifications, character) and some that shouldn’t (race, gender, age, height—part of why Trump won may in fact be that he is tall; he’s about 6’1”.). So let’s put all the other factors that affect elections into a package and call that F.

The probability that my candidate wins is then x/(x+y) + F, where F can be positive or negative. If F is positive, it means that my candidate is more likely to win, while if it’s negative, it means my candidate is less likely to win. (If you want to be pedantic, the probability of winning has to be capped at 0 and 1, but this doesn’t fundamentally change the argument, and only matters for candidates that are obvious winners or obvious losers regardless of how much anyone donates.)

The donation costs me money, x. The cost in utility of that money depends on my utility function, so for now I’ll just call it a cost function C(x).
Then my net benefit is:
B*[x/(x+y)+F] – C(x)

I can maximize this by a first-order condition. Notice how the F just drops out. I like F to be large, but it doesn’t affect my choice of x.

B*y/(x+y)^2 = C'(x)

Turning that into an exact value requires knowing my cost function and my opponent’s cost function (which need not be the same, in general; unlike the advertising case, it’s not a matter of splitting fungible profits between us), but it’s actually possible to stop here. We can already tell that there is a well-defined solution: There’s a certain amount of donation x that maximizes my expected utility, given the amount y that the other side has donated. Moreover, with a little bit of calculus you can show that the optimal amount of x is strictly increasing in y, which makes intuitive sense: The more they give, the more you need to give in order to keep up. Since x is increasing in y and y is increasing in x, there is a Nash equilibrium: At some amount x and y we each are giving the optimal amount from our perspective.

We can get a precise answer if we assume that the amount of the donations is small compared to my overall wealth, so I will be approximately risk-neutral; then we can just say C(x) = x, and C'(x) = 1:

B*y/(x+y)^2 = 1
Then we get essentially the same result we did for the advertising:

x = y = B/4

According to this, I should be willing to donate up to one-fourth the benefit I’d get from my candidate winning in donations. This actually sounds quite high; I think once you take into account the fact that lots of other people are donating and political contributions aren’t that effective at winning elections, the optimal donation is actually quite a bit smaller—though perhaps still larger than most people give.

If we impose a tax rate r on political contributions, nothing changes. The cost to me of donating is still the same, and as long as the tax is proportional, the ratio x/(x+y) and the probability x/(x+y) + F will remain exactly the same as before. Therefore, I will continue to donate the same amount, as will my opponent, and each candidate will have the same probability of winning as before. The only difference is that some of the money (r of the money, to be precise) will go to the government instead of the politicians.

The total amount of donations will not change. The probability of each candidate winning will not change. All that will happen is money will be transferred from politicians to the government. If this tax revenue is earmarked for some socially beneficial function, this will obviously be an improvement in welfare.

The revenue gained is not nearly as large an amount of money as is spent on advertising (which tells you something about American society), but it’s still quite a bit: Since we currently spend about $5 billion per year on federal elections, a tax rate of 50% could raise about $2.5 billion.

But in fact this seriously under-estimates the benefits of such a tax. This simple model assumes that political contributions only change which candidate wins; but that’s actually not the main concern. (If F is large enough, it can offset any possible donations.)
The real concern is how political contributions affect the choices politicians make once they get into office. While outright quid-pro-quo bribery is illegal, it’s well-known that many corporations and wealthy individuals will give campaign donations with the reasonable expectation of influencing what sort of policies will be made.

You don’t think Goldman Sachs gives millions of dollars each election out of the goodness of their hearts, do you? And they give to both major parties, which really only makes sense if their goal is not to make a particular candidate win, but to make sure that whoever wins feels indebted to Goldman Sachs. (I guess it could also be to prevent third parties from winning—but they hardly ever win anyway, so that wouldn’t be a smart investment from the bank’s perspective.)

Lynda Powell at the University of Rochester has documented the many subtle but significant ways that these donations have influenced policy. Campaign donations aren’t as important as party platforms, but a lot of subtle changes across a wide variety of policies add up to large differences in outcomes.

A political contribution tax would reduce these influences. If politicians’ sole goal were to win, the tax would have no effect. But it seems quite likely that politicians enjoy various personal benefits from lobbying and campaign contributions: Fine dinners, luxurious vacations, and so on. And insofar as that is influencing politicians’ behavior, it is both obviously corrupt and clearly reduced by a political contribution tax. How large an effect this would be is difficult to say; but the direction of the effect is clearly the one we want.

Taxing donations would also allow us to protect the right to give to campaigns (which does seem to be a limited kind of civil liberty, even though the precise interpretation “money is speech” is Orwellian), while reducing corruption and allowing us to keep close track on donations that are made. Taxing a money stream, even a small amount, is often one of the best ways to incentivize close monitoring of that money stream.

With a subtle change, the tax could even be made to bias in favor of populism: All you need to do is exempt small donations from the tax. If say the first $1000 per person per year is exempt from taxation, then the imposition of the tax will reduce the effectiveness of million-dollar contributions from Goldman Sachs and the Koch brothers without having any effect on $50 donations from people like you and me. That would technically be “distorting” elections—but it seems like it might be a distortion worth making.

Of course, this is probably even less likely to happen than the advertising tax.

The potential of an advertising tax

PNRJ market failure, public policy , , , , , , , , ,

Jan 7, JDN 2458126

Advertising is everywhere in our society. You may see some on this very page (though if I hit my next Patreon target I’m going to pay to get rid of those). Ad-blockers can help when you’re on the Web, and premium channels like HBO will save you from ads when watching TV, but what are you supposed to do about ads on billboards as you drive down the highway, ads on buses as you walk down the street, ads on the walls of the subway train?

And Banksy isn’t entirely wrong; this stuff can be quite damaging. Based on decades of research, the American Psychological Association has issued official statements condemning the use of advertising to children for its harmful psychological effects. Medical research has shown that advertisements for food can cause overeating—and thus, the correlated rise of advertising and obesity may be no coincidence.

Worst of all, political advertising distorts our view of the world. Though we may not be able to blame advertising per se for Trump; most of his publicity was gained for free by irresponsible media coverage.

And yet, advertising is almost pure rent-seeking. It costs resources, but it doesn’t produce anything. In most cases it doesn’t even raise awareness about something or find new customers. The primary goal of most advertising is to get you to choose that brand instead of a different brand. A secondary goal (especially for food ads) is to increase your overall consumption of that good, but since the means employed typically involve psychological manipulation, this increase in consumption is probably harmful to social welfare.

A general principle of economics that has almost universal consensus is the Pigou Principle: If you want less of something, you should put a tax on it. So, what would happen if we put a tax on advertising?

The amazing thing is that in this case, we would probably not actually reduce advertising spending, but we would reduce advertising, which is what we actually care about. Moreover, we would be able to raise an enormous amount of revenue with zero social cost. Like the other big Pigovian tax (the carbon tax), this a rare example of a tax that will give you a huge amount of revenue while actually yielding a benefit to society.

This is far from obvious, so I think it is worth explaining where it comes from.

The key point is that advertising doesn’t typically increase the overall size of the market (though in some cases it does; I’ll get back to that in a moment). Rather that a conventional production function like we would have for most types of expenditure, advertising is better modeled by what is called a contest function (something that our own Stergios Skaperdas at UCI is actually a world-class expert in). In a production function, inputs increase the total amount of output. But in a contest function, inputs only redistribute output from one place to another. Contest functions thus provide a good model of rent-seeking, which is what most advertising is.

Suppose there’s a total market M for some good, where M is the total profits that can be gained from capturing that entire market.
Then, to keep it simple, let’s suppose there are only two major firms in the market, a duopoly like Coke and Pepsi or Boeing and Airbus.

Let’s say Coke decides to spend an amount x on advertising, and Pepsi decides to spend an amount y.

For now, let’s assume that total beverage consumption won’t change; so the total profits to be had from the market are always M.

What advertising does is it changes the share of that market which each firm will get. Specifically, let’s use the simplest model, where the share of the market is equal to the share of advertising spending.

Then the net profit for Coke is the following:

The share they get, x/(x+y), times the size of the whole market, M, minus the advertising spending x.

max M*x/(x+y) – x

We can maximize this with the usual first-order condition:

y/(x+y)^2 M – 1 = 0

(x+y)^2 = My

Since the game is symmetric, in a Nash equilibrium, Pepsi will use the same reasoning:

(x+y)^2 = Mx

Thus we have:

x = y

(2x)^2 = Mx

x = M/4

In this very simple model, each firm will spend one-fourth of the market’s value, and the total advertising spending will be equal to half the size of the market. Then, each company’s net income will be equal to its advertising spending. This is a pretty good estimate for Coca-Cola in real life, which spends about $3.3 billion on advertising and receives about $2.8 billion in net income each year.

What would happen if we introduce a tax? Let’s say we introduce a proportional tax r on all advertising spending. That is, for every dollar you spend on advertising, you must pay the government $r in tax. The really remarkable thing is that companies who advertise shouldn’t care what we make the tax; the only ones who will care are the advertising companies themselves.

If Coke pays x, the actual amount of advertising they receive is x – r x = x(1-r).

Likewise, Pepsi’s actual advertising received is y(1-r).

But notice that the share of total advertising spending is completely unchanged!

(x(1-r))/(x(1-r) + y(1-r)) = x/(x+y)

Since the payoff for Coke only depends on how much Coke spends and what market share they get, it is also unchanged. Since the same is true for Pepsi, nothing will change in how the two companies behave. They will spend the same amount on advertising, and they will receive the same amount of net income when all is said and done.

The total quantity of advertising will be reduced, from x+y to (x+y)(1-r). That means fewer billboards, fewer posters in subway stations, fewer TV commercials. That will hurt advertising companies, but benefit everyone else.

How much revenue will we get for the government? r x + r y = r(x+y).

Since the goal is to substantially reduce advertising output, and it won’t distort other industries in any way, we should set this tax quite high. A reasonable value for r would be 50%. We might even want to consider something as high as 90%; but for now let’s look at what 50% would do.

Total advertising spending in the US is over $200 billion per year. Since an advertising tax would not change total advertising spending, we can expect that a tax rate of 50% would simply capture 50% of this spending as revenue, which is to say $100 billion per year. That would be enough to pay for the entire Federal education budget, or the foreign aid and environment budgets combined.
Another great aspect of how an advertising tax is actually better than a carbon tax is that countries will want to compete to have the highest advertising taxes. If say Canada imposes a carbon tax but the US doesn’t, industries will move production to the US where it is cheaper, which hurts Canada. Yet the total amount of pollution will remain about the same, and Canada will be just as affected by climate change as they would have been anyway. So we need to coordinate across countries so that the carbon taxes are all the same (or at least close), to prevent industries from moving around; and each country has an incentive to cheat by imposing a lower carbon tax.

But advertising taxes aren’t like that. If Canada imposes an advertising tax and the US doesn’t, companies won’t shift production to the US; they will shift advertising to the US. And having your country suddenly flooded with advertisements is bad. That provides a strong incentive for you to impose your own equal or even higher advertising tax to stem the tide. And pretty soon, everyone will have imposed an advertising tax at the same rate.

Of course, in all the above I’ve assumed a pure contest function, meaning that advertisements are completely unproductive. What if they are at least a little bit productive? Then we wouldn’t want to set the tax too high, but the basic conclusions would be unchanged.

Suppose, for instance, that the advertising spending adds half its value to the value of the market. This is a pretty high estimate of the benefits of advertising.

Under this assumption, in place of M we have M+(x+y)/2. Everything else is unchanged.

We can maximize as before:

max (M+(x+y)/2)*x/(x+y) – x

The math is a bit trickier, but we can still solve by a first-order condition, which simplifies to:

(x+y)^2 = 2My

By the same symmetry reasoning as before:

(2x)^2 = 2Mx

x = M/2

Now, total advertising spending would equal the size of the market without advertising, and net income for each firm after advertising would be:

2M(1/2) – M/2 = M/2

That is, advertising spending would equal net income, as before. (A surprisingly robust result!)

What if we imposed a tax? Now the algebra gets even nastier:

max (M+(x+y)(1-r)/2)*x/(x+y) – x

But the ultimate outcome is still quite similar:

(1+r)(x+y)^2 = 2My

(1+r)(2x)^2 = 2Mx

x = M/2*1/(1+r)

Advertising spending will be reduced by a factor of 1/(1+r). Even if r is 50%, that still means we’ll have 2/3 of the advertising spending we had before.

Total tax revenue will then be M*r/(1+r), which for r of 50% would be M/3.

Total advertising will be M(1-r)/(1+r), which would be M/3. So we managed to reduce advertising by 2/3, while reducing advertising spending by only 1/3. Then we would receive half of that spending as revenue. Thus, instead of getting $100 billion per year, we would get $67 billion, which is still just about enough to pay for food stamps.

What’s the downside of this tax? Unlike most taxes, there really isn’t one. Yes, it would hurt advertising companies, which I suppose counts as a downside. But that was mostly waste anyway; anyone employed in advertising would be better employed almost anywhere else. Millions of minds are being wasted coming up with better ways to sell Viagra instead of better treatments for cancer. Any unemployment introduced by an advertising tax would be temporary and easily rectified by monetary policy, and most of it would hit highly educated white-collar professionals who have high incomes to begin with and can more easily find jobs when displaced.

The real question is why we aren’t doing this already. And that, I suppose, has to come down to politics.

“But wait, there’s more!”: The clever tricks of commercials

PNRJ cognitive science, heuristics and biases, market failure , , , , , , , , , , , , , , , ,

JDN 2457565

I’m sure you’ve all seen commercials like this dozens of times:

A person is shown (usually in black-and-white) trying to use an ordinary consumer product, and failing miserably. Often their failure can only be attributed to the most abject incompetence, but the narrator will explain otherwise: “Old product is so hard to use. Who can handle [basic household activity] and [simple instructions]?”

“Struggle no more!” he says (it’s almost always a masculine narrator), and the video turns to full color as the same person is shown using the new consumer product effortlessly. “With innovative high-tech new product, you can do [basic household activity] with ease in no time!”

“Best of all, new product, a $400 value, can be yours for just five easy payments of $19.95. That’s five easy payments of $19.95!”

And then, here it comes: “But wait. There’s more! Order within the next 15 minutes and you will get two new products, for the same low price. That’s $800 in value for just five easy payments of $19.95! And best of all, your satisfaction is guaranteed! If you don’t like new product, return it within 30 days for your money back!” (A much quieter, faster voice says: “Just pay shipping and handling.”)

Call 555-1234. That’s 555-1234.

“CALL NOW!”

Did you ever stop and think about why so many commercials follow this same precise format?

In short, because it works. Indeed, it works a good deal better than simply presenting the product’s actual upsides and downsides and reporting a sensible market price—even if that sensible market price is lower than the “five easy payments of $19.95”.

We owe this style of marketing to one Ron Popeil; Ron Popeil was a prolific inventor, but none of his inventions have had so much impact as the market methods he used to sell them.

Let’s go through step by step. Why is the person using the old product so incompetent? Surely they could sell their product without implying that we don’t know how to do basic household activities like boiling pasta and cutting vegetables?

Well, first of all, many of these products do nothing but automate such simple household activities (like the famous Veg-O-Matic which cuts vegetables and “It slices! It dices!”), so if they couldn’t at least suggest that this is a lot of work they’re saving us, we’d have no reason to want their product.

But there’s another reason as well: Watching someone else fumble with basic household appliances is funny, as any fan of the 1950s classic I Love Lucy would attest (in fact, it may not be a coincidence that the one fumbling with the vegetables is often a woman who looks a lot like Lucy), and meta-analysis of humor in advertising has shown that it draws attention and triggers positive feelings.

Why use black-and-white for the first part? The switch to color enhances the feeling of contrast, and the color video is more appealing. You wouldn’t consciously say “Wow, that slicer changed the tomatoes from an ugly grey to a vibrant red!” but your subconscious mind is still registering that association.

Then they will hit you with appealing but meaningless buzzwords. For technology it will be things like “innovative”, “ground-breaking”, “high-tech” and “state-of-the-art”, while for foods and nutritional supplements it will be things like “all-natural”, “organic”, “no chemicals”, and “just like homemade”. It will generally be either so vague as to be unverifiable (what constitutes “innovative”?), utterly tautological (all carbon-based substances are “organic” and this term is not regulated), or transparently false but nonetheless not specific enough to get them in trouble (“just like homemade” literally can’t be true if you’re buying it from a TV ad). These give you positive associations without forcing the company to commit to making a claim they could actually be sued for breaking. It’s the same principle as the Applause Lights that politicians bring to every speech: “Three cheers for moms!” “A delicious slice of homemade apple pie!” “God Bless America!”

Occasionally you’ll also hear buzzwords that do have some meaning, but often not nearly as strong as people imagine: “Patent pending” means that they applied for the patent and it wasn’t summarily rejected—but not that they’ll end up getting it approved. “Certified organic” means that the USDA signed off on the farming standards, which is better than nothing but leaves a lot of wiggle room for animal abuse and irresponsible environmental practices.

And then we get to the price. They’ll quote some ludicrous figure for its “value”, which may be a price that no one has ever actually paid for a product of this kind, then draw a line through it and replace it with the actual price, which will be far lower.

Indeed, not just lower: The actual price is almost always $19.99 or $19.95. If the product is too expensive to make for them to sell it at $19.95, they will sell it at several payments of $19.95, and emphasize that these are “easy” payments, as though the difficulty of writing the check were a major factor in people’s purchasing decisions. (That actually is a legitimate concern for micropayments, but not for buying kitchen appliances!) They’ll repeat the price because repetition improves memory and also makes statements more persuasive.

This is what we call psychological pricing, and it’s one of those enormous market distortions that once you realize it’s there, you see it everywhere and start to wonder how our whole market system hasn’t collapsed on itself from the sheer weight of our overwhelming irrationality. The price of a product sold on TV will almost always be just slightly less than $20.

In general, most prices will take the form of $X.95 or $X.99; Costco even has a code system they use in the least significant digit. Continuous substances like gasoline can even be sold at fractional pennies, and so they’ll usually be at $X.X99, being not even one penny less. It really does seem to work; despite being an eminently trivial difference from the round number, and typically rounded up from what it actually should have been, it just feels like less to see $19.95 rather than $20.00.

Moreover, I have less data to support this particular hypothesis, but I think that $20 in particular is a very specific number, because $19.95 pops up so very, very often. I think most Americans have what we might call a “Jackson heuristic”, which is as follows: If something costs less than a Jackson (a $20 bill, though hopefully they’ll put Harriet Tubman on soon, so “Tubman heuristic”), you’re allowed to buy it on impulse without thinking too hard about whether it’s worth it. But if it costs more than a Jackson, you need to stop and think about it, weigh the alternatives before you come to a decision. Since these TV ads are almost always aiming for the thoughtless impulse buy, they try to scrape in just under the Jackson heuristic.

Of course, inflation will change the precise figure over time; in the 1980s it was probably a Hamilton heuristic, in the 1970s a Lincoln heuristic, in the 1940s a Washington heuristic. Soon enough it will be a Grant heuristic and then a Benjamin heuristic. In fact it’s probably something like “The closest commonly-used cash denomination to half a milliQALY”, but nobody does that calculation consciously; the estimate is made automatically without thinking. This in turn is probably figured because you could literally do that once a day every single day for only about 20% of your total income, and if you hold it to once a week you’re under 3% of your income. So if you follow the Jackson heuristic on impulse buys every week or so, your impulse spending is a “statistically insignificant” proportion of your income. (Why do we use that anyway? And suddenly we realize: The 95% confidence level is itself nothing more than a heuristic.)

Then they take advantage of our difficulty in discounting time rationally, by spreading it into payments; “five easy payments of $19.95” sounds a lot more affordable than “$100”, but they are in fact basically the same. (You save $0.25 by the payment plan, maybe as much as a few dollars if your cashflow is very bad and thus you have a high temporal discount rate.)

And then, finally, “But wait. There’s more!” They offer you another of the exact same product, knowing full well you’ll probably have no use for the second one. They’ll multiply their previous arbitrary “value” by 2 to get an even more ludicrous number. Now it sounds like they’re doing you a favor, so you’ll feel obliged to do one back by buying the product. Gifts often have this effect in experiments: People are significantly more motivated to answer a survey if you give them a small gift beforehand, even if they get to keep it without taking the survey.

They’ll tell you to call in the next 15 minutes so that you feel like part of an exclusive club (when in reality you could probably call at any time and get the same deal). This also ensures that you’re staying in impulse-buy mode, since if you wait longer to think, you’ll miss the window!

They will offer a “money-back guarantee” to give you a sense of trust in the product, and this would be a rational response, except for that little disclaimer: “Just pay shipping and handling.” For many products, especially nutritional supplements (which cost basically nothing to make), the “handling” fee is high enough that they don’t lose much money, if any, even if you immediately send it back for a refund. Besides, they know that hardly anyone actually bothers to return products. Retailers are currently in a panic about “skyrocketing” rates of product returns that are still under 10%.

Then, they’ll repeat their phone number, followed by a remarkably brazen direct command: “Call now!” Personally I tend to bristle at direct commands, even from legitimate authorities; but apparently I’m unusual in that respect, and most people will in fact obey direct commands from random strangers as long as they aren’t too demanding. A famous demonstration of this you could try yourself if you’re feeling like a prankster is to walk into a room, point at someone, and say “You! Stand up!” They probably will. There’s a whole literature in social psychology about what makes people comply with commands of this sort.

And all, to make you buy a useless gadget you’ll try to use once and then leave in a cupboard somewhere. What untold billions of dollars in wealth are wasted this way?

Super PACs are terrible—but ineffective

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It’s now beginning to look like an ongoing series: “Reasons to be optimistic about our democracy.”

Super PACs, in case you didn’t know, are a bizarre form of legal entity, established after the ludicrous Citizens United ruling (“Corporations are people” and “money is speech” are literally Orwellian), which allows corporations to donate essentially unlimited funds to political campaigns with minimal disclosure and zero accountability. This creates an arms race where even otherwise-honest candidates feel pressured to take more secret money just to keep up.

At the time, a lot of policy wonks said “Don’t worry, they already give tons of money anyway, what’s the big deal?”

Well, those wonks were wrong—it was a big deal. Corporate donations to political campaigns exploded in the era of Super PACs. The Citizens United ruling was made in 2010, and take a look at this graph of total “independent” (i.e., not tied to candidate or party) campaign spending (using data from OpenSecrets):

SuperPAC_spending

It’s a small sample size, to be sure, and campaign spending was already rising. But 2010 and 2014 were very high by the usual standards of midterm elections, and 2012 was absolutely unprecedented—over $1 billion spent on campaigns. Moreover, the only reason 2016 looks lower than 2012 is that we’re not done with 2016 yet; I’m sure it will rise a lot higher than it is now, and very likely overtake 2012. (And if it doesn’t it’ll be because Bernie Sanders and Donald Trump made very little use Super-PACs, for quite different reasons.) It was projected to exceed $4 billion, though I doubt it will actually make it quite that high.

Worst of all, this money is all coming from a handful of billionaires. 41% of Super-PAC funds comes from the same 50 households. That’s fifty. Even including everyone living in the household, this group of people could easily fit inside an average lecture hall—and they account for two-fifths of independent campaign spending in the US.

Weirdest of all, there are still people who seem to think that the problem with American democracy is it’s too hard for rich people to give huge amounts of money to political campaigns in secret, and they are trying to weaken our campaign spending regulations even more.

So that’s the bad news—but here’s the good news.

Super-PACs are ludicrously ineffective.

Hillary Clinton is winning, and will probably win the election; and she does have the most Super-PAC money among candidates still in the race (at $76 million, about what the Clintons themselves make in 3 years). Ted Cruz also has $63 million in Super-PAC money. But Bernie Sanders only has $600,000 in Super-PAC money (actually also about 3 times his household income, coincidentally), and Donald Trump only has $2.7 million. Both of these are less than John Kasich’s $13 million in Super-PAC spending, and yet Kasich and Cruz are now dropped out and only Trump remains.

But more importantly, the largest amount of Super-PAC money went to none other than Jeb Bush—a whopping $121 million—and it did basically nothing for him. Marco Rubio had $62 million in Super-PAC money, and he dropped out too. Martin O’Malley had more Super-PAC money than Bernie Sanders, and where is he now? In fact, literally every Republican candidate had more Super-PAC money than Bernie Sanders, and every Republican but Rick Santorum, Jim Gilmore, and George Pataki (you’re probably thinking: “Who?” Exactly.) had more Super-PAC money than Donald Trump.

Indeed, political spending in general is not very effective. Additional spending on political campaigns has minimal effects on election outcomes.

You wouldn’t immediately see that from our current Presidential race; while Rubio raised $117 million and Jeb! raised $155 million and both of them lost, the winners also raised a great deal. Hillary Clinton raised $256 million, Bernie Sanders raised $180 million, Ted Cruz raised $142 million, and Donald Trump raised $48 million. Even that last figure is mainly so low because Donald Trump is a master at getting free publicity; the media effectively gave Trump an astonishing $1.89 billion in free publicity. To be fair, a lot of that was bad publicity—but it still got his name and his ideas out there and didn’t cost him a dime.

So, just from the overall spending figures, it looks like maybe total campaign spending is important, even if Super-PACs in particular are useless.

But empirical research has shown that political spending has minimal effects on actual election outcomes. So ineffective, in fact, that a lot of economists are puzzled that there’s so much spending anyway. Here’s a paper arguing that once you include differences in advertising prices, political spending does matter. Here are two papers proposing different explanations for why incumbent spending appears to be less effective than challenger spending:This one says that it’s a question of accounting for how spending is caused by voter participation (rather than the reverse), while this one argues that the abuse of incumbent privileges like franking gives incumbents more real “spending” power. It’s easy to miss that both of them are trying to explain a basic empirical fact that candidates that spend a lot more still often lose.

Political advertising can be effective at changing minds, but only to a point.

The candidate who spends the most usually does win—but that’s because the candidate who spends the most usually raises the most, and the candidate who raises the most usually has the most support.

The model that makes the most sense to me is that political spending is basically a threshold; you need to spend enough that people know you exist, but beyond that additional spending won’t make much difference. In 1996 that threshold was estimated to be about $400,000 for a House election; that’s still only about $600,000 in today’s money.

Campaign spending is more effective when there are caps on individual contributions; a lot of people find this counter-intuitive, but it makes perfect sense on a threshold model, because spending caps could hold candidates below the threshold. Limits on campaign spending have a large effect on spending, but a small effect on outcomes.

Does this mean we shouldn’t try to limit campaign spending? I don’t think so. It can still be corrupt and undesirable even if isn’t all that effective.

But it is good news: You can’t actually just buy elections—not in America, not yet.