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Archive for April, 2011

Marco Arment is the brains behind one of my favorite apps. Instapaper allows you to store articles off the Web for later reading; very useful, for example, when I am surfing and come across an article I want to share with my students or use in a future blog post. And the editor of Instapaper periodically shares excellent reads that I might otherwise miss.

Instapaper is currently available for both the iPhone and the iPad for $4.99. As Marco discusses in his blog, however, the iPhone version has sometimes been available for free (but with ads).

Based on his pricing experiments, Marco has decided that free is a bad model. In part that’s because ads provide weak revenues, and it’s expensive to support two versions of the app. In part it’s because the free app cannibalizes sales from the paid version.

But that’s not all. Another problem is that the free version attracts “undesirable customers”:

Instapaper Free always had worse reviews in iTunes than the paid app. Part of this is that the paid app was better, of course, but a lot of the Free reviews were completely unreasonable.

Only people who buy the paid app — and therefore have no problem paying $5 for an app — can post reviews for it. That filters out a lot of the sorts of customers who will leave unreasonable, incomprehensible, or inflammatory reviews. (It also filters out many people likely to need a lot of support.)

I don’t need every customer. I’m primarily in the business of selling a product for money. How much effort do I really want to devote to satisfying people who are unable or extremely unlikely to pay for anything.

Free is a risky price because it allows people to get something without really thinking about whether they want it. That’s why health insurers insist you pay at least $5 to see your doc or get a prescription.  And it’s why DC’s nickel bag tax has been so effective in cutting use of plastic bags.

Kudos to Marco for sharing his results and calling on others to run similar experiments. But I won’t be one of them. Free continues to be the right price here in the blogosphere.

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A Tepid Quarter for GDP

Thursday morning brought the first official look at GDP growth in the first quarter. Headline growth was a disappointing, if not surprising, 1.8%.

Here’s my usual graph of how various components of the economy contributed to overall growth:

Consumers continued to spend at a moderate pace; their spending grew at a 2.7% rate, thus adding 1.9 percentage points to overall growth. Equipment and software investment (up at a 12.6% rate), inventories, and exports also contributed to growth.

Residential investment fell back into negative territory, reflecting the latest down leg in the housing market. But the real negatives were structures (down at a 21.7% rate, thus cutting 0.6 percentage points from growth) and government (down at a 5.2% rate). Defense spending fell sharply (11.7% rate), and state and local continued its decline (down at a 3.3% rate).

Note: As usual, imports subtracted from growth as conventionally measured. As discussed in this post and this post, I’d like to see GDP contributions data that allocate imports across the other sectors. Such data would reveal, for example, how much consumer spending contributed to growth in the U.S. economy itself. Presumably it’s less than the 1.9 percentage points shown in the chart, which reflects consumer spending that was satisfied by both domestic and international production, but we don’t know by how much.

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And here’s Round One, the Keynes vs. Hayek Rap.

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Someone is offering a free $5,000 bill tonight over at Intrade.com:

That’s right. You can sell 9,999 shares of The Donald (not me, the other one) at $0.52 a piece. In just that one trade, you can pocket almost $5,200 of free money. Unless, of course, you believe that Donald Trump could actually be elected president.

So why haven’t I picked up this $5,000+ bill? Because I haven’t seen an unambiguous  statement that buying and selling on Intrade is completely legit for U.S. citizens. Not worth the risk.

If Gary Gensler (Chairman of the Commodities Futures Trading Commission) or other relevant regulator would issue a ruling clarifying that Intrade trading is copacetic, that would be much appreciated.

For the latest Trump action, click here.

P.S. For sticklers: yes, the margin requirements on this trade could be rather a nuisance.

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1. Over at Third Way, Bill Rapp used my data on debt limit votes to make a great graphic showing that those votes are about politics, not principle.

2. Over at the Tax Policy Center, Eric Toder pushes back against the idea that tax expenditures — spending in the tax code — are loopholes and earmarks:

The House Budget resolution promises an individual tax reform that “simplifies the broken tax code, lowering rates and clearing out the burdensome tangle of loopholes that distort economic activity.” The Fact sheet describing President Obama’s new budget framework calls for “individual tax reform that closes loopholes and produces a system which is simpler, fairer, and not rigged in favor of those who can afford lawyers and accountants to game it.” The bipartisan National Commission on Fiscal Responsibility and Reform notes that the tax system is riddled with tax expenditures and adds, “These earmarks not only increase the deficit, but cause tax rates to be too high.”

But the largest tax expenditures are not loopholes or earmarks snuck into the law in the dead of night to benefit a shadowy handful of super-wealthy individuals or well-connected corporations. Rather, they benefit tens of millions of taxpayers. Among the biggest: itemized deductions for home mortgage interest, charitable contributions, and state and local taxes, exemption of income accrued within tax-preferred retirement saving accounts, and the exemption from tax of employer contributions to health insurance plans. IRS data show that 39 million taxpayers claimed deductions for home mortgage interest and charitable contributions in 2008, and 35 million deducted state and local income taxes.

3. The Committee for a Responsible Federal Budget offers a helpful side-by-side comparison of four leading budget plans:

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My latest column at the Christian Science Monitor makes the case that defense spending deserves close scrutiny as America evaluates its fiscal priorities. Excerpt:

This year the US will spend about $110 billion in Afghanistan and $44 billion in Iraq. Regular defense spending is even larger, at about $550 billion. Military spending will total more than $700 billion this year.

That spending gets far less scrutiny than it deserves. Discussions of our long-run budget challenges usually emphasize the big entitlement programs – Medicare, Medicaid, and Social Security – and the need for new revenues. Congressional budget debates, meanwhile, have bogged down on the sliver of spending that goes to domestic discretionary programs [written before the 2011 budget deal].

Defense should be on the table as well. Military spending has more than doubled over the past decade. Some of that increase has been necessary to respond to the 9/11 attacks and the new challenges they revealed. But not all. Some of the increase has simply been excess.

Adm. Mike Mullen, chairman of the Joint Chiefs of Staff, made this clear in remarks in January. Because of the dramatic expansion of the Pentagon budget, he said, “We’ve lost our ability to prioritize, to make hard decisions, to do tough analysis, to make trades.”

We also have embarrassingly little ability to track that spending. When the Government Accountability Office recently audited the government’s finances, it concluded – as it has for many years – that the Defense Department’s books are so poorly kept that they can’t be audited. Taxpayers are thus giving $700 billion a year to an organization that can’t prioritize and can’t tell us where the money is going. That’s unacceptable.

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Over at Managerial Econ, Luke Froeb highlights a nice example of the winner’s curse. Like Google, Yahoo uses automated auctions to sell ads. One wrinkle is that some advertisers prefer to pay for impressions, some prefer to pay for clicks, and some prefer to pay only for resulting sales. Yahoo thus needs some mechanism to put these different payment approaches on a comparable footing:

To choose the highest-valued bidder, Yahoo develops predictors of how many clicks and sales result from each impression. For example, if one click occurs for every ten impressions, an advertiser would have to bid more than 10 times as high for a click as for an impression in order to win the auction.

Yahoo was very proud of its predictors, but was puzzled that they systematically over-predicted the actual number of clicks or sales after the auctions closed.

This is the winner’s curse in action. As auction guru (and Yahoo VP) Preston McAfee explains in the paper Luke cites:

In a standard auction context, the winner’s curse states that the bidder who over-estimates the value of an item is more likely to win the bidding, and thus that the winner will typically be a bidder who over-estimated the value of the item, even if every bidder estimates in an unbiased fashion. The winner’s curse arises because the auction selects in a biased manner, favoring high estimates. In the advertising setting, however, it is not the bidders who are over-estimating the value. Instead, the auction will tend to favor the bidder whose click probability is overestimated, even if the click probability was estimated in an unbiased fashion.

McAfee then goes on to explain how Yahoo overcame this self-inflicted winner’s curse, and other strategies to improve auction performance.

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