Month: February 2005

2005-02-14 00:19 (New York)

(Commentary. Gene Sperling, who was President Bill Clinton’s top economic adviser, is a columnist for Bloomberg News and a senior fellow at the Center for American Progress. The opinions expressed are his own.)

By Gene Sperling
Feb. 14 (Bloomberg) — Imagine the following: The father of a financially stretched family decides to live it up by leasing three fully loaded Hummer H1s for the bargain price of $9,750 a month.
As the family’s financial situation deteriorates, the father calls the family together for a belt-tightening discussion. He holds up a jar of Whole Foods chunky peanut butter and says, “Do you realize we are spending $4.49 on this? We could be saving $2.04 if we bought Skippy peanut butter for only $2.45.”
His teenage son responds, “Like, dad, man, why are you busting us about two bucks on peanut butter when you’re spending, like, almost $10,000 a month on cars?” The father sternly responds, “Don’t change the subject. We are talking about peanut
butter.”
On Feb. 7, President George W. Bush sought to use his 2006 budget to emerge as a born-again fiscal belt tightener. His goal was clear: Focus the fiscal debate on cutting programs for hardworking families and the poor — which are the financial
equivalent of peanut butter — while ruling out any effort to add up, put on the table or even acknowledge the budgetary equivalent of luxury Hummers — his tax cuts for the highest-income Americans.

The Cuts

Like the son in the family fable, most Americans understand the basic law that money is always fungible — a dollar on cars could also be a dollar spent on peanut butter. Yet Bush’s entire budgetary case rests on the assumption that no one will notice or change the subject to mention that his proposed spending cuts are dwarfed by the deficit-exploding tax reductions that he is seeking for high-income Americans.
Consider some of the cuts Bush is claiming are necessary to get tough on the deficit:
First, he would cut $500 million for job training and dislocated workers in the midst of what is still the slowest jobs recovery since the 1930s.
Second, he would virtually eliminate the $500 million Community Oriented Policing Services program when we are concerned about domestic terrorist threats.
Third, Bush would impose $4.5 billion in net cuts to Medicaid for the poor and disabled when health-care costs and the number of uninsured are rising.
And fourth, he would scrap the $1 billion a year in funding for the GEAR-UP and TRIO programs that reach out to economically disadvantaged children early and encourage them to go to college when our economy desperately needs a larger share of this population to obtain college degrees.

The Exemptions

Yet while these cuts add up to only about $6.5 billion a year, no one is supposed to mention that in the same budget Bush calls for implementing two obscure tax provisions that increase personal exemptions and itemized deductions that the top 2 percent of Americans can use to reduce their tax payments to the tune of $115
billion over the next decade.
That’s enough to prevent all these cuts and still reduce the deficit by $55 billion. Nor can we mention that if we pulled back on the income-tax cut (leaving alone capital gains and dividends) for the 0.5 percent of Americans making more than $400,000 a year, we could save $300 billion over the next decade — enough to buy a
lot of peanut butter and still make a big dent in the deficit.
Anyone who took seriously Bush’s commitment to deficit reduction might assume that his tight cap on domestic programs was motivated by the deficit exploding because such spending had gotten out of control.

One-Sided Reality

Yet, in an analysis conducted at the Washington-based Center for American Progress, it was found that when you exclude expenditure on defense, homeland security and international affairs, discretionary spending has actually decreased from 3.4 percent of gross domestic product in 2001 to 3.3 percent in 2005.
On the other hand, the decision to pass and extend three tax cuts and an expensive prescription drug benefit without any offsets is set to increase the deficit by more than $5 trillion over the next decade, including interest costs.
Even when looking at our long-term capacity to deal with the challenge of the baby boomers’ retirement, Bush is trying to construct this same one-sided budgetary reality.
While the Social Security Trust Fund is solvent, the president laments that in 2018 the government as a whole will have to “somehow” borrow an additional $200 billion to meet its legal Social Security commitments. Yet he seems oblivious to the fact that his own tax and spending policies will increase government borrowing that year by more than $500 billion.

Eat the Generic

Bush wants members of Congress to go home and tell their constituents that there is simply no choice but to achieve Social Security solvency entirely through benefit cuts with new price- indexing rules. Yet he disallows any discussion of the fact that making permanent his tax cuts for only the top 1 percent of earners
— as his budget calls for — costs almost as much as is needed to keep Social Security solvent for 75 years.
Still, I get it, Mr. President, I’m changing the subject. This budget isn’t about finding numbers that lead to deficit reduction, it’s about using the pretext of deficits to limit government’s role to help those most in need. Perhaps you think the father was right to forbid any discussion of luxury Hummers. Let them eat Costco
generic peanut butter.

First, let’s consider what actual P2P losses are to the industry.

They are much more difficult to calculate than the RIAA would have you believe. Why? First, downloaders pull songs they would never buy; I have Outkast’s “Hey Ya” somewhere; I consider it a goofy novelty song, and the only reason I have it is that someone else sync’ed it to a Peanuts animation (everyone on stage dancing to Schroder’s piano). It was an amusing but unauthorized use, which I downloaded, smiled at, and never saw again.

Oh ya: The CD that song came from — OutKast’s 2003’s release, Speakerboxxx/The Love Below — sold 10-million plus copies.

Lost sales? Hardly.

Consider the biggest of all downloaders — mostly-broke college students. They have a computer their parents bought them, and the campus gives them a big, fat pipe. They get access to music they would never have bought, resulting in future post-college sales. But the one-to-one lost sales argument is transparently false.

Next, let’s consider what the damages to the industry are. Consider the issues of substitution: What would it cost to purchase an “unlimited amount” of digitally distributed music? The answer is found in the Napster-to-Go model:

“The Napster to Go model . . . shows that the RIAAs claims of a lost sale for every download to be demonstrably false. If you can download an unlimited number of songs via napster and play them for as long as you continue to subscribe, then the maximum loss the RIAA suffers from a single downloader cannot exceed $15/month no matter how many songs a person downloads.” — via boingboing

Over the course of 10 years, that represents total gross losses of $1,800, of which Napster keeps between 15 and 20%. Net loss: $1,500 dollars.

But wait, there’s more: The Rhapsody Music Subscription from Real Networks charges only $10 per month. That’s $120 per year. Over a decade, the net loss downloaders present to the industry by not signing up for Rhapsody are: lost revenue of $1,200 (gross). In other words, the total net industry losses are ~$1,000 per decade. Hardly as apocalyptic as portrayed.

By approving the Napster/Rhapsody subscription models, the music industry has unwittingly created a viable legal defense, at least when it comes to damages portion of their litigation, for defendants in a RIAA P2P litigation. The claims of losses in the $100,000 or even $10,000 are silly — as long as this $1,000 net loss per decade option exists.

Of course, that doesn’t consider studies (such as the one from Harvard/UNC CHapel Hill) that shows P2P drives CD and concert ticket sales. I only buy music that I hear and like. Since that hardly happens via the radio anymore, P2P is my most common source of new music (that, and Apple adverts).

Further, the industry’s disingenous claims that its the artists are getting ripped off by downloaders are rather misleading. (Putting aside the industry’s own long and storied history of ripping off their artists for another day).

A recent NYT article reveals that most musicians make their bread and butter not by selling CDs, but by touring and performing:

“According to a new list of the 50 top-earning pop stars published in Rolling Stone, over the hill is the new golden pasture. Half the top 10 headliners are older than 50, and two are over 60. Only one act, Linkin Park, has members under 30.

The annual list, which entails some guesswork, reverses the common perception of pop music. Not only is it not the province of youth; it’s also not the province of CD sales, hit songs and smutty videos.

While sexy young stars take their turn strutting on the Billboard charts or MTV – or on the cover of Rolling Stone – the real pop pantheon, it seems, is an older group, no longer producing new hits, but re-enacting songs that are older than many of today’s pop idols.”

This has serious financial repurcussions for the business model the industry is presently wed to. And the list of artists who are making the big bucks reveals industry mismanagement has led to mostly ignoring the key economic demographic driver of our century: The baby boomers.

Here’s a little secret the RIAA would rather not have you know: Musicians make most of their money performing and touring — not selling CDs or downloads. Rolling Stone has a detailed analysis of the top 50 acts . . . here’s a top 10 list to whet your appetite:

2004 Music Money Makers
1. Prince $56.5 MILLION
2. Madonna $54.9 MILLION
3. Metallica $43.1 MILLION
4. Elton John $42.9 MILLION
5. Jimmy Buffett $36.5 MILLION
6. Rod Stewart $34.6 MILLION
7. Shania Twain $33.2 MILLION
8. Phil Collins $33.2 MILLION
9. Linkin Park $33.1 MILLION
10. Simon and Garfunkel $31.3 MILLION

Note that 9 of the top 10 grossing performers aren’t the hot new thing — they are the better known rock classics — which the labels have mostly also been paying little attention to for so many years.

The industry can scapegoat P2P for all their woes, but a closer analysis of the math demonstrates the claim is illusory. (Mis)management is the primary sources of the industry problems.