Jonathan Haskel's Blog

Monday, 20 February 2012

Thursday, 16 February 2012

Creative industries versus creative activities

DCMS have a new estimate of the UK"s creative industries, full report here. Their main finding is that Creative Industries accounted for 2.89% of gross value added (GVA) in the UK in 2009. In 2008, it was 5.6% of GVA. Why?

This is because the method has changed (p.2 of the latest report). First, in the old method GVA was multiplied by 1.3 due to underreporting of creative GVA. Now it is not. Second, adjustments to software. Page 9 of the report says

·        Removal of the following SIC codes from Software/Electronic Publishing sector

o   62.02 Computer consultancy activities

o   62.01/2 Business and domestic software developmen

Then it adds

SIC codes 62.02 and 62.01/2 were removed as the industries these captured were more related to business software than to creative software.

This last sentance says to me what is questionable about this method. The list of industries included is the indsutries deemed creative

1.     Advertising

2.     Architecture

3.     Art and antiques

4.     Crafts

5.     Design

6.     Designer fashion

7.     Film and video

8.     Interactive leisure software

9.     Music

10. The performing arts

11. Publishing

12. Software and computer services

13. Television and Radio.

The problem is that this list includes industries even though not all their activity is creative e.g. the BBC is in a creative industry, but some of its activities are not (e.g. managing the buildings). Likewise it excludes creative activity in industries who are not deemed creative industries (e.g. Rolls Royce in aerospace). Thus it is important to count creative activity regardless of the industry. that, to me, is a better approach then creative industries. And we do just this in our work for the UK innovation index, here.

Friday, 10 February 2012

Eurocrisis links

1. Greek police to arrest German budget hardliners.

2. Escaping from the crisis: a fiscal union of political union. From the FT.

3. Quantitative easing in 60 seconds.

4. Ireland can show Greece a way out of the crisis

5. A clever escrow plan to outwit the Greeks? From Jacob Kirkegaard who sees the central problem as this:

Until now, successive Greek governments have argued that the troika has no choice but to pay the next loan tranche, knowing that the associated contagion from a sudden unstructured Greek default would be devastating for the entire euro area. Accordingly, Athens has been able to get away with its deficient program implementation

The escrow plan essentially makes bond payments priority over other payments.

Thursday, 9 February 2012

How does copyright law affect investment?

As economies become more knowledge based, the climate of IP legislation matters more and more. Here's a recent paper by Josh Lerner on the effects of copyright law on venture capital investment that is interesting.

The paper is “The Impact of Copyright Policy Changes on Venture Capital Investment in Cloud Computing Companies” which studies how a change in US copyright law relative to the EU affected the willingness of US venture capital to invest in innovative projects relative to such investment in the EU. My reading of the paper is as follows.

In 2006, Cablevision developed a Remote Storage Digital Video Recorder (RS-DVR), which allows customers to record and replay TV on a hard drive. However, the difference with traditional DVRs, is that it did not sit at home, but remotely, thus recording and playing back from remote servers in the “cloud”. In 1984, in the Sony Betamax case, the Supreme Court had found that at viewer using a home VCR to “time shift” i.e. record for viewing at a later time, did not contravene copyright, being of fair use. The plaintiffs in this case were careful to argue that the remoteness made Cablevision making the copy, not the viewer (see e.g. discussion in https://www.eff.org/deeplinks/2008/08/victory-dvrs-cloud).

In response, a consortium of U.S. television and copyright holders filed a complaint against Cablevision in May 2006 over alleged copyright infringement and won an initial judgment in 2007 in a lower court, quoted by Lerner

[P]laintiffs successfully argued that Cablevision’s proposed system would directly infringe their copyrights in three ways.
·        First, by briefly storing data in the primary ingest buffer and other data buffers integral to the function of the RS-DVR, Cablevision would make copies of protected works and thereby directly infringe plaintiffs’ exclusive right of reproduction under the Copyright Act.
·        Second, by copying programs onto … hard disks …, Cablevision would again directly infringe the reproduction right.
·        And third, by transmitting the data … to … customers in response to a “playback” request, Cablevision would directly infringe plaintiffs’ exclusive right of public performance.

In 2009, the Supreme Court affirmed the decision of a lower court to overturn this judgment saying there was no copyright infringement. Lerner, drawing on accounts by computer commentators, argues that this clarified the legal role of cloud computing, who potentially would have been contravening copyright offering such cloud-based computing services.

His key finding is that average quarterly venture capital investment into cloud-based companies rose by 41% in the US after the decision. Since investment is rising everywhere, he needs a benchmark against which to judge this and takes the EU, where investment rose by less, 27%. He therefore argues that the liberalsation of copyright significantly positively affected venture capital investment. This additional effect, is, he argues robust to controlling for other factors such as broadband penetration etc. The following figure gives a sense of the statistical results:

The relative uptick seems to be there, but it does come a bit after the decision, given by the vertical line. Perhaps investment takes time to come on stream?

One might also ask whether this result necessarily means that EU copyright law need reform. I am no expert on it, but given that the legal position is so confused, as Hargreaves notes, this can hardly help matter in Europe.

Thursday, 2 February 2012

Why didn’t Google start in the UK?

This is the exam question posed by Prime Minister David Cameron to the Hargreaves review of UK Intellectual Property and it came up again whilst I was listening to the excellent Avi Goldberg.

(Update: Shane Greenstein writes an excellent close analysis of this question too, here)

The first thought is that it was the California cluster. Avi says no, the initial Google breakthrough was the search algorithm, which anyone could have done. The second generation Google is uses artificial intelligence which needs the right copyright environment (much more on this and how Google might or might not have destroyed newspapers is from Shane Greenstein's wonderful post on Google here).

This gets us to Hargreaves, http://www.ipo.gov.uk/ipreview-finalreport.pdf. As he points out points out, we don’t have the right copyright IP enviroment in Europe.

The key bits in Hargreaves are in Chapter 5, especially 5.2. they are these.

Copyright Exceptions5.5     Copyright exceptions are designed to allow uses of content that offer benefits deemed either more important than those delivered by the core aims of copyright and/or benefits that do not significantly detract from those aims. The copyright exceptions for educational purposes and for research are intended to promote knowledge, skills and innovation in the economy, without unduly undermining the incentive for educational and academic publishers to create the works that students, teachers and researchers need.

5.6       EU law confines copyright exceptions to a closed list of categories, such as criticism, news reporting, research, or archiving. Almost all are restricted to non-commercial uses. Individual EU countries may implement exceptions within these categories to a greater or lesser degree, but there is no flexibility to create exceptions in new areas. The UK does not currently exploit all the exceptions available. Most notably, we do not have exceptions for private copying or for parody and the exception for archiving falls well short of current needs. Previous attempts to modernise this framework in the UK have not succeeded.
5.9       The US has a more flexible approach to copyright exceptions. It includes the concept of “Fair Use”, a defence in the US copyright framework which builds on certain general principles through case law to develop permitted uses of copyright works. Fair Use serves a number of purposes in the US, fixing what might otherwise be imbalances in the copyright system.
5.10   Under the European approach to exceptions, new kinds of copying which have become possible due to advancing digital technology are automatically unlawful. They require agreement of rights holders if they fall outside the pre-established and closed list of categories for permissible exceptions. Even copying which falls within one of the permissible areas at EU level can still require new action by national legislatures to create or develop the exception to meet new needs. The risk in this situation is twofold:

•

Hargreaves quotes an example:

“Research scientists, including medical researchers, are today being hampered from using computerised search and analysis techniques on data and text because copyright law can forbid or restrict such usage. “

(Another example is the restriction on parody: Newport State of Mind being a wonderful example)

A second and also significant problem is confusion in the law

“is difficult for anyone to understand why it is legal to lend a friend a book, but not a digital music file. The picture is confused by the way some online content is now sold with permissions to format shift (iTunes tracks) or to “lend” files (Amazon ebooks) at no extra cost. This puts the law into confusion and disrepute. It is not a tenable state of affairs.
“Commercially it leaves rights holders with an unsatisfactory choice between having rights they cannot or do not enforce, or seeking to preserve legal entitlement to payment for acts of private use and reuse, which ordinary consumers regard as part of normal use. This alienates customers and puts the state in a position where it is invited to “choose sides” between rights holders and citizens. Effective enforcement of the law, in these circumstances, can become impossible.”

They then set out the US approach:

5.12 By contrast the US approach enables judges to take a view as to whether emerging activities in relation to copyright works should legitimately fall within the scope of copyright protection or not. Fair Use provides a legal mechanism that can rule a new technology or application of technology (like shifting music from a CD to a personal computer) as legitimate and not needing to be regulated…
viFair Use offers a zone for trial and error, for bolder risk taking, with the courts providing a backstop to adjudicate objections from rights holders if innovators have trespassed too far upon their rights. (my italics)

5.22 …In the US, Fair Use has successfully fulfilled this role in a small number of cases which have been extremely important for the development of consumer technologies, notably those relating to reverse engineering,ixixhome video recording, and internet search caching and thumbnail images.

Finally, he answers the question on the card:

5.17 Does this mean, as is sometimes implied, that if only the UK could adopt Fair Use, East London would quickly become a rival to Silicon Valley? The answer to this is: certainly not. We were told repeatedly in our American interviews, that the success of high technology companies in Silicon Valley owes more to attitudes to business risk and investor culture, not to mention other complex issues of economic geography, than it does to the shape of IP law. In practice, it is difficult to distinguish between the importance of different elements in successful industrial clusters of the Silicon Valley type. This does not mean that IP issues are unimportant for the success of innovative, high technology businesses. The Review’s judgment is that they are of growing importance and that they merit serious attention from the UK Government.

In the end Hargreaves doesn't go for Fair Use, since its very complicated with respect to EU law

5.24 We therefore recommend below that the Government should press at EU level for the introduction of an exception allowing uses of a work enabled by technology which do not directly trade on the underlying creative and expressive purpose of the work (this has been referred to as “non-consumptive” use5).

The Monday Euro meeting, as I understand it, resolved to introduce an European Patent, after arguing since at least 1973. Maybe Eurocrats are getting their IP act together.

Update
The last sentance, written in Februrary 2012 was too optimistic. There did seem to have been some agreement in Summer 2012, but Italy and Spain have not agreed and progress has been held up at the European Parliament, with Parliamentairns saying the leaders had changed the agreement (BBC News, 3 July 2012, http://www.bbc.co.uk/news/world-europe-18694030).

Monday, 16 January 2012

Interest on reserves as a policy tool for financial stability

Tim Taylor has another terrific post, today on a Stein paper on interest on reserves. here's the point.

1. banks have to sell equity as a cushion against asset price declines.
2. banks also have to hold reserves with the Central Bank, also as a potential cushion against trouble.
3. some central banks pay interest on those reserves, some do not.
4. the usual Central Bank policy lever is to via open market operations, buying and selling bonds from banks (and thus affecting short term interest rates), providing thus banks with more or less cash from which they then lend more or less out.
5. making banks hold reserves provides another policy lever. And now that Central Banks want to conrol both financial stability as well as short interest rates, they need another lever.
6. So how do they do it? Taylor writes:

"During the financial crisis, banks and other financial institutions found themselves in trouble because they had all ramped up their level of short-term debt--that is, debt which came due quite soon on a daily or monthly basis and was commonly being rolled over (and over and over) each time it came due. When the financial crisis hit, it became impossible to roll over all this short-term debt, and so many financial institutions suddenly found themselves without funding.

Kashyap and Stein argue that financial institutions will often have a tendency to take on too much short-term debt from society's point of view, because individual financial institutions are looking only at their own finances and not taking into account the risk that if they all take on too much short-term debt, the risk of a system-wide financial crisis goes up. Thus, a way to reduce the risk of financial crisis is to put limits on bank holdings of such short-term debt.

One way to do this is to use a broad notion of "reserve requirements." In theory, banks wouldn't just hold reserves based on the deposits from customers, but on any debt that they are depending on renewing in the short run. Kashyap and Stein explain: "

...within the traditional banking sector, reserve requirements should in principle apply to any form of short-term debt that is capable of creating run-like dynamics, and hence
systemic fragility. This would include commercial paper, repo finance, brokered certificates of deposit, and so forth.

...Going further, given that essentially the same maturity-transformation activities take place in the shadow banking sector, it would also be desirable to regulate the shadow-banking sector in a symmetric fashion."

so, a new instrument to regulate both intereset rates and the cushion of reserves that banks must hold. and a new way of thinking about monetary policy.

Tuesday, 10 January 2012

General purpose technologies

Diane Coyle makes a point that David Edgerton has also made to me in Diane's review of Chandler, Shaping the Industrial Century. David says to me that Chemistry is a general purpose technology. Here's Diane:

There is a tendency to think of high-tech in a narrow way. It’s computers and the web. It’s electricity, it’s steam. These are the General Purpose Technologies, which underpin innovation across the economy. However, basic scientific discovery and its technological implementation are high tech too, and what Robert Gordon has described as a ‘big wave’ develops. The chemicals and pharma industries rest on major scientific discovery, albeit giving way to decreasingly lie sky development as the years go by. Thus Du Pont established one of the first ever corporate R&D centres at the turn of the 20th century but downgraded its R&D function by the 1960s. So when thinking about the ‘big wave’ we are experiencing, it is important not to forget biotech, nanotechnology, robotics, materials science etc. It’s genomes and graphene as well as mobiles and broadband.

Various teaching links

1. A very good survey of IPRs in Europe covering patents, copyrights and other IPRs, by Dietmar Harhoff.

2. Financial crisis. Why can Spain not borrow but the UK and US can? Palley in today's FT argues that the ECB is indeed a lender of last resort for firms, but does not lend to governments:

"The euro already has a lender of last resort in the European Central Bank, which has dutifully performed that function. Lenders of last resort provide liquidity in financial panics, which is exactly what the ECB did in the financial crisis of 2008-09 and has continued doing via its Lombard lending facility. According to Bagehot’s rule, lenders of last resort should lend without limit, to solvent firms, against good collateral – though Bagehot also recommended lending at high rates, whereas today’s practice is (sensibly) to lend at low rates.

The euro lacks a government banker, like the Federal Reserve or Bank of England, which helps finance budget deficits and keeps rates low on government debt. This explains why the US and UK can borrow at low rates and remain solvent, whereas Spain, which has a roughly similar deficit and debt profile, is under speculative attack.

...
the euro instituted “central bank dominance” by stripping governments of access to central bank help in managing public finances. This was done by creating a “detached” central bank that is prohibited from buying government debt. This is fundamentally different from an “independent” central bank which distances its decision-making from government, but is allowed to purchase government debt. The Federal Reserve and the Bank of England are both independent but not detached. The ECB is detached by design.

...The solution is to create a European Public Finance Authority (EPFA) that issues collectively guaranteed debt on behalf of eurozone governments which the ECB is allowed to buy...

Characterising the euro’s problem as a lack of a lender of last resort obscures its fundamental neoliberal design flaw regarding its lack of a government banker and subservience of fiscal policy. That is a structural problem which creates financial fragility and permanent budgetary pressure that shrinks the social democratic policy space."

3. More financial crisis. Who is funding the balance of payments imbalances within the EZ?
I have had trouble following the intricacies of this. It falls under the heading of what has the ECB done in the crisis, that Martin Wolf deals with here? The conventional answer is cut interest rates etc. The additional answer is funding imbalances. I think it works like this.

Before the crisis, e.g. Greeks were buying Mercedes cars, but not exporting goods to Germany in return. Thus Germans had to be buying Greek assets ending up as deposits in Greek banks. After the crisis, private lending to Greece has stopped, so finance is needed to cover the deficit, and indeed Greeks are taking money out of Greek banks.

One mechanism is deflation in Greece so that exports rise. That won't happen. Another is via the printing press

National central banks provide their banks with the funds needed to offset the money their residents send abroad, as they pay more for imports than they earn from exports and, instead of being financed voluntarily from abroad, as before, now start to send a large part of their money out of the domestic financial system. This money then ends up in the commercial banks of the surplus countries, which deposit it at their own central banks. In essence, base money is being created in deficit countries and used to pay for goods and services from – and flight capital to – surplus countries.

These net flows of money then end up as liabilities of the central banks of the surplus countries to their own banks. The offsetting shift in the books consists of rising claims of the central banks of the surplus countries (above all, of the Bundesbank) on the central banks of the deficit countries.

Thus the surplus countries now hold, apparantly, vast reserves of periphial countries, the incentive effects of which are to encourage inflation, and if the perphical countries are poor risks, risk for the central bank.

Teaching note: Why is there no Wal-Mart in the UK?( Or, Regulation and productivity: evidence from retailing )

How regulation affects productivity is surprisingly hard to pin down: indices of regulation are hard to come by, other things are going on that distort various effects etc. Here is some work with Raffaella Sadun (and the published version, September 2011, $) that tries to take a stab at it.

We look at retailing. This is of interest since a lot of US post-1995 productivity growth was due to retailing/wholesaling, WalMart in particular. In the UK, post-1995 retail productivity growth slowed down.

What’s the story?

First, in 1996 there was a change in retailing planning regulations in the UK making it much harder for retailers to build large out-of-town stores.

Second, after this change retailers stopped expanding into big box stores. WalMart, who bought a UK supermarket called Asda, for example, stopped opening new big box stores altogether Here’s a picture.

Figure 1: Changes in the Employment Distribution of Small Shops within National Supermarket Chains (vertical lines mark the 10th, 50th and 90th percentiles of the distribution)

Note: figures are histograms of shop employment for each shop within a national supermarket chain in 1997/8 (top panel) and 2002/3 (bottom panel). A national chain operates in all 11 UK regions. SIC521 is “non-specialised stores”, mostly supermarkets. Source: ARD data at ONS.

The Figure compares the histogram of store sizes in UK national supermarket chains in 1997/8 and 2002/3. The histogram shows that over the relatively short time period of four years the median size of a store belonging to a large supermarket chain has fallen from 75 employees to 56 employees.

This tendancy to smaller stores is remarkably different from happened in countries with different planning policies, where retail chains have chosen large store formats to drive their expansion, notably the US. A 1998 McKinsey report documents that “a typical UK (grocery) store is roughly half the size of a typical US store and two thirds the size of a typical French store”.

The paper studies statistically the effect of having smaller stores on the (loss) of economies of scale in UK retaling. It finds that the trend to smaller stores within chains over this period is associated with lowered productivity (TFP) growth in retailing of 0.2% pa. This is about 20% of the post-1995 slowdown in UK retail TFP growth (which was about 1% pa).

Update

The recent failure of Best Buy in the UK seems an interesting case study. This BBC report here suggests that they were not able to get many big box formats in the UK. Equally, in the era of the internet, is geographic location a competitive advantage any more?

And some more papers from Rachel Griffith and Heike Harmgart, setting out effects on openings and prices.

Blogging in the USA

It's been an ultra-busy last few months with teaching and moving to the US, where now I am visiting the Tuck School of Business, Dartmouth College for a few months from January. Blogging should resume!