voluntaryXchange

Kelo, Grokster and File Sharing

It's time to juxtapose the Kelo and Grokster decisions. I suggest that the upshot of the Kelo decision is very close to file sharing, and that ultimately the meaning of the Grokster is deeply twisted.

Kelo suggests that if:

• Able owns an asset for which part of the value is certain,
• An additional part of the asset's value is more uncertain, and
• Able is unwilling to commit to "crystalizing" that additional value at a price that is satisfactory to the interested buyer.
  

Then the government is entitled to:

• Take the asset from Able,
• Compensate them only for the certain part of the value,
• Transfer ownership of it to Baker who will "crystalize" the additional value, and
• Take a cut of that additional "crystalized" value in the form of additional taxes.

Now consider file sharing (yes, I know that the Grokster case wasn't really about file sharing itself, but let's be realistic and recognize that it is one brick in the foundation for an ultimate set of laws about file sharing). So anyway, how is the list below so different from the pair of lists above?

• Able Music Company owns a recording for which part of the value is certain,
• An additional part of the recording's value is more uncertain, and
• Able is unwilling to commit to selling the recording at a price that is satisfactory to the interested buyer (and which will "crystalize" that uncertain value).
  

So, the scorned buyer (Baker):

• Obtains a shared copy of the recording without the help of the government,
  
• Compensates Able Music Company for the certain part of the value,
• Takes ownership of it allowing Baker to "crystalize" the additional value, and
• Transfers no money to the government in the form of taxes.

Now, let's go down the two pair of lists bullet by bullet and see if there are any critical differences. Both the homeowner and the music company:

• Own an asset some of whose value is certain. For a recording, that might be something like a penny for each copy they burn.
• Have the option to sell it someone for even more value. For a recording, this might be between zero and (say) $2 a song.
• Are not willing to close the deal. The music companies are closing out lots of buyers who might pay less than the going rate of about $1 a song.

For file sharing, we have the following:

• The file sharer places no burden on the music company or the government, so this is a wash.
• The most obvious objection is with the lack of compensation to Able. But this is a lark - the only certain value that a recording has is its marginal cost of reproduction, which is zero if Baker copies the file without involving Able. This will bother some of you, but we must recognize that the recording itself is intrinsically useless - it is only copying it and transferring to people who want it that creates value.
• Certainly, it seems like the file sharer "crystalizes" the value of the recording in the same way as someone who buys the CD.
• The government gets nothing.

The last part is a little problematic, but has now been addressed by the tortured logic of Kelo. In that case, New London confirmed to Justice Scalia that increased tax revenue was one of their objectives, and the majority affirmed this as a reasonable goal. Without casting aspersions on the motives of government officials, the reasonable fear from Kelo is that if a locality is willing to use eminent domain to secure extra tax revenue, then it may be only a modest lateral shift to require tax compensation for performance of eminent domain procedures. If this is the case then it eviscerates the importance of the first and last bullet in the last sentence - if the government doesn't do anything, then it shouldn't get any compensation either.

Looking back over the points and arguments presented above, it is clear that the real difference between eminent domain cases after Kelo and file sharing is that consumers have gone and taken the music companies "uncrystalized" option value without the imprimatur of government.

Is anyone else out there bothered by the fact that the only difference between bad but legal "real estate sharing" and bad but illegal file sharing is the approval of a controlling legal authority that has blown this particular Constitutional precedent completely out of proportion?

Lastly, what does this argument imply about the Grokster decision? It is generally interpreted that what the justices ruled against was Grokster's encouragement of file sharing. This means that their crime was to encourage people to undertake new actions that didn't involve the government without seeking the government's imprimatur. Finding fault with that is something worthy of the French.

P.S. I adopted the word crystalization from a Tim Worstall post that trackbacked to my earlier post. I thought it was an excellent word for the fixing of the value of an option.

Stem Cells and Moral Agents

I'm combining the words of Steve Landsburg:

The embryo contains all the information necessary to create a moral agent.  True.  It's also true that I could, in principle, write down on a piece of paper all the information that's in the embryo, hence enough information to create a moral agent.  Does it follow that the piece of paper *is* a moral agent?

And Don Boudreaux:

... Many folks on the right conclude that each human embryo is a moral agent merely because each one contains the genetic and chemical materials necessary for growth into a human being.  But because moral agency is created by far more than mere chemical compounds, there’s nothing obviously immoral about stem-cell research.

It'll Never Work

There is a great set of quotes at the site It'll Never Work! of predictions that technologies will not change/improve/succeed.

Via Craig Depken at Heavy Lifting.

Importing Price Ceilings

Elizabeth Whelan writing in National Review Online points out that if Congress approves legislation to legalize the importation of pharmaceuticals from countries which impose ceilings on their price, that this will be a backdoor way to impose implicit price ceilings within the U.S. as our pharmaceutical makers are forced to match prices.

Via Hot Blava.

Kelo and Call Options

Ownership of an asset entails rights - rather than obligations - to dispose of the asset as you see fit. Last week's Kelo decision shows that the Supreme Court justices need some education on this.

This distinction about rights versus obligations has increasingly led the field of finance to use the theory of call options to think constructively about assets. Thus, ownership of a real estate asset is like owning a call option with an expiration date that is effectively infinite (a super LEAP, if you will). The owner has the freedom to sell the real estate when they want to and to keep any profits.

The situation in Kelo vs. New London is that the homeowners have a call option that is in the money that they do not wish to exercise at this time. In most situations this is a right that is not infringed upon, which is why Kelo is so problematic.

What the Supreme Court has approved is that it is OK if the government has a potential owner who is willing to exercise the option to transfer ownership to them, have them pay the current owners the exercise price rather than the going price, pay taxes on the gain, and keep the difference.

Eminent domain is typically used only in real estate cases. But let's stretch a bit. I think there is ample reason to do this given that Justice Scalia did pin down New Haven as justifying their taking on the basis of increasing tax revenue. Tax revenue can be generated in many ways.

So, what is to prevent the government from going to the owner of a Google call LEAP with a strike price of $50? These are currently trading for a little less than $250 reflecting Google's current price of just more than $300. There is a lot of paper profit there that the government will get a piece of ... eventually. How much of a stretch is it to use Kelo to justify forcing the transfer of that option - at the strike price of $50 - to someone willing to exercise it now so that the paper profit can be turned into $250 of liquid cash to be split between the government and the new owner? This is farfetched, but if markets are efficient then the government is going to get its cut of that $250 eventually anyway, so why quibble about the timing? Further, it would be substantially cheaper to do this than a real estate deal - there just wouldn't be all those pesky details like environmental impact studies.

I think, viewed in this light, that it is hard to find any reasonable justification for Kelo.

P.S. My colleague Tim Lewis did make clear to me this morning that following Barron vs. Baltimore (1833) is an alternative basis for justifying the Kelo vs. New London decision.

Felonies and Misdemeanors

Victor David Hansen says (the emphasis is mine):

...Few mention there really are monsters and mass killers living among us -- the North Koreans who have starved 1 million of their own, Saddam's reign of terror that may have killed as many, and, of course, the Islamicist murderers who behead, blow up and torture. "Mein Kampf" still sells well in some Arab capitals, not in Washington or New York.

    So cowards ... prefer to showboat the purported misdemeanors of people who are civilized and will listen to them, rather than to condemn the horrendous felonies of those who are barbaric and will pay them no heed.

Via Little Green Footballs and Newsbeat 1.

Very Cool Soccer Footwork Video

Check out this video of soccer footwork (warning: the site is safe for work, but the advertisements are questionable).

Via Heavy Lifting.

Tax Revenue Is a Public Good? Huh?

Glenn Reynolds (Instapundit) draws a key conclusion about the Kelo vs. New London decision in his column at MSNBC:

It used to be that tax revenues were to be spent promoting the public good. Now, apparently, they're a public good in and of themselves.

Another Kelo Gem

From The Electric Commentary:

I wonder if I could get the Tennessee government to seize the Instapundit site for me if I promised to turn it into a pornographic website. It would bring in increased revenue, increased tax revenue for the state, and it would create jobs. Who could be against that?

I'll raise the ante. I'd like to develop the Supreme Court into a venue what will cost less tax dollars and generate revenue. They've already got the nice building and the black dresses. Shorten the hems, hire some girls, add music and lights ...

Trickle-Down Economics of Liberal Justices

Trickle-down economics has been resuscitated by the left. Four liberal Supreme Court justices and one moderate formed the majority opinion in favor of New London in last Thursday's Kelo vs. New London decision.

The skinny is that the poor folks (Kelo) must acquiesce in eminent domain decisions made by local governments (New Haven), provided that the latter can justify it on the basis of increasing tax revenue.

Since the poor pay far less taxes than the rich this is a reversal of the Robin Hood motif. To be clear, it is the second coming of trickle-down economics.

Really, how different is this than the early 80s story that government will help big business and let them create wealth (and pay more taxes along the way)? Well, there is a different party pushing the idea. And there is the fact that it is the local government whose hold has been relaxed, rather than the Federal government.

Yet ... there is one difference that is huge on paper, but perhaps smaller in reality: the new trickle-downers are quite sure - based on their past successes no doubt - that spending a lot of resources to pick winners is the way to go. I guess the opinion of the Court is that it's OK to give up the bird in the hand for the two in the bush if you have the right pedigree.

Have we come full circle in the last generation - what with Democrats favoring voodoo economics and Republicans controlling both houses of Congress and acting as bad as the Democrats did (without a Tip O'Neill to carry them)?