Krugman’s Blog, 3/23/13

There were three posts yesterday.  The first was “The Economics of Evil Google:”

Updated below

Google’s decision to shut down Google Reader has upset a number of people I know, and provoked a lot of discussion about the future of web-based services. The most interesting discussion, I think, comes from Ryan Avent, who argues that Google has been providing crucial public infrastructure — but doesn’t seem to have an interest in maintaining that infrastructure.

I’ve been trying to think this through in terms of more or less standard microeconomics, and here’s what I’ve come up with:

First, it’s a well-understood though not often mentioned point that even in a plain-vanilla market, a monopolist with high fixed costs and limited ability to price-discriminate may not be able to make a profit supplying a good even when the potential consumer gains from that good exceed the costs of production. Basically, if the monopolist tries to charge a price corresponding to the value intense users place on the good, it won’t attract enough low-intensity users to cover its fixed costs; if it charges a low price to bring in the low-intensity user, it fails to capture enough of the surplus of high-intensity users, and again can’t cover its fixed costs.

What Avent adds is network externalities, in which the value of the good to each individual user depends on how many others are using it. To some extent the monopolist can capture these externalities, since they add to the price people are willing to pay, so I’m not sure they change the logic of provision or non-provision. But they mean that if the monopolist still doesn’t find it worthwhile to provide the good, the consumer losses are substantially larger than in a conventional monopoly-pricing analysis.

So what’s the answer? As Avent says, historical examples with these characteristics — like urban transport networks — have been resolved through public provision. It seems hard at this point to envision search and related functions as public utilities, but that’s arguably where the logic will eventually lead us.

Update: Illustrating my point: here’s a hypothetical case in which the demand comes both from high-intensity users who are willing to pay a lot for a service, and low-intensity users who aren’t willing to pay that much. Because of fixed costs, the average cost per user declines with the number of users. You can see from the way that this is drawn is that there is no price at which a monopolist can cover its costs here; yet the losses from providing the service at a price that draws in the low-intensity users would be much less than the gains to high-intensity users from having the service available.

The next post of the day was “Psychological Roots of Austerity:”

Simon Wren-Lewis has a thoughtful post on the reasons for austerity mania, in which he accepts the role of special interests but argues that there are also psychological roots. Specifically, he suggests that politicians know that they are often irresponsible, and

when the market starts to punish fiscal profligacy, it is as if a parent has discovered the child’s guilty secret. (The market is seen by many as a mysterious deity.) The politician wants to repent (or at least be seen to repent), and atone for past sins. After eating too many pastries, we go on a crash diet. After deficit bias, we have austerity.

His analysis had me thinking about President Obama’s first inaugural, and my (lonely) upset reaction:

In response to an unprecedented economic crisis — or, more accurately, a crisis whose only real precedent is the Great Depression — Mr. Obama did what people in Washington do when they want to sound serious: he spoke, more or less in the abstract, of the need to make hard choices and stand up to special interests.

That’s not enough. In fact, it’s not even right.

Looking back, I think we can see the austerian temptation even there, literally in the first hour of the new administration. Since then Obama has veered back and forth between reasonable Keynesianism and acceptance of deficit fetishism, but if even he, even then, was pulled in by the emotional tug of austerity, you can see why good macroeconomics has had so little impact on policy.

The last post of the day was “Attacking Success:”

OK, this is rich. Or actually, it’s anti-rich. Or anti-rich liberal. Or something.

Anyway, Jonathan Chait informs us that the right-wing blogosphere is all-aTwitter over the fact that Matthew Yglesias just bought a nice condo. Apparently this is hypocritical because you can’t be a liberal and own private property, or something. Chait has a lot of fun with the whole thing, and its notion that a liberal supporter of mild redistribution is the same thing as a Communist; check out his picture caption.

But I think there are two more things to be said here.

First, you should bracket this with the Rob Portman/gay marriage story as an example of the perversion of the ideas of civic virtue and sincerity. On today’s right, not only is civic virtue, nay patriotism, associated with narrow defense of your own self-interest, any deviation from that standard — like being an affluent person who nonetheless supports aid to the poor paid for by progressive taxation — is considered prima facie hypocritical. Somehow, though, this never gets to the obvious conclusion: that defending your nation is obviously hypocritical unless a member of your own family has been killed by terrorists …

But second, notice how quickly a staple of right-wing outrage goes out the window if there’s possible political gains to be made by violating a supposed principle. All through the 2012 campaign we were lectured about the evils of “attacking success“, which was defined as any criticism of how a wealthy individual got that way. But as soon as they think they spot an opening, right-wingers go ahead and … attack success. And unlike Romney, who was criticized for his business practices rather than his wealth per se, Yglesias is under attack simply for doing well.

But this is nothing new. Remember the pure envy-based attacks on John Kerry in 2004?

The lesson here is never to take right-wing huffiness about the process of politics and political debate seriously. These guys don’t actually believe in any rules at all; whatever rule they may lay down in one case, they’ll break in an instant if they think they see an advantage.



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