Reconciling the Consumer and Producer Markets for Spotify & Streaming Music Services

Last week, musician David Byrne penned an extensive op-ed critique of streaming music providers in The Guardian. Byrne argues that subscription services like Spotify and Rdio will ruin the creative sustainability of young musicians due to their low compensation rates. He writes:

The amounts these services pay per stream is miniscule – their idea being that if enough people use the service those tiny grains of sand will pile up. Domination and ubiquity are therefore to be encouraged. We should readjust our values because in the web-based world we are told that monopoly is good for us… In the future, if artists have to rely almost exclusively on the income from these services, they’ll be out of work within a year.

Byrne cites examples of other artists who have voiced criticism of Spotify’s business practice, including Thom Yorke and Nigel Godrich, the latter of whom released another argument against streaming music on the same day Byrne’s editorial was published. In addition to quoting other musicians unhappy with Spotify’s compensation rates, Byrne provides examples of artists who have been paid pittance for their music:

The major record labels usually siphon off most of this income, and then they dribble about 15-20% of what’s left down to their artists. Indie labels are often a lot fairer – sometimes sharing the income 50/50. Damon Krukowski (Galaxie 500, Damon & Naomi) has published abysmal data on payouts from Pandora and Spotify for his song “Tugboat” and [David] Lowery even wrote a piece entitled “My Song Got Played on Pandora 1 Million Times and All I Got Was $16.89, Less Than What I Make from a Single T-shirt Sale!”

That Byrne and other artists are voicing their displeasure with Spotify is understandable given the low royalty rates that Spotify pays out. According to The Cynical Musician, artists earn a mere $0.00029 per stream through Spotify, and other subscription services pay similar rates. This seems grossly unfair and borderline ludicrous for artists like Krukowski and Lowerey, especially when Spotify’s net worth is currently estimated at around $3 billion and it pays out $500 million to the major labels for use of their catalogs.

These numbers, however, belie a much more complicated financial reality that streaming services must negotiate. The arguments against Spotify that Byrne, Godrich, and others make also extend beyond propositions for fair financial compensation and into normative assumptions on what new music businesses should encourage or provide. Accordingly, the backlash against streaming music adheres to a music production model that has different base assumptions than those of music consumers. A more comprehensive look into how the producer understanding of the market differs from the consumer understanding of the market shows areas where all parties involved – artists, consumers, labels, and streaming services – can adjust their expectations and practices for the long-term sustainability of commercial success in music.

Bryne, Yorke, and Godrich argue that more effective revenue sources need to be tapped in order to fairly compensate artists for digital music purchases. They suggest that the growing demand for streaming music requires equitable increases in how much artists are paid for providing their music on these services. Both Byrne and Godrich also tilt this argument to particularly focus on new artists who don’t have income from merchandise or touring that more established musicians might. Byrne: “What’s at stake is not so much the survival of artists like me, but that of emerging artists and those who have only a few records under their belts (such as St Vincent, my current touring partner, who is not exactly an unknown). Many musicians like her, who seem to be well established, well known and very talented, will eventually have to find employment elsewhere or change what they do to make more money.”

While Byrne’s intentions are admirable, his singular focus on new musicians leads to a muddied conception of exactly how streaming services should compensate artists. Why should an “emerging” artist without other income sources be treated differently than any other established artist with low streams or digital sales? When Byrne talks about “musicians” in his piece, shouldn’t we assume that every artist on Spotify deserves to enjoy the ability to earn a living wage from making music? He quotes the Black Keys’ Patrick Carney: “For unknown bands and smaller bands, it’s a really good thing to get yourself out there. But for a band that makes a living selling music,” streaming royalties are “not at a point yet to be feasible for us.” Is Byrne arguing that even artists who generate almost no activity or interest deserve to earn money from streaming that, at a minimum, supports basic “feasibility” or subsistence?

The implications of this question are an extrapolation from Byrne’s thesis, but they do call into question how Byrne divides budding artists and the rest of the lower-profile musicians on Spotify. Byrne, Godrich, and Carney believe that promising artists require better support to compose new, creative music, but by their own logic, all artists on Spotify should be entitled to similar levels of fair compensation.

This model, of course, is unworkable, and it’s why Spotify compensates artists based on stream counts. While it might be ideal for an innovative, lower-profile band to earn a healthy income despite only generating a slim number of streams, it’s not a sustainable business model. There are 80 million songs and tens of thousands of artists on Spotify, and the vast majority of traffic focuses on the same top-40 tracks that populate the Billboard and iTunes charts. To guarantee every single artist a basic guaranteed income (to guarantee fairness across the board) requires fixing a high base royalty rate to the lowest common denominator- say, a band that generates only 1,000 streams of their album in a year. Spotify is already operating at a quarterly loss with their current royalty rates; this increase would put the company out of business faster than the quashing of a Smiths reunion rumor.

This isn’t to say that the rate Spotify pays is fair. “Daft Punk’s song of the summer, “Get Lucky”, reached 104,760,000 Spotify streams by the end of August: the two Daft Punk guys stand to make somewhere around $13,000 each,” Byrne reports. That’s not a terrible number, but as it’s one of the top songs on Spotify, it doesn’t speak well for the vast majority of artists who don’t generate that kind of reception.

Perhaps an even better way to quantify the unfairness of Spotify’s rate is to compare the “per-stream” profit of Spotify vs. a paid music download. Most songs retail for $0.99 as individual downloads, and we might think of this retail price as the right to stream a given song in perpetuity or for life. Let’s assume a person buys a song at age 20 and will play that song an average 20 times each year for the next 60 years. That’s effectively 1200 streams, which theoretically generate revenue of $0.00083 / stream. Even if the artist only gets a fraction of that total as a royalty (the label probably takes a pretty good chunk of the $0.99 retail price), this amount is still substantially higher than Spotify’s $0.00029 / stream- and most people will only play a select few tracks this frequently over the course of their life. Based on this conception of what “purchasing music” entails, Byrne and co. are correct that Spotify’s royalty rate should be higher.

The problem is that roundly criticizing streaming services for low rates alone is not enough; a rising base royalty tide inherently raises all artistic ships, but too high of a tide washes everything away. The missing piece in Byrne’s argument is the presence of a discretionary mechanism for more effectively compensating artists who need that extra funding to support otherwise-unworkable projects. Without this mechanism, there isn’t a good way to fairly distinguish who deserves an even higher rate.

Godrich alluded to this issue in one of his earlier posts about Spotify:

Catalogue and new music cannot be lumped in together. The model massively favours the larger companies with big catalogues. They need the new artists to be on the system to guarantee new subscribers and lock down the “new landscape.” This is how they figure they’ll make money in the future. But the model pays pittance to the new artist right now. An inconvenient fact which will keep coming up. I feel a responsibility to speak up when I see something going on which I think is unfair. I’m not bitching about not getting paid. It’s about standing up for other artists’ rights. It’s up to streaming providers to come back with a better way of supporting new music producers. It’s not for us to think up how it could work. That’s your department.

In addition to the aforementioned issue of qualifying how to meter higher royalty rates, there are two problems with the argument Byrne and Godrich are making here. First: why are they placing agency on Spotify for low royalty rates and not music labels for trying to negotiate better deals? Godrich: “The big labels did secret deals with Spotify and the like in return for favourable royalty rates. The massive amount of catalogue being streamed guarantees that they get the big massive slice of the pie (that $500 million [which Spotify pays out to labels]) and the smaller producers and labels get pittance for their comparatively few streams.” This isn’t a just a problem on Spotify’s end; it sounds like oligopolistic behavior by major labels has resulted in a failure to consider their clients’ best interests (or, conversely, it’s creating crowding-out effects that give less leverage to smaller independent labels). Byrne and Godrich should continue to advocate for higher rates from Spotify, but to an equal or even greater degree, the target of their discontent should be labels for mortgaging artistic development for pure profit.

The other, more underlying problem with Godrich and Byrne’s arguments is their fundamentally different conception of individual artists’ value versus that of most music consumers. Byrne and Godrich recognize the unique creative potential of each individual artist and advocate financial support for these artists to encourage their development. In contrast, I hypothesize that most music consumers, influenced by the ongoing devaluation of digital music, view artists as producers of interchangeable products who have minimal unique value.

Let’s break this hypothesis down by first looking at the consumption trends of digital music purveyors. The Top 100 tracks on iTunes, Spotify, and other online music providers generally reflect the same broad consumption patterns, in that the same songs (usually pop radio hits) account for the highest of sales and traffic. This suggests the majority of music consumers use streaming music providers to primarily access the songs of the moment. Beyond hot tracks, consumers then find value in the back-catalog that contains their favorite artists- a small group of bands or singers that they follow closely and would support beyond casual streaming (going to concerts, buying albums, etc). The remaining value of streaming services comes from the long tail, or the extensive back-catalog that allows listeners to quickly and easily access a huge bank of tracks that fit a specific moment or immediate need. Soundtracks for parties, seeking out new artists, and other “one-off” listens fall into this category.

Herein lies a substantial difference from Byrne’s arguments. “A culture of blockbusters is sad, and ultimately it’s bad for business,” he says, but based on the listening patterns exhibited on major music services, this culture is currently the main driver of industry profit, with “new” artists often acting as simply a bonus for a sizable number of people.

In theory, many music listeners would agree Bryne’s assertion that “a culture of blockbusters is sad.” The problem, however, is that it’s not a culture of blockbusters that is crowding out new musicians, but a larger-than-ever supply of these new musicians. In Byrne’s excellent book How Music Works, he describes a number of changes in how record companies have operated since the mid-twentieth century. Two of those changes stand out in terms of how artists now make music:

1) Recording costs currently approach zero for many projects. “Now an album can be made on the same laptop you use to check email,” Byrne writes.

2) Manufacturing and distribution costs are also approaching zero. “Digital distribution is pretty close to being free. Digitally, it’s no more expensive to distribute a million copies than a hundred,” he says.

If there are minimal costs to both create music and disseminate it to potential listeners, basic economics dictates that the supply of music is going to increase since more people now have the ability to make and share it. And supply has increased, greased by improving technological standards that allow people to download and stream music in almost no time at all. We may be living in a “culture of blockbusters” as Byrne asserts, but we’re simultaneously living in an era of unprecedented musical flourishing spurred by the collapse of a hierarchical structure for getting music to the public. Anyone can make music and earn a following with greater ease than ever before.

Ironically, though, the increasingly horizontal nature of music creation is spurring the deleterious effects that Byrne discusses in his op-ed. When the supply of artists increases, I argue that consumers begin to place less value in a given individual artist because there are so many alternate songs or albums that can act as effective supplements. This problem is exacerbated by a service like Spotify, which people use primarily to find hits and see the long-tail artist catalog as a cherry on top. If there is a fixed percentage of long-tail streams (versus hot 100 or radio hit streams), and more artists continue to enter this fixed pool, the average individual attention for each artist is going to drop. More artists results in a devaluation of individual musicians since there’s simply more potential music to choose from.

The technology that has allowed more people to create music is also shaping how we conceive of the value of music and individual songs. That music is now so easily accessible on YouTube and via piracy suggests it is being assigned an inherently lower value than other forms of art. I believe that our modern conception of media value is increasingly a positive function of two factors: file size and length. The larger an object’s file size and the longer its length, the higher the price we’re willing to pay for it (notwithstanding the actual unit costs that are associated with each object). I’d maintain this is partly why people are willing to pay $50-60 for video games (large file size, 40+ hours) and $15 for films (medium file size, 2-3 hours). This isn’t to say every piece of media is inherently valued at these levels across the board, but it suggests a trend for what people expect a given media product should be worth.

Not surprisingly, music comes off pretty poorly in this equation. Low file sizes make it the easiest form of media to pirate and upload to YouTube, and short track lengths (usually 3-4 minutes) suggest a commodity that is exchangeable and transient. This is especially the case when there is no corresponding physical packaging.

The increase in music supply further affects the purchase of full albums beyond individual songs. The greater the quantity of available music to listen to, the less likely it is that a consumer will go all-in and splurge on only one album, especially if he/she is on a limited budget. The purchase of an album reflects a greater willingness to put more time into the music. It’s a deeper investment in the artist’s work. For most people, though, there is very little reason to pick up a random album on a whim. Even a $7 sticker price is asking too much for an unknown value. We put money into things that last longer because we have reason to think this length provides justifiable return. Most people only buy a select few games or watch a limited number of movies because they pick and choose based on subject material that’s likely to appeal to them. The other element is that the supply of available movies and games is much more limited than music today. Byrne’s rationale for cheaper music production extends to why people don’t value individual albums as much – more artists are around to make more music. When so many supplementary items are available, it’s unlikely a consumer will put his financial and temporal eggs in one basket to purchase a single album when others could fill a similar need.

All of this is to say that a fundamental shift has already occurred in how people consume music, and there’s no going back to the status quo of twenty or even ten years ago. We’re at a nexus where musicians fear they won’t be able to make sufficient profit to sustain their work and where consumers are placing less value on individual units of music, be they songs or albums. What can be done to have these trends coexist?

I’m no expert in music making or the music business, and many people smarter than me are trying to tackle this question. But a few potential avenues stand out:

1) People are more risk-averse when buying full albums due to the high cost associated with them. Record prices need to be lowered or additional physical content needs to be added to CD sets to further entice buyers to move beyond digital streaming. LPs that throw in extra photos and a free digital download of the record are a step in the right direction, for example.

2) Streaming rates need to be higher, as discussed above. Though services like Spotify are operating at a loss, discontent will continue to mount if rates are not increased. Artists should try to negotiate more equitable deals with record labels, too. Label revenue per stream on Spotify is $0.0016, according to The Cynical Musician, which is nearly five times as much as the average artist rate.

3) Creative marketing is imperative; bands are now, more than ever, responsible for their own financial destiny. Godrich’s admonishment to record labels of how finding new profit avenues is “your department” for finding a solution to low streaming rates doesn’t hold any water at all; this isn’t some problem that artists can offload and expect to be solved. While labels might bear the brunt of trying to find more profitable avenues, artists now exert greater control in getting their music to people in new ways.

I would imagine that Byrne would be pessimistic about these three suggestions, and I don’t think he’d be incorrect- they’re not enough to spark a sea change in how musicians are compensated. “Musicians might, for now, challenge the major labels and get a fairer deal than 15% of a pittance, but it seems to me that the whole model is unsustainable as a means of supporting creative work of any kind. Not just music,” he says.

But Byrne’s pessimism about the future of artistic innovation in music and other spheres of culture seems, on the whole, too pervasive. He suggests in How Music Works that many, if not most, musicians would make music without any incentive for profit because it’s something they love to do. The ubiquity of great music today suggests that even if making music becomes increasingly less of a career-sustaining activity, the impulse to create something completely new will still exist. And the technology is there to get people to hear it. Perhaps record labels will become an institution that, in addition to marketing the biggest pop starts, fund projects that require a prohibitive up-front investment that couldn’t be accomplished on a DIY level.

So yes, streaming music is having negative effects for a number of musicians, and that needs to change. But the problem isn’t so cut-and-dry as to say that providers like Spotify are the problem and a culture of hits is an inevitable outcome. The underlying changes in how people create and value music need to be more thoroughly considered in order to find new best practices to solve this problem. Rectifying these differing consumer and producer views of the market is the first step to a more nuanced understanding of digital music consumption and finding ways to equitably satisfy artists, consumers, labels, and providers.

Who Will Win the Economics Nobel?

Tomorrow morning will see the announcement of the winner(s) of the 2013 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, colloquially known as the Nobel Prize in Economics.

Thomson Reuters has a tradition of offering predictions as to who will take home the Economics Prize, as well as the Nobels in Medicine, Chemistry, and Physics (for whatever reason they don’t try their hand at guessing Literature and Peace). Their performance this year was hardly stellar – the only correct prediction was for Physics, which was awarded to Francois Englert and Peter Higgs last week for their own correct prediction about the existence of the Higgs Boson – so perhaps we shouldn’t put too much stock in their forecasting ability.

In any case, Reuters identifies three groups of economists as possible recipients: MIT’s Joshua Angrist, Berkeley’s David Card, and Princeton’s Alan Krueger for their work in empirical microeconomics; Oxford’s David Hendry, Cambridge’s M. Hashem Pesaran, and Yale’s Peter Phillips for their work in time series analysis; and Chicago Booth’s Sam Peltzman and Chicago Law’s Richard Posner for their work in the economic theory of regulation.

The New York TimesEconomix blog and the Wall Street Journal’s Real Time Economics also weigh in with a host of other guesses. Marginal Revolution’s Tyler Cowen notes that his “personal prediction (which never once has been correct, at least not in the proper year) is for an early ‘shock’ prize to Banerjee, Duflo, and Kremer…” The second, MIT’s Esther Duflo, is a winner of the American Economic Association’s John Bates Clark Medal, many former recipients of which have ultimately gone on to become Nobel laureates.

My own bet is for a prize in applied micro or econometrics, given that fields such as game theory and macro have been recognized multiple times in the last several years. If it’s the former, then I’ll follow Reuters’ lead in betting on Card and Krueger. If the latter, then I think Real Time Economics is justified in claiming that Chicago’s Lars Hansen, who developed the technique known as the “generalized method of moments”, “is seen by many as a shoo-in.”

Update: I got one! (Correct, that is. I did not win one myself.)

Opposing Debt Ceiling Hostage-Taking is the Reasonably Moderate Thing to Do

Chris has offered a clarification of what he wrote last week about the “debt ceiling consequences of the [government] shutdown” in which he explains that he was not so much focused on how the shuttering of federal agencies might change the House Republicans’ calculations about how to approach the matter of increasing the debt limit as he was on the fact that a prolonged closure of the government would inevitably see the two disputes fused into one mega-dispute that would be much harder to resolve.

Given that these issues have been impossible for the two sides to dispose of separately, there is little reason to think that it will be any easier to do so if they are combined. Late last week, reports began surfacing that GOP leaders were coming to believe the only way out of the quagmire would be to finally strike a hitherto elusive “Grand Bargain” on taxes and spending with Obama and the Democrats. Business Insider’s Josh Barro posted on Twitter that “[t]he idea that resolving the shutdown becomes easier if you try to reform entitlements at the same time is so insane.” Convincing the Republicans to reopen the government and extend federal borrowing authority in one piece of legislation when they have been completely opposed to doing either separately will not be an easy task. Convincing them to do both of these things while also negotiating a fiscal accord that could not be concluded during any of the many attempts made since the wave election of 2010 – and to do all of that before the end of next week – would be downright Herculean.

Talk of the Grand Bargain may have faded, but the October 17th deadline is approaching fast and time to develop alternative plans is running short. This Week host George Stephanopoulos maintained on his ABC show this past Sunday that “the chances of actually tripping over into default are higher than they’ve ever been.” Ezra Klein’s Wonkblog has debuted a fun (but frightening) feature called the “Daily Default Dashboard” that uses a composite index of financial market indicators and online betting statistics to keep track of just how likely that outcome might be. As of yesterday, the needle had moved from “something’s not quite right” to “getting kind of scary” on account of interest rates on one-month Treasuries nearly doubling overnight.

I agree with Chris that the case for pessimism is strong. Yet I still think we as a nation are in a better position right now than if the Republicans had totally capitulated on the government funding issue and provoked the “whale of a fight” over the debt ceiling that House Speaker John Boehner promised back in August. For one thing, polls are beginning to show that the Republicans are indeed taking more of the blame than either Obama or congressional Democrats for the shutdown, and that even their own co-partisans are doubtful of the ultimate merits of their scorched-earth strategy (if one can call it a strategy). Unity in the Republican ranks is breaking down, even if the process of disintegration has so far proceeded in fits and starts.

By contrast, congressional Democrats – and especially Senate Democrats – have preserved their cohesiveness to a remarkable degree, selling even vulnerable red state members up for reelection next year on the benefits of maintaining a united front against the GOP. As a result, the Republicans have repeatedly downsized their demands and now seem willing to settle for relatively small-bore concessions like a repeal of the Affordable Care Act’s medical device tax or further means-testing of Medicare. Of course, the president’s position is still that any concessions are too many, but it is only because of his having adopted such an uncompromising stance in the first place that the opposition appears ready to end the crisis in exchange for token gestures.

On a related note, I think it’s important to flesh out a meta-point Chris made about his thoughts on the debt ceiling, namely why he felt the need to “come down so hard against the GOP.” He writes:

Negotiating over the specifics of a budget deal is one thing. A minority party’s use of its standing to block spending bills and dictate the legislative process is something else entirely. There will be a Republican President and Senate in the future; what happens if they encounter a Democratic House? Would we really want to go through this mess again? Establishing strong principle is imperative here, not for the benefit of the Democratic Party but for the integrity of the governing process.

Liberal commentators and politicians bemoan what they see as a “false equivalence” promoted by journalists, whom they perceive as reluctant to report on any example of bad behavior by members of one party without simultaneously highlighting a commensurate transgression on the other side of the aisle. While that is indeed a real problem, the current crisis has actually seen a range of nonpartisan media outlets displaying a greater willingness to assign blame solely to the Republicans.

To anyone who might charge us with abandoning our commitment to reasonable moderation by not offering up equally forceful criticisms of both parties, we answer that opposing debt ceiling hostage-taking is the reasonably moderate thing to do. As Chris pointed out, there are aspects of healthcare reform that can and should be changed, and we ought to having a vigorous debate about the fixes that need to be made as implementation proceeds. I suspect that he and I differ on what those fixes should be; maybe we can hash that out sometime soon. But for now, we are in agreement about the fact that the Republican Party’s current conception of the rules of American political engagement is a dangerous one. If we are ever again to be a fully functioning democracy, putting an end to these tactics is critically important.

More on the Budget Battle and Debt Ceiling Consequences

Matt’s post yesterday elucidated why the current budget battle might provide calmer waters for the upcoming debt ceiling debate. I hope he’s correct. The consequences of the government shutdown are harmful, to be sure, but they pale in comparison to the effects of breaching the debt ceiling. If the former precludes the latter, the argument can be made that our current squabbling was, in some unsatisfying ways, justified.

Unfortunately, it’s not guaranteed that the budget fight will assuage the Tea Party’s insistence on getting something out of the debt ceiling debate. Matt provides testimony from Evan Soltas, Ezra Klein, and Noam Scheiber about how the budget fight should temper the Republicans’ drive for extraction, but it’s still very much uncertain whether the House will roll over and lie down. Matt acknowledged this: “It is not necessarily the case that a shutdown-induced PR nightmare will diminish [the hard Right’s] appetite for further escalation. In fact, it might even do the opposite.”

More worrisome is the fact that the budget situation and the debt ceiling debate are increasingly joined at hip. Matt correctly points out that I didn’t clearly discuss the connection between the two in my previous post, and I apologize for that. By “possible spillover effects,” I meant that the entrenched disagreement between the House and the Senate / President Obama would carry on from the budget battle into the debt ceiling debate. Based on the risk of this entrenched opposition, the debt ceiling debate becomes a potential consequence of the budget battle when:

1) It’s decided that they should be addressed together, either by necessity or by agreement.

2) A limited timeframe for solving both mandates a sweeping policy proposal for immediate resolution.

Point number 2 becomes increasingly unavoidable as each day passes, and point number 1 is already happening. On September 28, House Budget Committee Chairman Paul Ryan (W.I.) told National Review Online that “I think (the government shutdown) will fold into the debt ceiling fight. I think that’s inevitable. And preferable in my opinion. I like combining all of our leverage, which is sequester and the debt limit.” Perhaps more disconcertingly, even Democrats acknowledge this is a desirable outcome. “We’d like to move them both together,” says Sen. Charles Schumer (N.Y.), the third-ranking Democratic leader. “I think having them together is a good thing because who wants to go through this again. The hope is maybe once the Tea Party has realized it’s not getting its way on shutting down the government that they won’t try the same stunt on debt ceiling.”

(Another scenario not suggested by Ryan or Schumer: the GOP gives up on the budget battle and focuses solely on negotiating a non-Obamacare deal, such as additional sequester, with the leverage of the debt ceiling. This idea was adamantly supported by a host I briefly heard on the radio earlier this week. You know, because bargaining with the full faith and credit of the United States in the balance should always be the go-to strategy.)

Ryan and Schumer’s quotes are equally disturbing. Ryan speaks to the main reason why the Tea Party will continue to advocate for a government shutdown: it forces Congress to deal with both issues at once, supposedly giving the GOP a stronger hand against the Senate and President. This is the opposite outcome of Matt’s scenario and risks creating even further deadlock. Schumer, on the other hand, assumes Matt’s outcomes but uses Ryan’s rationale to come to them. It’s problematic if Democrats believe that combining the debates and giving Republicans a power play will somehow lessen the danger of toying with the debt ceiling.

Of course, one Senator and one Congressman do not a collective decision make. More importantly, John Boehner’s staff indicates that he will not allow House Republicans to wage a debt ceiling coup and will instead rely on a combination of Democratic and Republican votes to push a raise through regardless of the Tea Party faction’s objections. Most financial organizations are assuming this will be the outcome of the current squabbling; I read a quote (can’t recall the source) from one analyst saying that people are delusional if they think the U.S. would actually default on its debt obligations.

Although it’s highly unlikely we’d cross that line, it’s still a little unnerving to see some banks and organizations prepare for worst-case scenarios just in case. And even if a solution is reached before the October 18 deadline, consequences will still be felt if a lengthy negotiations process occurs. A drop in consumer confidence, declines in the stock market, and a credit downgrade all occurred in advance of the last-minute 2011 debt ceiling deal and economists are already warning about similar effects this time resulting from protracted negotiations.

Beyond the economic effects of continued squabbling over the debt ceiling, it would be supremely frustrating to have endured multiple weeks of government shutdown only to see the House force-pass a clean continuing resolution and an uncontested debt ceiling increase. The exact same outcome could have been achieved without any collateral costs had the same decisions been made in early September. Economists indicate that 0.1 to 0.2 percentage points of 4th quarter GDP growth could be lost with the government shutdown when all is said and done, notwithstanding any effects from a loss of consumer confidence linked to debt ceiling uncertainty. That’s in addition to the personal, social, and cultural effects of the shutdown, a number of which I listed in my previous post.

Matt correctly argues that this entire process could be an attempt by Tea Partiers to gain credibility with their caucuses via a major battle with President Obama. While it might be a cunning political decision for select Tea Party Congressmen to spend two weeks’ demonstrating their hearty opposition to Obamacare, the intent reeks of opportunism and selfishness. I wrote in my earlier post that the GOP can’t win this fight and I still don’t think they’ll be able to extract any meaningful concessions from the Democrats, which is ultimately why this whole process was a waste of time and resources. This might be how the political game is played but it doesn’t make it less sickening to watch.

Matt raises an excellent point about the potential risk of another debt ceiling fight in the run-up to the 2014 elections. Perhaps this is the ultimate goal of the Tea Partiers: go to the limits now to demonstrate their opposition to Obamacare, and agree to a new debt ceiling increase without any blowback next year. They’ll argue how they fought to the end without any success in 2013 and don’t want to risk another series of ill effects this year when, clearly, this President just won’t budge. Again, politically cunning but a disheartening use of force that causes more harm than good.

A brief word on why this writer is coming down so hard against the GOP. First, there’s the rationale that Ezra Klein gives on behalf of the White House:

Top administration officials say that President Obama feels as strongly about this fight as he has about anything in his presidency. He believes that he will be handing his successor a fatally weakened office, and handing the American people an unacceptable risk of future financial crises, if he breaks, or even bends, in the face of Republican demands. And so the White House says that their position is simple, and it will not change: They will not negotiate over substantive policy issues until Republicans end the shutdown and raise the debt ceiling.

Negotiating over the specifics of a budget deal is one thing. A minority party’s use of its standing to block spending bills and dictate the legislative process is something else entirely. There will be a Republican President and Senate in the future; what happens if they encounter a Democratic House? Would we really want to go through this mess again? Establishing strong principle is imperative here, not for the benefit of the Democratic Party but for the integrity of the governing process.

I also maintain that the GOP would have been better served fighting for smaller concessions right up to the October 1 deadline. Had they avoided a budget shutdown, they could have seized the difficulty-registering-for-Obamacare narrative immediately and added evidence to their case of why Obamacare, as currently constructed, is not necessarily the best path forward. This would afford them two avenues in advance of 2014: a better rationale for why the law should be repealed, or specific policy fixes that could be used to make the law more efficient. (I’d prefer to see the latter but I imagine Republicans would take the former.) Either way, it seems like they would have been better served, and would have better served the American people, by avoiding obstructionism. Their political gambit went the other way. Perhaps Matt’s forecast is correct and it will reap rewards for them down the road. Perhaps it won’t.

To extend Matt’s comparison, it might well be the case the shutdown is comparable to The Purge. Given the uncertainty we still seem to be facing, though, it’s possible that we’ll wind up with two separate purges or one big combined purge, either of which defeat the whole point of a purge in the first place.

The Government Shutdown is Kind of Like That Movie “The Purge”

Chris had a very thorough post on the debt ceiling crisis earlier this week that looked at both how we got here and at what might happen if Congress fails to increase the Treasury’s borrowing authority in the next couple of weeks. I think his analysis of the situation is correct: Congressional Republicans backed themselves into a corner in the course of their attempt to delay, defund, or repeal Obamacare in exchange for keeping the government open, and had better figure out a way to end the shutdown and raise (or “suspend”) the debt ceiling as expeditiously as possible. Whereas the shutdown “is more of an inconvenience than a minor cataclysm” (although “each passing day makes the situation increasingly worse for more and more people”), failure to raise the debt ceiling would at best result in unthinkable levels of austerity – and at worst an international financial crisis.

I was somewhat disappointed when I finished the piece though, since it was titled “The Debt Ceiling Consequences of the Shutdown” [emphasis added] and yet it never actually discussed the connection between the two events. Chris writes:

More problematic is that the largest potential consequences of the shutdown are still yet to come. It’s possible that the budget battle will have spillover effects for this month’s upcoming debt ceiling vote, a critical legislative process that could have global financial consequences if not handled responsibly.

He then presents us with some quotations about the negative impact of the 2011 debt ceiling debate on the U.S economy and on our reputation in the eyes of at least one of the major ratings agencies, as well as the likely result of letting the current standoff continue to escalate. But what exactly are the “possible spillover effects” of the current crisis on the next one? He never tells us.

I’m curious to hear more detail about how Chris thinks the two fights are linked, because I agree completely that they are. It seems to me, however, that the connection is much less ominous than you might think after reading his screed about how the House Republicans need to put an end to their “spitfire histrionics.”

In fact, I actually think it’s a good thing that we’re experiencing a shutdown right now, given the political climate in which we find ourselves. There were early signs that House Speaker John Boehner, who served under Newt Gingrich during the shutdowns of the 1990’s and knows from firsthand experience that the Republicans were widely perceived as having sustained more political damage from that debacle than Bill Clinton, would attempt to avert a shutdown by convincing his members that the best time for staging an apocalyptic confrontation with Obama would be when the debt limit needed to be increased.

The U.S. never having defaulted, the aftermath of a debt default is largely a collection of hypotheticals and unknowns. This means that, unlike in the case of a shutdown, there is no precedent for a failure to raise the debt ceiling having gone badly for Republicans. Therefore, according to this line of thinking, failure to raise the debt ceiling has more potential upside for the GOP than failure to pass a continuing resolution that keeps the government running. This may or may not seem like a strange argument, depending upon how risk-averse you are and how much you believe the warnings of economists and financial analysts who say that this is a very dangerous game to be playing.

Wonkblog’s Ezra Klein wrote back in August that “trading a government shutdown for a debt-ceiling breach is like trading the flu for septic shock” and that Boehner’s apparent attempts to “talk his party down from this tree [allowing a shutdown]” would only make it that much more difficult to get it down from “that higher, more dangerous, tree [allowing a breach of the debt ceiling]” in a few months’ time.

By the last week of September, Wonkblog was featuring a post entitled “We may have a shutdown after all. And that may be a good thing.” Echoing the logic of his earlier tree metaphor, Klein and his co-blogger Evan Soltas reacted to the view of Politico reporters Jake Sherman and John Bresnahan that if “unified Democratic opposition forces Republicans to swallow a government funding bill they deem less-than-satisfactory, House Republicans will certainly counter by increasing their demands for reform when it comes to the debt-ceiling legislation.” Soltas and Klein reply that

when it comes to the final compromise on the bill, Sherman and Bresnahan are surely right: House Republicans are going to be more resistant to raising the debt ceiling if they feel they didn’t even stand and fight on the CR [continuing resolution]. If avoiding a government shutdown means breaching the debt ceiling — or even just increasing the likelihood of a breach in the debt ceiling — that’s a very bad trade. The corollary, of course, is that accepting a shutdown for a much lower likelihood of a debt-ceiling breach might be a good trade…

It’s a mark of the insane and reckless turn in our politics that shutting down the government so one of our [two] major political parties can get the brinksmanship out of its system is emerging as the sober, responsible thing to do. But here we are, greatest nation the world has ever known.

It might be helpful to think of the shutdown as kind of like that movie The Purge, which I have never seen. My understanding of the premise is as follows: at some point in the near dystopian (utopian?) future, society figures out that the most effective way of keeping crime rates low is to designate a single day every year on which all criminal activity is temporarily legal. A twenty-four hour period in which everyone is free to unleash his darkest impulses functions as a sort of emergency release valve that keeps violent and anarchic tendencies from erupting unexpectedly at other points during the year. (Yes, I realize that this is a strange model of human nature, and that this “cure” is in many ways worse than the disease, and that we’re actually discussing this movie as if it offers meaningful insights about reality. But just suppose for a moment that there’s something to it.)

All politicians talk about “fighting” for their constituents and for their agendas, but the rhetoric of the Tea Party movement is imbued with military imagery to an unusual degree. Insurgent conservative politicians nowadays are loath to express a willingness to work with members of different ideological persuasions. It’s natural to expect that constant assurances by Tea Party-backed congressmen that there will soon be an epic battle with Obama that never actually takes place will only result in an unhealthy cycle of heightened expectations followed by crushing disappointment.

At some point, these congressmen will actually need to deliver on their promises to avoid facing primary challenges and the wrath of their donors. Better for them to force a real-life showdown when failure to reach a deal implies as little actual damage as possible. At least they’ll retain some credibility in the eyes of their supporters when the time comes to cave on something else. As Klein and Soltas put it, maybe it would be best for everyone if the extreme wing of the GOP “got the brinksmanship out of its system now” and gave itself permission to behave more responsibly during the next crisis. Perhaps the shutdown will see to it that the darker thoughts swirling around in the Tea Party id are purged for the foreseeable future.

A related argument says that allowing the more belligerent members of the GOP caucus to experience the political blowback of precipitating a government shutdown will deter them from wanting to endure the presumably greater pain associated with a default. Writing before the shutdown began, The New Republic’s Noam Scheiber concurred with this line of reasoning:

Suppose Boehner surrenders… and avoids a shutdown. The only way he’s likely to keep his job in the face of the inevitable conservative backlash is to promise a for-real-this-time confrontation a few weeks later, in which the House insists on a year-long delay for the individual mandate, the linchpin of Obamacare, in exchange for raising the debt ceiling…. Problem is, Obama has absolutely refused to negotiate over the debt limit in any way…. [E]ither Boehner gets it or the global economy gets it….

If Boehner resigns himself to a shutdown, on the other hand, suddenly the future looks manageable. After a few days of punishing political abuse, Boehner will be able to appear before his caucus, shrug his shoulders in his distinctive Boehnerian way, and bleat that he executed the strategy conservatives demanded… The demoralized conservatives will realize they’re out of moves – at least in this particular battle – allowing Boehner to raise the debt limit a few weeks later with little drama.

The problem, as we have already seen, is that the prospect of a default seems legitimately not to frighten many of the hard-liners in the House (and Senate). It is not necessarily the case that a shutdown-induced PR nightmare will diminish this faction’s appetite for further escalation. In fact, it might even do the opposite.

There is one other point that isn’t entirely related but that I think has been largely overlooked in the commentary on the GOP’s strategic morass and bears mentioning. The assumption seems to be that any debt ceiling increase would last for one year, with even a leaked copy of a Boehner proposal from a couple weeks ago containing a provision to “suspend” the borrowing limit for exactly that long (until December 2014). Scheiber mentions the House’s push for a one-year delay of the individual mandate, which seems to have been designed to give the appearance of a fair trade: conservatives would get a one-year reprieve from the Affordable Care Act in exchange for Obama and the Democrats (or rather, the country and global economy) getting one more year without utter calamity.

Assuming that the Republicans do end up taking more heat than Obama from the public as a result of this brinksmanship, why would they possibly want to replay this entire debacle in the run-up to the 2014 midterm elections? The GOP has a real shot at taking over control of the Senate and would presumably want to do everything in its power to wipe this egregious episode from the electorate’s memory far in advance of next November. It is often said that politicians think too much about politics and not enough about doing the right thing for the country. It’s clear that at least some of them don’t think much about politics either.

In less than two weeks, we’ll find out whether this theory is correct. If it isn’t, then maybe we all need to watch The Purge and learn how to stay safe when the world ends.

The Debt Ceiling Consequences of the Shutdown

The current government shutdown is an embarrassing and deeply unfortunate byproduct of the Republican Party’s calcified rejection of Obamacare.  It’s one thing for Republicans to continue to question the efficacy of the health care law, as Ramesh Ponnuru points out.  But it’s entirely another matter when they refuse to pass a budget bill that does not include funding for Obamacare, even though the Senate and the President have made it clear that these bills will not be passed.  Rod Dreher’s thoughts on this extremely frustrating and irrational position are ringing quite true.

More problematic is that the largest potential consequences of the shutdown are still yet to come.  It’s possible that the budget battle will have spillover effects for this month’s upcoming debt ceiling vote, a critical legislative process that could have global financial consequences if not handled responsibly.  James Surowiecki:

The ceiling is the legal limit on the amount of money that the government is allowed to borrow, and raising it is necessary not just to keep the government running in the future but to allow it to pay for obligations it’s already incurred. As Justin Wolfers and Betsey Stevenson convincingly showed last year, the 2011 imbroglio over the debt ceiling put a significant dent in both business and consumer confidence, held back hiring, and further weakened the recovery. It also sent the stock market tumbling—even though a debt-ceiling deal was eventually reached, the Dow fell almost fourteen per cent in less than a month during the crisis, in part because it made people realize that a U.S. default was no longer unthinkable. (It also led to the first downgrade of the U.S.’s credit rating in history.) So it’s hardly surprising that the standoff in Washington is spooking—if not yet terrifying—investors. Markets dislike uncertainty, and what the Republican hard-liners in the House of Representatives have done, most significantly, is to make the future look uncertain by suggesting that, if they do not get the concessions they want (above all, the repeal of Obamacare) they are willing to let the U.S. default.

Martin Wolf looks at the consequences of a debt ceiling debacle:

At best, a failure to raise the debt ceiling would necessitate a sharp cut in spending. At worst, the US would default. Analysts at Bank of America Merrill Lynch argue that hitting the ceiling would require the US to balance its budget at once, cutting spending by about 20 per cent, or 4 per cent of GDP. That would push the US into another recession – even if there were no default. The consequences of an actual default, particularly one that lasted for some time, are beyond prediction. Unlike a shutdown, there is no precedent, for good reason. The notion is suicidal.

Michael Mackenzie, also of the Financial Times, has more information on the consequences of hitting the ceiling.

Right now, the government shutdown is more of an inconvenience than a minor cataclysm.  But each passing day makes the situation increasingly worse for more and more people.  Brad Plumer recaps the nine most harmful effects of the current closure, including cuts in nutrition and health programs, potentially delayed benefit remittance to veterans, and a hit to fourth-quarter GDP growth.

With the debt showdown looming as an ominous potential climax, it would behoove the Republican Party to resolve this situation as quickly as possible.  The Democrats in the Senate should be open to small negotiations on non-Obamacare policies to facilitate this process, but the onus is on the GOP to face the reality of the situation.  Its best bet was to allow the implementation of Obamacare and then emphasize the most inefficient parts of the plan throughout 2014 while simultaneously offering counterproposals for a new system.  That the public currently opposes the health care law 47% to 45% suggests demonstrated failures in the system would have lent credible evidence to buttress the Republicans’ case against the law.  Now, they’ve gone all in without any road map to extricate themselves from the reality that Obamacare will not be defunded, despite the fact that 72% of Americans oppose their shutdown strategy.  The faster the Tea Party wing of the House acknowledges this mistake, the more smoothly the next two weeks will go.

Enough of the spitfire histrionics that are engulfing the House.  It is unconscionable that veterans stand to lose access to benefits over an unnecessary fight that the Republicans cannot win, and it is obscene that this risk could extend to policy that affects the health of the global economy.

Religion and Rational Choice Theory

I think Chris vastly overstates my level of expertise when he says that I’ve done “extensive research” on how people choose their religious affiliation, but it is a topic in which I’m very interested; I wrote my undergraduate thesis on mathematical models that can be used to analyze this question and similar questions in economics and political science. I’ve actually never read the Hirschman book that Margaret Steinfels discusses in the Commonweal column that Chris has linked to, but the framework that she alludes to – conceptualizing religious institutions as something like “firms” competing with one another for adherents in an active “religious marketplace” – is a helpful one for thinking about issues of religious participation in the modern West.

There is a diffuse literature in economics and sociology known as the “rational choice theory of religion” which posits that individuals do not simply decide to remain or to become a member of a religious body because they have been socialized into it or because they feel pressure from their friends and relatives, but rather that they actively weigh costs and benefits in order to determine whether a particular group is right for them.

“Costs” might consist of frequent participation in services, fasting, tithing, volunteering, etc. “Benefits” can be either supernatural (rewards in an afterlife) or more mundane (a sense of spiritual well-being, a feeling of belonging to a supportive community, etc). This helps to explain why fringe cults that the vast majority of people would see as extreme can actually manage to cultivate a following (pun intended): while they may make extraordinarily onerous demands of their followers, they often promise immense otherworldly rewards to those who join the flock.

It turns out that integrating the economic notion of rational-self interest into the study of religion can provide plausible explanations for otherwise puzzling phenomena. Peter Berger’s The Sacred Canopy advances the theory that religious pluralism ultimately erodes religiosity, since the recognition and acknowledgement of competing theological ontologies and ethical systems causes one to become less sure of one’s own commitments. When one religion is dominant in a given area or among members of a certain population, it casts a “sacred canopy” over even those who do not belong. The emergence of other religious groups discredits not only the hitherto dominant tradition, but those newer groups as well. The canopy that had previously sheltered the very idea of religion from the raging storms of secularism becomes tattered and frayed.

It turns out that there are serious problems with such a view of religion, though. There is actually empirical evidence suggesting that religious pluralism, or what we might call religious competition in the market metaphor, actually promotes religious participation rather than eroding it. The rationale is easy to understand if you think through the implications of the metaphor. Healthy competition among firms is, all else equal, generally thought to lead to the production of higher quality and more affordable goods and services, since producers must give their customers what they demand or risk losing business to a competitor. Monopolies, unburdened by such a constraint, know that they can slack off and still do fairly well.

The United States, which has had a constitutional guarantee of freedom of religion since its inception, is the most religious industrialized nation in the world. The United Kingdom, on the other hand, has a state-sponsored church but far lower rates of attendance at services and lower self-reported religiosity. While there are obviously myriad other cultural and historical reasons why religion might play the role that it does in both countries, the apparent inverse relationship between pluralism and participation is suggestive. Richard Dawkins, a fierce advocate of the separation of church and state, has noted that people often ask him why quarantining religion from government seems to have the paradoxical effect of increasing religious activity rather than diminishing or suppressing it. He claims to have no explanation to offer, despite the fact that rational choice logic seems to yield a solution to the apparent conundrum.

In Acts of Faith: Explaining the Human Side of Religion, a comprehensive book-length exposition of the rational choice approach, sociologists Rodney Stark and Roger Finke argue that all human beings have some sort of innate religious preference, and that these preferences tend to follow a bell curve-shaped distribution. Some people have an inborn sense that religion should be strict and should guide every aspect of their lives. Such people will likely be drawn to demanding varieties of religion, like Mormonism or the Jehovah’s Witnesses or Orthodox Judaism. Others have a preference for more liberal faiths that offer a greater degree of individual autonomy and that leave a wider range of decisions to personal choice.

The majority, however, falls somewhere in between. In America today, both austere sects like the Amish and progressive churches like the Unitarian Universalists command relatively small followings. Although aggregate religious participation has dropped off steeply over the last few decades, it is still the case that the groups dominating the scene are those that are strict, but not too strict. They may require their congregants to attend weekly services or undertake periodic fasts, but they probably don’t ask them to sell all their possessions and become itinerant preachers (well, maybe they do, but they don’t really press the issue).

Where does the notion of the Catholic Church as a “lazy monopoly” fit into this framework? Chris, following Steinfels, suggests that the Church might be growing rather than shrinking if the hierarchy were more responsive to the concerns of the laity, treating them like adults rather than infantilizing them. While Francis might possibly be moving toward a “flatter” vision of the Church (more on that in an upcoming post), Benedict XVI seemed to embrace the idea of a pyramidal ecclesial structure wholeheartedly. He did not see the Church as a lazy monopoly but as a monopoly that knew exactly what it was doing, and mused about whether it might not be better if we ended up with a “smaller, purer Church.”

There is a sense in which this line of argument is beyond critique. Chris rightly points out that there is little an institution that understands itself to be dealing in “immutable truths” can do to appeal to the masses if people are simply nonreceptive to those truths or to the meta-notion that any truth can be immutable. Moreover, there are those who embrace Benedict’s approach but reject his false choice between purity and mass appeal. As Ross Douthat has written, both in his 2012 book Bad Religion and in several of his Sunday New York Times columns, it is the churches that have most enthusiastically embraced the innovations of modernity that have been most seriously impacted by the decline in churchgoing. If you have nothing to offer people that they can’t get from, for example, participation in secular politics, then why would anyone give you a second look? Liberalizing is not as promising an option as it might seem for churches seeking to revitalize themselves.

The problem with this hypothesis is that it fails to account for the idea that individuals might have heterogeneous religious preferences. Another way to think about the prediction that greater competition leads to greater participation is to imagine that there are a variety of “market niches” that are ill-served by the presence of a single religious monopolist but that are more likely to see their personal spiritual needs met when there are a variety of available options.

While some niches may respond negatively to a lack of theological rigor or to a perceived doctrinal flexibility in their religious leaders, others may be drawn to such things (although they would no doubt frame them in more positive terms). Any shift in dogma or practice will please some and offend others. What matters is the relative size of the constituencies that are pleased and offended. So while it could very well be that Episcopalianism would collapse if it adopted every idea ever pushed by John Shelby Spong, it might also be the case that the Amish population would grow if they allowed themselves to start using microwaves.

This argument that liberalization, or what Stark and Finke would call a lessening of “tension with the social environment,” is intrinsically fatal to the robustness of religious congregations carries an implication that there is but one way to reinvigorate religion, and that is to cling firmly to “orthodoxy.” Acts of Faith contains a helpful example that shows why the rational choice approach cannot be used to make definitive recommendations about the path that should be taken by ailing religions. Stark and Finke consider the steep dropoff in vocations to the Catholic priesthood since the mid-1960’s, and conclude that

[t]he collapse of Catholic vocations was self-imposed, not merely incidental to the process of modernity. It was the assembled bishops of the Catholic Church who, after collective deliberations [at Vatican II], withdrew many of the most compelling motivations for the religious life [e.g. intimating in Lumen Gentium that priests and religious are not superior in holiness to the laity], while retaining the most costly aspects of vocations [e.g. celibacy]. Perhaps orthodox Freudians and other proponents of irrational choice theories might have expected that Catholics would still flock to the religious life out of neurotic need. The fact that the “flocking” went in the other direction testifies that humans subject even their most intense forms of religious commitment to reasoned evaluation. This point is additionally confirmed by the exceptions: some dioceses still generate vocations, and some religious orders still attract new members – those able to revivify perceptions of a positive ratio between the costs and rewards of the religious life… We do not propose that the Catholic Church ought to retain its reliance on costly religious vocations – on a church staffed by a corps of what Max Weber called “religious virtuosi.” Centuries of Protestant experience demonstrate the adequacy of less costly vocations.

According to this analysis, the effect of retaining “costly” practices like celibacy while reemphasizing the exalted status of the priest would have a similar effect to abandoning or reforming those practices but continuing to put laypeople and priests/religious on equal footing. The tenor of Francis’ papacy so far, as well as remarks made to reporters by his newly-appointed Secretary of State Pietro Parolin, suggest that the latter path is more likely than the former.

As a budding economist who obviously spends a great deal of time thinking and reading about religion and culture, I worry about attempts to overextend economic logic and to apply it to situations where explanations from sociology or anthropology or other related fields might be more effective. And so even I myself sometimes find it strange that I’m drawn to the approach promoted by people like Stark, Finke, and Hirschman. Yet maybe it isn’t all that unusual. Just as economists need to develop a sense of where and when and in which contexts their preferred assumptions are appropriate and where they break down, so too should scholars of religion appreciate the fact that religious behavior is not entirely unlike other kinds of human behavior. Maybe the sacred and the profane are not mutually exclusive.