Ocean Gebhardt is based in Portland. He got his Masters in Finance and Fiscal Policy and wrote his thesis on the Dumb Agent Theory (whoa! That’s the name of this website!). He has been blabbering about economics ever since.

Rebecca Gebhardt is based in Atlanta with her husband Giuseppe. Having grown up in Switzerland in the 80′s (whoa! That’s where Ocean grew up too!), she was witness to the dichotomy between Western Europe and Soviet Eastern Europe, and has been an unapologetic free marketer ever since.

We both have other careers and dedicate our spare time to this blog, which is why we bother you from time to time for contributions, advice, or propose awesome swag and enlightening books.

Want to know more? Go here, or ask us anything by mailing us here: Questions@dumbagent.com

First of all, if the parents are paying for the education, the child will then be expected to earn enough to pay for his/her children’s education. Of course, by the time these children are in college, tuition will have climbed to at least $140’000 (if current rates continue). This is far above any inflation rate and is therefore like one big Ponzi scheme.
The second option would be student loans, which then means the students needs to pay back this $100’000 on top of all other life expenses, including a car, mortgage, family, etc. Chances are, more than 20 years will be spent paying this, at which point the child is getting ready to go through the same cycle. Here the loans will be for a greater amount (to cover higher tuition rates), since there is very little chance the parents were able to save enough since they’ve been paying off their loans*.
Well, could anything make this situation worse? Sure. It turns out many students in China, as well as many other countries in Asia, just have other people apply to college for them. This means someone else who can offer “ghostwritten essays in flawless English, fake awards, manipulated transcripts and even whiz kids for hire whoʼll pose as the applicant for SAT exams.” The price for this? Between $5,000 and $15,000.

And, lest you think it was purely a cultural matter, a certain Sam Eshaghoff from Emory University was recently convicted of taking the SAT for six other students, earning between $1,500 and $2,000 for each test.

In other words, families are paying extra, under the table money in order to have their children go to an institution where they will then pay exorbitant fees, and somehow hope that our economy will provide jobs to make it all worthwhile.

This does all sound a bit crazy, doesn’t it? So what are the alternatives? Some have been proposed, such as degree-based tuition in Florida (science students pay more than humanities students since their degree is technically worth more in legal currency), or just offering elite education for free. While we don’t disagree with the fact that certain degrees are worth more monetarily than others, an increase is certainly not what is needed. And unfortunately, even if MIT offers courses for free (as does Berkeley in the form of online lectures), people will still pay much more to actually have the degree.

Here is one likely scenario, however: A recession might occur, during which students decide to get more education so they can A) ride out the recession and B) be more qualified once it’s over. Unfortunately, if it’s a prolonged recession, this strategy won’t work. This means they will search and search for jobs, finally settling for being underpaid in a job they likely could have had without the extra education. In other words in two years they’ve only gained a degree and loans.

Suddenly people will look to who was able to weather the recession and come out on top. As happens with all recessions, creative destruction (as described by Schumpeter) will occur. This means that old, inefficient companies will die out, while new, more efficient ones will be born. The dot-com bust brought us Google et al. In fact, some people will even realize how 70% of the Forbes 500 started during downturns**. In other words, entrepreneurial activity is what is beneficial, not higher degrees. At first a few intrepid souls will start pushing their children towards entrepreneurship rather than more and more degrees (these will most likely be entrepreneur parents to begin with). Slowly but surely, other parents will catch on.

The process might take a while, but the longer the economic downturn lasts, the more it will be sped up. At this point the bubble that is higher education will finally burst, and parents will stop blindly and mindlessly throwing money at these institutions for unworthy degrees.

* For more precise calculation check out “The proud parents”.
** Including Texas Instruments, HP, 20th Century Fox, Eli Lilly, IBM, Lexis Nexis, Merck, Burger King, IHOP, Hershey’s, Gillette, GM, Alcoa, J&J, Hyatt, Chevron, CNN, GE, AT&T, Fedex, Abbott, Procter & Gamble, Lilly, MTV, Coors, Trader Joe’s, Bristol-Myers, Microsoft, Apple, Sun, Adobe and many others.

Well, it turns out it’s neither of these. It is cars. By far. And this isn’t because I’ve recently relocated to Portland. Freakonomics recently had a podcast entitled “Where have all the Hitchhikers gone?“, which brings up an interesting point. Hitchhikers, despite their reputation for being dangerous serial killers, were great at increasing the efficiency of cars.

Think about it, around 80% of car seats go unused. When you are looking at rush hour traffic, remember that 80% of that space is just that: space. It is not being occupied by anyone. Needless to say, if any other form of transport, like planes or trains, operated at only 20% occupancy, it would be deemed a huge failure. So how can we change this?

Well, hitchhiking has all but disappeared. This is due not only to safety concerns, although those are quite big (thanks to safety campaigns and various serial killer headlines). This is also because cars have become much cheaper recently, gas is very cheap as well (at least in the US), and interstates make driving from A to B very easy. In other words, convenience. So one might as well use his or her own car, or rent one, or use a service like Zipcar, right? Except, none of these solve the problem of 80% vacancy, and the relative traffic, congestion, pollution, etc. that come with that.

So how do we solve this? Well, cheap cars, gas and interstates should not be deterrents to hitchhiking per se, but of course safety is (although the serial killer aspect sensationalized the whole ordeal quite a bit). An easy solution is to car pool, which is done mainly among coworkers when convenient. Although, if you have a dinner or drinks after work, you’re just as quick to use your own car so as to be independent.

So how about an Airbnb (or Couchsurfing if you will) for cars? Users have to register, so we can be pretty sure they’re not serial killers. Ideally an app on your phone can show you which options are close by and, if need be, you can schedule regular pick ups, etc. Maybe a payment system can even be arranged, where members pay a nominal fee, and those who offer rides are paid something via the website.

A cursory Google search turns up a few companies that perform carpool and rideshare services, and yet this doesn’t seem to have picked up very much. Well, if safety isn’t a primary concern anymore, it must be due to convenience. It seems that inconvenience might be the best way to encourage filling up the 80% vacancy rate.

Empty car seats are currently a tremendous resource. If sharing seats can be more convenient, not linked to status and considered safe, this could bring overall driving times and costs down (suddenly driving down the coast becomes an option when you find a website full of other people doing it). As a consequence, airlines and public transport will have more competition and will therefore have to upgrade their service, which would be a nice thing indeed.

Enter a model used by the Dutch, wherein a whole postcode will win each month’s lottery. The winnings are divided up between all residents within that postcode, meaning all winners receive around $13,000. So everyone in the community can be that much better off.

So how can these two ideas be combined? Well theoretically, the 40% of winnings taken by the government should be used to benefit its citizens, correct? What if these citizens received the winnings themselves? Could this allow the government to decrease (or eliminate) the amount of taxes taken out of the savings’ winnings?

As an explanation, people would be able to open bank accounts, knowing the interest they earned would be directed toward a pool of money. This money would then be doled out in a monthly lottery but, rather than have one individual win the full amount, a whole postal code could win it. Of course, this probably means winnings will be in the $10,000 range rather than the $1,000,000 range, but it also means 40% wouldn’t be taken out as taxes, since these would constitute a form of payment to citizens regardless.

The devil, as always, is in the details. Would the bank accounts still be private or state owned? And exact amounts of earnings, winnings and (eventual) tax payments would have to be calculated. But if it encourages people to save and not to spend their own earnings on lottery tickets, might it not be worth checking out?

How Movie Studios Shoot Themselves in the Foot

In 1975, Sony released Betamax, a video cassette recording device that could be attached to a television set and could record television programs onto its Betamax cassettes.

In 1976 Walt Disney and Universal Studios sued Sony for copyright infringement. They argued that these video cassette recorders (VCRs) could be used to copy and distribute their movies. They also argued that most people would record movies for later viewing and, when this viewing occurred, they would skip over the commercials, thereby depriving the studios of their source of revenue. The case dragged on, through various courts, until 1984, at which point the supreme court ruled in favor of Sony.

Interestingly, the movie studios failed to realize that in a few short years a market for videotapes of each of their movies would provide huge revenue streams. Needless to say, had the court ruled in their favor, movie videotapes, and therefore companies such as Blockbuster and Hollywood videos, would not have existed for many years to come, and the whole VCR market would have been pushed back by years.

Fast forward to 2004, and MGM, along with 27 other entertainment studios, is suing Grokster (remember them?) over copyright infringement for their P2P software. Much like the Betamax case, Grokster argued that their product could be used legitimately or illegitimately and, just like Sony Betamax, they were not liable for what their users chose to do. More to the point, the studios should have noticed the parallels and realized the potential for future profits in this new medium.

Unlike the Betamax case, however, the courts ruled in favor of the studios in 2005. Now, half a decade later, we are at much the same point as we were then (except other companies have taken Grokster’s position). MGM could have tried selling movies online, encoding them, providing a monthly access fee, advertising the fact that movies available through their websites were legitimate and virus-free, among many other revenue generating schemes.

Instead they chose to set back the online movie industry by years.

What Porn Can Teach Us

The movie industry is finding itself at a crossroads. This is a multimillion dollar industry staring nervously at the music industry, the file sharing that swept it up, and the industry’s abysmal response to it all. Now Hollywood is wondering what will happen to them. Will they lose returns because of illegal sharing? Will this mean they won’t be able to afford to make new movies? Will all our actors be out of work?

We think it would help if these Hollywood execs, rather than looking at the music industry, followed millions of internet users and looked at the porn industry. This is an industry that, not many years ago, had movie directors, released movies, had well-known actors and actresses, and could be a lucrative career for many. These days, however, there are countless online providers of free or cheap videos and websites. Amateurs are quite literally posting videos from their bedrooms and competing with the professionals.

So what has happened? There are still plenty of sites that make much money (otherwise you wouldn’t be bombarded with spam about it), but they do so by differentiating themselves. Whether it be a specific niche (we won’t get into specifics) or a performer who has created a name for her/himself, certain people have found ways of standing out by providing the customer with what they want.

What does this mean for the movie industry? Hollywood will usually say that without their big budgets (and therefore their grasp on the industry) expensive movies like The Matrix would never have been made. We believe this will be less and less true as time passes. With the equipment that can be bought on credit card advances, people are increasingly able to film and edit video that looks more and more professional. So special effects will be more and more mainstream. Of course, hiring big name actors might become harder, which would mean The Wachowski brothers might have had to hire someone other than Keanu Reeves to play Neo.

On the other hand, actors who differentiate themselves will still be in very high demand. Likewise, freelancers who have real talent will find funding for their movies. Movies will be more niched, more targeted and provide more of what customers want, and an industry that once had extremely high barriers to entry will be giving everyone a shot at bat. And those who are able to keep with the times will benefit enormously. Much like has happened with the Porn industry.

Let’s start with the basics. A patent is granted to an inventor wherein, in exchange for his revealing the secrets of his invention, he has a 20 year monopoly over the technology. This means that others can build on his invention and invent their own products in the meantime. This encourages innovation and also means that others don’t have to wait 20 years before inventing new products.

Recently, however, this hasn’t been the case. When the total profits from patents are around $4 Billion, but the associated litigation costs are $14 Billion, it is hard to argue that they are helping the economy in any sense. What is going on here?

First of all, the patent office in the United States is falling very much behind in its approval of patents, with a 700,000 patent backlog and a waiting period of three years.

Secondly, the so-called “patent trolls” are buying up patents and using them as lottery tickets. In other words, they are not creating anything but just suing any company they can for infringing upon their patents. Whether they are right or wrong often doesn’t matter, since the other party will usually prefer to settle, rather than fight the case. Needless to say, lawyers on both sides of the case will pick up a percentage of every IP lawsuit they can bring about.

This has the opposite effect of what patents were originally supposed to do: It stifles innovation. Entrepreneurs and small businesses are regularly finding themselves sued for one reason or another, and are therefore often scared to forge ahead in new industries and markets.

Recently, the America Invents Act was passed. This has been touted by politicians (who were quick to pass it) as, well, the “America Invents Act” (some marketing firm might have helped). It is a step in the right direction, in that patent protection is granted from the moment it is filed, rather than issued and, secondly, the patent office itself will have more control over its budget. But will this really stop any of the associated litigation? We doubt it.

So what is the solution? Mark Cuban has mentioned that we should get rid of patents completely, at least in software and processes. According to him most inventors don’t invent for the patent, but to get a new business up and running, so that new patents merely get in the way of innovation. According to him, software should be copyrightable, while if you’re creating a new process “… use it. The benefit is from creating the idea and using it in a business to your advantage. Afraid that some big company might steal the idea? That is life. When you run with the elephants there are the quick and the dead.”

And we are inclined to agree. Business ideas are just too abstract to merit patents, and big companies (remember when Google bought up Motorola for its patents back in August last year?) are finding it much too easy to buy up more and more of these in order to stifle future innovation by suing more small businesses. So when it comes to online businesses, Enough with the Patents.

Those of you who travel in the US have now become accustomed to a steady decline in airline service. Expectations are so low that we barely notice things that would shock many in other countries (and we are often only reminded when we go abroad on another airline). One inconvenience we have been loth to put up with, however, is checking our luggage. We all remember a time when this wasn’t necessary, yet now it has become a permanent feature (NB: JetBlue and Southwest are two exceptions, who still don’t charge for checked luggage, bless their hearts). So might it be cheaper to plan ahead and ship the luggage rather than check it? Luckily, our friends at Airfarewatchdog have saved us the effort by compiling a chart of their own, which you can find here.

Of course, it isn’t comprehensive, but by scanning it you can see that, if you have lighter pieces of luggage, it still tends to be worth checking it in. If, however, you have overweight or oddly shaped luggage, it might be worth shipping after all. There are some exceptions, though. Like if you’re flying from Chicago to Orlando you will pretty much always want to ship your luggage.

Curious about whether it is worth shipping your luggage? Check with USPS, Fedex or UPS and compare to what your flight charges you.

By the same token, if there is an entire topic we have not touched upon at all that you would like added, feel free to let us know as well. In fact, if you want to write something yourself and if we like it we will feature it and consider it for inclusion in the book (this is an “if” guys, so no guarantees!).

So, got something to add? Feel free to comment below or to write us at Articles@dumbagent.com.

Also, since the book edition will be coming out, our old book is now discounted and you can buy it right here!

What worries us is when other states start emulating some of California’s models. 10 years ago more than two thirds of all big studio films were filmed in California. Now less than half are. This is because other states have started offering tax incentives and perks for studios to film in their state. The argument is that having a film crew in the area and gaining the publicity will be good for the economy in the long term. Unfortunately hard numbers are difficult to come by, but we’d be surprised to learn that any state has made a profit for this. Having the film crew in the area creates, at best, temp jobs. The publicity is minimal and a crapshoot (New Zealand was helped by Lord of the Rings, Detroit has hardly been helped by the 137 movies filmed there in recent years).

In the meantime, however, California is still messing up its own recovery. It has ranked 50th out of 50 states in terms of business climate. An example of this is Ms. Dashtaki, a Zoroastrian immigrant from Iran who came to the state in 1984. She is also an entrepreneur, making yogurt in the traditional “old country” way. As The Economist reports, she then received a letter from the “milk and dairy food safety branch” of the California Department of Food and Agriculture (CDFA) and was told to shut her business down. What ensued was a path down legalese to follow laws regulating yogurt that hadn’t been changed since 1947. For example, her milk needs to be pasteurized before she can use it, but she uses pasteurized milk, so was hoping for a waiver, but was told that wasn’t possible. So she was told to buy: “a “pasteuriser with a recorder”, a “culture tank”, and a “filler”, which apparently also required a “mechanical capper” to screw lids on jars.”. She pointed out this would change the taste of the yogurt substantially, but it didn’t matter. What did matter, however, was that the code doesn’t allow milk to be pasteurized a second time, so now she was at an impasse. Like any decent entrepreneur, she is contemplating leaving the state. We can’t blame her.

These two policies (along with our other article on Direct Democracy- link above) illustrate some of the main problems with California. But, lest this seem like a California-bashing session, we should mention what they have gotten right. As a response to gerrymandering, California has decided to redraw its election boundaries. While many might be cynical about how this can be done, we are happy to see that it has been accomplished by an independent commission who has access to no political information. Other initiatives, such as the Think Long Committee and a council of independent experts to review all initiatives, are also steps in the right direction, although the sharp partisan jabs created by direct democracy and gerrymandering are the main aspects that need to be fixed. Gerrymandering is a consequence of the “winner takes all” form of politics in the US (as opposed to proportional representation), and has existed since Elbridge Gerry gave it its name in the late 1700′s. If California’s initiatives put an end to this, and are thus emulated throughout the country, it could be momentous indeed.

And if you buy books via our store, you pay the same price as always but we receive a commission from Amazon, so you can help us with our expenses (like Becky’s caviar dinners and private helicopter).

We have also written book reviews for many of these books, which you can find here:

Macrowikinomics book review.
The Upside of Irrationality book review.
The Rational Optimist book review.
The Checklist Manifesto and Work the System book reviews.
SuperFreakonomics book review.
Nudge book review.

If you have any other suggestions for books that make you smarter, feel free to let us know in the comments or by sending us an email!