Wednesday, April 22, 2015

A Civil Discussion on a Faraway Law by Todd Neva

A Civil Discussion on a Faraway Law
April 23, 2015, by Todd Neva, guest blogger

It was a noble cause, a valiant effort, but it failed.

An Israeli law entitled “Protection of Literature and Authors,” which passed the Knesset in early 2014, establishes an eighteen-month protection period from the date of first publication. The Ministers of Knesset picked winners and losers.

Americans can look at the pros and cons of a faraway law and make a reasoned decision. We might not agree with each other, but we don’t get emotional. We don’t question each other’s motives. There was plenty of that in Israel.

The proponents of the law were called ignorant and stupid to think that a law of the Knesset could change the laws of economics. The law would increase prices, which will hurt sales. Established authors would do just fine (and, in fact, supported the law), but new authors would be shut out of the market. People will read fewer books.

The opponents of the law were called immoral. Well, not directly: Netanyahu said, “As the People of the Book, we are committed to maintaining the income of the authors who create our cultural treasures.” God was on the side of passing the law, because literature is valuable and should not be treated as a commodity. Literature is too important to subject to free market conditions. Authors deserve a fair wage, and higher prices will attract more authors. Culture will flourish.

The law was designed to boost author income and break up a duopoly between a large, established chain and a newer, discount chain. Those two giants controlled 80% of the market, and they deeply discounted books with such deals as 4 for 100 shekels ($25).

During the protection period, publishers cannot change the recommended price marked on books. Retailers may not discount books — higher prices will result in more profits for the authors. Authors get a minimum royalty of 8% of the retail price for the first 6,000 copies sold and 10% for each copy thereafter. Over a seven-year period, the author will be paid no less than 16% of the actual payment received by the publisher for the books sold.

Both proponents of fixed book pricing (FBP) and free-market advocates wish to promote “bibliodiversity” and to cross-subsidize new authors. How is that common goal best accomplished? Fortunately, we can assess FBP laws in other countries and over the last ninety years. The first FBP law was passed in 1924, and no fewer than eleven countries currently have FBP laws.

France implemented an FBP in 1981 to protect independent booksellers. The law’s credited with preserving 2,500 small stores, representing 22% of sales.

The UK, which abolished its FBP law in 1996, saw one third of independent bookstores close by 2005, and the remaining stores represent only 4% of sales. However, since revoking the law, the book market in the UK has grown significantly and is more vibrant than in France. Finland also saw significant growth in its literary market after it abolished its law 1971.

FBP laws have unintended consequences: Mexico passed a law in 2008 to freeze book prices and save retailers from closing, but without adequate enforcement or penalties for noncompliance, law-abiding retailers closed anyhow.

Countries with FBP laws publish fewer new titles. “A comparison of 14 European Union countries reveals that those with price-setting laws release significantly fewer book titles per 1000 citizens than do countries with… unregulated literary markets,” reported Michael Jaffe in a blog published by The Times of Israel.

Who were the winners and losers a year after the Knesset passed its FBP law?

Prices have risen. New book sales declined about 50%. Fewer titles are planned for new authors. Overall book sales are down 20%. Children’s book sales are down 25%. Established authors continue to do fine. The publishing industry is in financial turmoil — they used to complain about small profits for a large volume of books, and they now commiserate over no profits for a small volume of books. The established chains are smarting, and one even suffered so much financially it was sold to investors for a fraction of its pre-FBP value. Independent booksellers, which did not deeply discount to begin with and mostly catered to niche markets, are holding their own.

The law’s proponents, which are now much fewer, say results are mixed, it will take more time to evaluate, and the law might need a few tweaks. Once enough time has passed, the Israeli book market will reach equilibrium. People will forget how many books they used to read. They will forget that Israeli publishers used to publish as many new titles per year as publishers in the United States.

FBP laws create winners and losers. They help small, independent booksellers. Established authors benefit, too. However, they suppress sales and profitability in the market, and publishers take fewer risks on new authors, because they have fewer marketing levers to promote books. Consumers pay higher prices and read fewer books.

Price-fixing always creates winners and losers. In the United States, antitrust laws prohibit businesses from fixing prices, but then other laws fix prices or set certain market conditions. Our government picks winners and losers when it intervenes, rather than leaving that job to the cruel, invisible hand of the free market.

Minimum wage is an example of price-fixing. Like fixed book pricing, minimum wage laws prevent workers from selling their labor for less than $7.25 per hour, or more in some states and cities. And like FBP, minimum wage laws create winners and losers. Established authors benefit = skilled workers benefit. New authors are shut out of the market = low skilled workers are shut out of the market. Overall book revenue decreases = overall employment decreases. As Americans assess whether minimum wage should be increased, it would be beneficial to have a discussion on the winners and losers without questioning each other’s motives or framing it as a moral argument.

Todd Neva has a Bachelor of Science, Business, and Master of Business Administration from the Carlson School of Management at the University of Minnesota. He worked for sixteen years in the fields of marketing research and finance until becoming disabled. He co-authored Heavy: Finding Meaning after a Terminal Disease, which was discounted by Amazon for a year after publication in January 2014. He blogs on the topics of suffering, grief, and disability at nevastory.com, and he typically avoids comment on politics or economics so he can focus on his message of a higher calling.

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