Data paradox, Part 2: who pays for free data?
In a previous post, I laid out three data paradoxes:
- Information is more broadly valuable when it is freely available.
- Useful data is costly to assemble.
- There is no viable business model for public data dissemination.
“Doctor, if I stop reading blogs, will I live?”
“No.”
Given these harsh realities, how do we create useful data? Who pays for something that is valuable only when free?
Let’s slightly modify the question: who benefits from data? Cui bono?
“Who’s this quee guy, Bono?”
Better data enables capital sources to make better decisions. As a result, market velocity increases, as does overall market volume. Better data thus creates a better housing finance ecosystem. Thus its beneficiaries are:
- Investors.
- Consumers.
- Professionals who are paid per transaction and thus benefit from increased volume.
- Vendors of a product perceived risky who want to demonstrate its safety (Lasik eye surgery, anyone?)
- Policymakers who design programs or provide funding for them.
Among these groups, who has the leverage to enforce data quality?
“Anybody here know the answer?”
Assuring quality data is thus, first and foremost, a logical obligation of government.
Government is one of data’s biggest beneficiaries: aside from the policy outcomes, taxes rise when market activity increases. So unique among stakeholder groups in a position to influence data quality, government captures an economic return, even if the return is phase-delayed and indirect.
Once government realizes better data is in the national interest, it has numerous ways to compel data sources to deliver quality information:
1. Collect it directly. Among the world’s oldest examples is the Constitution’s requirement of a decennial census, the first such example in
2. Require that all licensed practitioners report information. Most fields of endeavor require some form of government imprimatur or licensing to operate. (In securities, for instance, one must either register with the SEC — if one wants to sell to the general public — or be exempt from registration, but even in the latter case one has state filing requirements.) Those who wish access to government-regulated and government-insured markets can be compelled, as a condition of entry, to disclose required information.
That principle can be extended two further administrative steps, by making participants (1) warrant the accuracy and completeness of data, or (2) deliver the information in a government-prescribed format. (HUD, for instance, now requires financial statements to be electronically submitted.)
Once information is reported, government has two choices:
- Consolidate and publish summaries.
- Make raw data accessible and let markets do the work. For instance, if you want to know what’s up with a Section 501(c)(3) non-profit, Guidestar will let you find it.
This last also illustrates another feature of public-private data: Guidestar offers readily accessible data for free, and value-added analysis for a cost.
3. Require a vow of celibacy. In any game, one can divide those on the field into players and referees. It’s a cardinal principle that while one may have a player-coach, one can never have a player-referee.
One of these is a referee: can you tell who?
Government can thus require that every market transaction is accompanied by an impartial assessment by a referee who cannot be a player. Corporate issuers are players; auditors are referees. Under Sarbanes-Oxley, not only can auditors not play, they cannot coach.
The vow of celibacy approach means that, like the eunuch, one may be intimately familiar with the subject at hand but also demonstrably estopped from participating in the field of action.
Unlike Teddy Roosevelt, they cannot be the “man in the arena” … nor do they need powdered rhino horn.
Finally, there is one last, subtler approach that works in mature and complex ecosystems:
4. Threaten to take over reporting unless the industry self-policies. Government can muse that it will impose a direct government intervention … unless an industry effectively governs itself (such as FASB of the AICPA).
This last approach is particularly effective in the immediate aftermath of a real or perceived catastrophe. The affected industry or monopolist is running scared, well aware that direct government regulation, whether maliciously or benignly intended, is likely to be clumsy.
“Ned, I’ve underestimated you. I don’t know why it took me so long. You’re using your incompetence as a weapon.”
“My defense was evolving and you guys got scared.“
For that reason, it’s no coincidence that increased transparency and more rigorous reporting requirements are among the first reforms following catastrophe: it costs nothing, adds value, and is hard for a chastised and chastened scandal-plagued industry to resist. Hence:
- SEC registration followed the 1929 stock market crash.
- FIRREA (pronounced Fie-ree-ah), which imposed state certification of real estate appraisers, followed the S&L crisis.
“But what does it mean, O wise one?”
“O please tell me, O wise one.”
Simply put:
Markets benefit from transparent reliable publicly-available data, but as no private participant has a sustainable economic motivation to create it, government is the sole logical actor to compel reliable public data transparency.
I’ll leave you with a final paradox:
“I’m very happy to report we have identified the blog and cut it out in a successful blog-ectomy.”
If government is the primary driver of good data, who creates reliable trans-national data?
Who creates reliable transparent public data that crosses governmental boundaries?
Where can good international data come from?
“Here we have a clear case of carpal blogger syndrome.”
