Real Mechanical Rates Have Declined with Inflation Increases Due to #FrozenMechanicals

If you follow economics, you probably have heard the expressions “real wages” or “nominal wages” or “real” versus “nominal” wages. This isn’t a Cartesian metaphysical discussion–it’s about the effect of inflation on what they tell you you’re getting paid. Nowhere is this truer than with the statutory mechanical royalty rate. The rate will inevitably decline over time due to the rot and decay of inflation. Inflation is like having a cavity in your tooth that you don’t fix. It doesn’t go away. It may not hurt yet but it’s going to.

The effects of inflation are hardly a secret. Because of the effect of inflation on interest rates set by the Federal Reserve (who is charged with keeping inflation under control), vast numbers of people around the world keep watch on U.S. inflation rates as well as inflation rates in other countries.

US Inflation Rate Over Past 5 Years

For example, an hourly worker might be paid $12 an hour by her employer. That’s her “nominal wage” or “money wage.” But the issue is not what the worker is told they are getting paid, it’s what the worker can buy with her wages. What her nominal wage buys her is her “real wage” or her nominal wage adjusted by inflation during the same time period. Real wages are always less than nominal wages. This is why workers commonly get annual cost of living adjustments to nominal wages that increase their nominal wages based on inflation in addition to nominal performance-based increases. The same is true of entitlement payments like Social Security which just announced its biggest inflation adjustment in many years.

This is particularly important when understanding nominal and real statutory mechanical rates set by the government’s Copyright Royalty Board every five years. With a nominal wage (as opposed to a government rate freeze like a price control), there are a number of different countermeasures you can take in response to a wage freeze and take quickly. You can always try to negotiate a higher hourly or annual wage if you are falling short of inflation. You can also try to quit and find another job that pays more money. Perhaps even get an annual raise built into your salary.

However, with the statutory mechanical royalty, there is no escape. Songwriters are at the mercy of both the government (in the form of the Copyright Royalty Board) and the people who are supposed to be negotiating for them who seem to have decided that millions of songwriters don’t need a cost of living adjustment. Without “indexing” the statutory mechanical to inflation (meaning a CRB ruling requiring automatic cost of living increases based on increases of inflation), songwriters’ buying power actually decreases over time. That’s the difference between the nominal mechanical royalty and the real rate, i.e., the inflation adjusted rate.

Nowhere is this more apparent than with the “frozen mechanical” that you’ve probably heard a lot about if you’re a regular reader. It’s called “frozen” because the rate for physical and vinyl was set by the CRB in 2006 and has not been raised since–apparently at the request or acquiescence of those negotiating in the songwriters’ interest. Think about that–remember what happened in 2008 (just a couple years after the rate was frozen)? The Great Recession aka The Big Short.

It may not be obvious to you but most of the laws in the US are not passed in Congress and they are not signed by the President. The overwhelming majority of these laws are created by administrative agencies, often located in the Executive Branch, but not always. When it comes to songwriters there is a federal agency that has almost total control over certain aspects of your life.

That agency is the Copyright Royalty Board which has three “judges” that are appointed by the Librarian of Congress (therefore are in the Legislative Branch of government along with Congress). While these members of the Copyright Royalty Board are styled “judges” they are not “all purpose” judges appointed by the President and confirmed by the Senate (under Article III of the Constitution for those reading along at home). (This CRB appointment issue is a matter of some debate but we will talk about the appointment issue some other time (attention Justice Kavanaugh).)

Whether you know it or not or like it or not you have delegated your personal agency to the CRB and you have also delegated your agency to the people who can afford to appear before the CRB. This is the classic case of the merger of the little intellectual elite in a far-distant capitol who think they can plan your life better than you can. If you have no idea about the CRB, there’s an easy answer–you’re very unlikely to ever wander into a CRB hearing because the hearings take place in the Library of Congress which is not someplace that songwriters typically are found. Even so, you have delegated your authority whether you know it or not and whether you like it or not to certain representatives of the music publishing community who act on your behalf and probably without your direct authorization. There’s plenty of blame to go around. To paraphrase Lord Byron, if you want a friend in Washington get a dog. Preferably a big one with teeth.

Here’s an example. According to government data, 9.1¢ in 2006 is worth approximately 13¢ today, or approximately a 33% inflation rate. That means that the frozen 9.1¢ rate in 2006 has the buying power of approximately 6¢ in 2021. In other words, the real mechanical rate has actually declined although the nominal rate has stayed the same. Why? Because like King Canute commanding the ocean, the nominal rate was not increased to at least stay even with inflation and inflation rotted it from the inside out.

So you can see that when you’re considering the mechanical rate that is set every five years by Copyright Royalty Board, the rate that matters is the real rate. However, the CRB only set a nominal rate for songwriters in 2006 even though they could have increased that nominal rate based on increases in the consumer price index. They could also have increased the rate in Phonorecords II or Phonorecords III but did not.

And now 15 years later, the frozen mechanicals crisis has been engaged by a revolt of the songwriters in Phonorecords IV, currently before the CRB. The struggle is all about real vs. nominal mechanical rates.

Does the Metaverse Have Rights? Permissionless Innovation Bias and Artificial Intelligence

As Susan Crawford told us in 2010:

I was brought up and trained in the Internet Age by people who really believed that nation states were on the verge of crumbling…and we could geek around it.  We could avoid it.  These people [and their nation states] were irrelevant.

Ms. Crawford had a key tech role in the Obama Administration and is now a law professor. She crystalized the wistful disappointment of technocrats when the Internet is confronted with generational expectations of non-technocrats (i.e., you and me). The disappointment that ownership means something, privacy means something and that permission defines a self-identity boundary that is not something to “geek around” in a quest for “permissionless innovation.”

Seeking permission recognizes humanity. Failing to do so takes these rights away from the humans and gives them to the people who own the machines–at least until the arrival of general artificial intelligence which may find us working for the machines.

These core concepts of civil society are not “irrelevant”. They define humanity. What assurance do we have that empowered AI machines won’t capture these rights?

All these concepts are at issue in the “metaverse” plan announced by Mark Zuckerberg, who has a supermajority of Facebook voting shares and has decided to devote an initial investment of $10 billion (that we know of) to expanding the metaverse. Given the addictive properties of social media and the scoring potential of social credit it is increasingly important that we acknowledge that the AI behind the metaverse (and soon almost everything else) is itself a hyper efficient implementation of the biases of those who program that AI.

AI bias and the ethics of AI are all the rage. Harvard Business Review tells us that “AI can help identify and reduce the impact of human biases, but it can also make the problem worse by baking in and deploying biases at scale in sensitive application areas.” Cathy O’Neill’s 2016 book Weapons of Math Destruction is a deep dive into how databases discriminate and exhibit the biases of those who create them.

We can all agree that insurance redlining, gender stereotyping and comparable social biases need to be dealt with. But concerns about bias don’t end there. An even deeper dive needs to be done into the more abstract biases required to geek around the nation state and fundamental human rights corrupted by the “permissionless innovation” bias that is built into major platforms like Facebook and from which its employees and kingpin enjoy unparalleled riches.

That bias will be incorporated into the Zuckerberg version of the metaverse and the AI that will power it.

Here’s an example. We know that Facebook’s architecture never contemplated a music or movie licensing process. Zuckerberg built it that way on purpose–the architecture reflected his bias against respecting copyright, user data and really any private property rights not his own. Not only does Zuckerberg take copyright and data for his own purposes, he has convinced billions of people to create free content for him and then to pay him to advertise that content to Facebook users and elsewhere. He takes great care to be sure that there is extraordinarily complex programming to maximize his profit from selling other people’s property, but he refuses to do the same when it comes to paying the people who create the content, and by extension the data he then repackages and sells.

He does this for a reason–he was allowed to get away with it. The music and movie industries failed to stop him and let him get away with it year after year until he finally agreed to make a token payment to a handful of large companies. That cash arrives with no really accurate reporting because reporting would require reversing the bias against licensing and reporting that was built into the Facebook systems to begin with.

A bias that is almost certainly going to be extended into the Facebook metaverse.

The metaverse is likely going to be a place where everything is for sale and product placements abound. The level of data collection on individuals will likely increase exponentially. Consider this Techcrunch description of “Project Cambria” the Metaverse replacement for the standard VR headset:

Cambria will include capabilities that currently aren’t possible on other VR headsets. New sensors in the device will allow your virtual avatar to maintain eye contact and reflect your facial expressions. The company says that’s something that will allow people you’re interacting with virtually to get a better sense of how you’re feeling. Another focus of the headset will be mixed-reality experiences. With the help of new sensors and reconstruction algorithms, Facebook claims Cambria will have the capability to represent objects in the physical world with a sense of depth and perspective.

If past is prologue, the Metaverse will exhibit an even greater disregard for human rights and the laws that protect us than Facebook. That anti-human bias will be baked into the architecture and the AI that supports it. The machines don’t look kindly on those pesky humans and all their petty little rights that stand in the way of the AI getting what it wants.

If you don’t think that’s true, try reading the terms of service for these platforms. Or considering why the technocrats are so interested in safe harbors where their machines can run free of liability for collateral damage. The terms of service should make clear that AI has greater rights than you. We are way beyond pronouns now.

If the only concern of AI ethics is protection against stereotypes or insurance redlining (a version of the social credit score), we will be missing huge fundamental parts of the bias problem. Should we be content if AI is allowing its owner (for so long as it has an owner) to otherwise rob you blind by taking your property or selling your data while using the right pronoun as it geeks around the nation state?

Please take our Songwriter MLC Awareness Survey

Please take a few minutes (4 or so) to help us understand how the Mechanical Licensing Collective and the Copyright Office is doing getting the word out about signing up with the MLC and getting paid royalties (including your share of the $424 million black box/unmatched payment that has been sitting at MLC for months).

Your response are anonymous and we’ll post the results when we get a threshold number of responses. We’d really appreciate your help!

To take the survey on Survey Monkey, click here.