Ev Ehrlich's Everyday Economics

21Mar/126

Art Brodsky, “Cartels,” Ants and Aphids

Yesterday’s Huffington Post had a column by Art Brodsky, the communications director of the interest group Public Knowledge.   The gist of it, if I may be trusted to represent it fairly, was that the Federal Communications Commission has been remiss in not taking action in a series of cases in which Comcast has acted abusively, and that if they can’t get their act together to enforce either common sense, past agreement, or the law, then how can they be trusted to take effective action against Verizon, Comcast, and other cable companies as they try to create a “telecom cartel?”

The issue to which he’s referring is a cross-marketing agreement between Verizon and a group of cable companies that comprises - Comcast, Cox, and others, and that I’ve discussed here.   I’ll return to that in a moment.

Suffice it to say that I think Brodsky’s criticism is not just wrong, but a bad kind of wrong – out of touch with what’s really going on in the broadband sector.  And one way to begin showing that confusion is by noting that Brodsky, while writing what is probably, to him, a standard lambasting of the “telecom cartel,” inadvertently owns up to two ideas that he probably wouldn’t support if he were to be confronted directly
with them.

The first is that wireline and wireless compete.  Because, if they do, then much of the concern about a cable-telco “duopoly” to the home  disappears.  If the FCC were only to recognize what anyone who’s “cut the cord” has recognized, they’d find themselves squarely in the new millennium.

And the second is that anti-trust law is an effective substitute for the kinds of regulation he thinks the FCC alone can accomplish.  Because, if it is, then there’s reason to question why one sector of the economy ought to be subject to different standards of competition than any other –  particularly if, given that wireline and wireless compete, it’s much more competitive than we might have thought.

Let me start with the second of the propositions – that instead of having the FCC run its own court, we should let the anti-trust laws govern the
regulation of anti-competitive behavior.

Brodsky makes note of the way Comcast arranges its channel line-up, specifically, sending Bloomberg News to a remote outpost while
favoring CNBC, a station it owns.  Here’s the story, from Brodsky:

Bloomberg …(is not in)…the channel lineups with the rest of the news channels, and particularly with CNBC, the business channel
that's owned by NBCU, which is owned by Comcast… In Washington, D.C., CNBC is channel 39, MSNBC is 38, CNN is 36. Bloomberg is 103. In Philadelphia, CNBC is at channel 47, Bloomberg is 103. Many other Comcast systems have similar channel lineups.

I have Verizon FiOs at home, so I went over and checked.  Lo! and behold, CNN, CNBC, MSNBC, and Bloomberg are all contiguous on the FiOS
channel schedule, in contrast to Comcast.   So Brodsky has it right.

Brodsky, however, wants the FCC to force Comcast to change its schedule.  Here’s a better idea.  Why not let Bloomberg sue Comcast under the
anti-trust laws?  In fact, this seems like an easy anti-trust case to adjudicate.  Are Bloomberg’s ratings, or the path of Bloomberg’s ratings, different when they’re not  located near these other channels?  In the many places where there are side-by-side Comcast and other systems – fiber, telecom, satellite – does placement create a meaningful difference?  If it does, then not only should Bloomberg be granted relief, but it
would have the prospect of the monetary damages that anti-trust violators and colluders have to pay, much as Major League Baseball paid its players $270 million when it colluded against them in the 1980s.  All it has to do is show harm.

I like that solution, and Brodsky should, too.  It means that telecoms generally, and television specifically, should be treated using the same norms of competition as are all other sectors of the economy – shouldn’t the same concepts that govern where a channel is placed on a cable
system apply to whether all the laundry detergents are placed together on a supermarket aisle save for one brand that’s put on a lower shelf in the kosher food section?  I think the telecoms sector is much more competitive than Brodsky does, but no one would argue that there will never be the prospect of uncompetitive conduct in any sector.  That’s why we have anti-trust law.  Come to court, show us you’ve been hurt by predatory or collusive behavior, and we’ll fix it.  In fact, we’ll fix it in a way that deepens and clarifies our standards for competition throughout the  economy.  What makes the FCC a better judge of that than the courts to which we’ve entrusted that function?

And now, let’s go back to the first proposition that Brodsky embraces without (to all appearances) realizing it – that wireline and wireless compete.

I’ve got a Verizon wireless antenna that finds LTE (4G) signal if it can and, if not, kicks back to 3G.  It’s on 4G now, so I’m going to run a speed test on it.  There – 9.05 Meg download and 1.41 upload.   I also have a cabin in West Virginia that gets Frontier Communications version of broadband, and it tests out at about 8 Meg download and 1 Meg upload.  And there are millions of households with connections that are no better, so I say they compete, in that they do the exact same thing, although wireless lets me carry the laptop to a better chair.

And in fact, Brodsky agrees – why else would he worry that a cross-marketing agreement  etween Verizon wireless and cable companies amounts to “cartelization?”  Cartel members have to sell the same product or else they aren’t cartels – look at how the bicycle/banana cream pie cartel failed to restrict output in both industries.  So Public Knowedge now admists that wireless and wireleline cvompete.  Good.

Now, as I’ve argued before,, this cross-marketing agreement isn’t an anti-competitive step.  In the broadband world, these arrangements come and go as alliances are formed and reformed.  The same week as they announced this cross-marketing agreement, Verizon also announced a partnership with Redbox that will create an Internet-based streaming service to take on the cable companies’ bread-and-butter – pay per view.
How does that square with the idea of a cartel?

What I see in the Verizon-cable deal is that the cable companies had spectrum and Verizon wanted it.   But the cable companies said, “If we sell you our unused spectrum, then we can’t offer our customers a wireless service.  So let us offer them yours,” and Verizon agreed.  I mean, I don’t know that, but it seems like a pretty reasonable scenario.  Not much of a cartel, particularly compared to such famous cartels as OPEC, the Mexican guys on Breaking Bad, or the National Recovery Administration.
If someone doesn’t like that, tell the FCC to make more spectrum available.

But what’s even more disturbing about this cartel thing is that it ignores reality.  Quick – what’s happening in the world of broadband services today?  How’s the Comcast or Verizon or AT&T plan for world domination coming along?  Have the black helicopters landed yet?

No, they haven’t, and if they do, they’re going to say…Apple.

Brodsky makes this remark in his Jeremiad about Comcast’s market power:

Comcast's power and influence belies its rankings of #66 on the Fortune 500 and #101 on the Financial Times Global 500.

Leaving aside whether being one of the world’s 100 largest companies can be “belied,” how about being Number One?  If you’re worried about power, how does one hundred billion in free cash sound?

I’m not wailing about Apple.  More than any other once-largest corporation in the world – Exxon, IBM, Gneral Motors, and the like – Apple got there by figuring out what people ould want if it were offered to them.  My wife has an iPad and loves it.  I don’t, but am sorely tempted now that the ew model gets LTE (again, making it faster than many landlines) and has a ouped up screen, which means it will stream high-def baseball games on a aconic summer night, particularly now that the souped-up Nats look ready to hallenge the aging Phils.  Apple sold thee million of those boys in a few days – the last time a thing spread across he universe that quickly, it was the universe.

But the point is that Apple is slurping up the value created y the networks that the telecom “cartel” companies.  The better the signal the carriers create, he more value Apple, Google, Facebook, Amazon, and the rest extract.  Here’s a strong, but valid analogy.  There are some species of ants that gather aphid eggs, hatch them, attach the aphids to the roots of plants, and then “milk” te aphids for the nutrients they absorb from the roots, a process known as “mutualism.”   In some ways, Apple has “farmed” and “milked” the signal carriers in the same fashion.  The better the signal Brodsky’s “cartel” companies offered, the more powerful the devices that Apple, Amazon, and others have offered, and the more powerful the devices, the more consumers demand of the signal companies.  In response, the signal companies have continually innovated and improved their speed and reliability, and are restrained from price increases, lest they incur the wrath of not only Apple’s customers, but Apple itself.  Or, as the chairman of Unisys once said to me when I reported to him, “two companies make money every time we sell a computer.  Unfortunately, they’re Intel and Microsoft.”

I’ve talked about this “cage match” competition before.  It’s what’s going on in the world around us.  Apple and other device makers have
colonized the signal producers – video content now clogs the broadband Internet under the FCC’s (and Brodksy’s) “one size fits all” net-neutral policies – Amazon is now a player in cloud computing and Google in device manufacture.  The lines between these “stages” or “layers” of the broadband experience are being blurred if not eradicated.  Meanwhile, Apple had a hundred billion in free cash, Google is the sixth largest company in America by market capitalization, larger than Verizon and Comcast together.

So is the problem that a telecom “cartel” is restricting our access to broadband (much as OPEC throttles the supply of oil) and gouging us
when we pay for it?  Is the cartel’s most heinous crime moving Bloomberg to a spot on the dial near the field hockey channel?  Surely ambition must be made of sterner stuff.

Brodsky and his fellow critics should start paying to attention to the ants, and leave the aphids alone.

27Feb/129

Senator Kohl, Competition, and Public Knowledge

Last week, I posted a note about forthcoming hearings under the auspices of the Senator Herb Kohl’s Anti-Trust Subcommittee regarding Verizon wireless’s new cross-marketing deal with a group of cable companies, in which the two will cross-market their services while Verizon buys unused spectrum from the cable guys.

First, I made a mistake in that post.  I said the hearings would take place on February 23rd.  I misposted – they’re going to take place after February 23rd, a period of time that includes time immemorial, but may prove to be soon.

Aside from that correction, I stand by last week’s remarks, in particular the idea that these hearings will be important because they’ll tell us whether the Senate can spot competition when it sees it.  Specifically:

 “…many observers see broadband space as a series of ”stovepipe” or staccato markets – firms specialize and compete in providing signal, or in manufacturing devices or their operating systems, or in social media or other applications, and their competition is narrowly limited to that segment.”

The problem, in part, is that advocates look at the broadband sector and they see telephones, particularly since they both involve communicating and, more importantly, are subject to the dictates of the FCC.  And the old Ma Bell system and the broadband Internet are easy to confuse, as one delivered a monochromatic, static dial tone and the other is a platform for a competition among a burgeoning number of devices and services that are changing every day life, so if you’re not careful – or observant – you might find yourself  thinking about broadband and the Internet in
“telephone” terms – counting the wires to the home, or presuming that whoever provides signal provides everything that is somehow related to that signal,which is like arguing that the electric company is going to monopolize hair driers and refrigerators.

In an effort to demonstrate these fallacies, John Bergmayer, a senior staff attorney at the advocacy group Public Knowledge, last week editorialized that the FCC and whoever else is listening should nix the Verizon-cable deal, because it would be anti-competitive.    I’d make three points about what Bergmayer has to say.  The first is that his argument is garbled – it switches course almost in mid-sentence – particularly
on whether an Ethernet connection and an LTE connection compete.  The second is that he doesn’t get that the broadband sector, in practice, is more than a series of “stovepipe” or staccato markets…to reuse the quote I excerpted a few paragraphs ago.  And third, and perhaps most  Important, is that what he contemplates, or seems to contemplate, as a solution is to turn broadband into -- you guessed it – the old Ma Bell system; after all, when he looked at broadband, he was seeing Ma Bell and the FCC, right?

Let’s start at the top.  Bergmayer laments the death of “facilities based competition,” meaning there are too few options for getting signal from where it starts to your device (or as they say in agricultural economics, from “moo to you”).  Well, there’s cable, and in some places fiber, and in others DSL conveyed by the old phone lines, although everyone understands it’s not as good as the first two (as Bergmayer says, “the physics
doesn’t allow it.”  And then, of course, there’s wireless, which is flooding your home with evermore powerful signal, as do “4G’ technologies such as LTE, which are not as fast as a cable or fiber hook-up, but are now as fast or faster than the DSL that Bergmayer regards as inadequate.  (And can I count the prospect of being able to move from WiFi island to WiFi island as these appear with growing frequency?  Probably not in Bertgmayer's book.)

Not so fast.  Because wireless should be disregarded when we assess how you get signal, says Bergmayer.  Why?  For one, it’s not fast enough – he says, although it’s obviously gaining rapidly on wireline options and for large parts of the population, works perfectly well.  In fact, advocates always disparage mobile technologies until they have to admit they got it wrong – check out this piece from 2004 when the Consumer
Federation said that mobile hasn’t eroded “Bell market shares” and VOIP is “nascent at best” before the first paragraph ends.

But the more damning evidence is that, as Bergmayer says:

If mobile wireless was a substitute for wired we'd see large numbers of people dropping one for the other. But people who can afford it tend to have both. It's fair to note that wireless has substituted for wired telephones for millions of people, but this is a fairly low-bandwidth application--there are no hopes in the near future for a mobile broadband wireless service that affordably matches all of  he performance characteristics of cable or fiber and can sustain the same sort
of use.

 

OK, let’s parse that.  Sure, we now all agree that mobile and landline telephony compete --  but as wireless via 4G becomes more powerful, should we expect this competition to spread?  No, and to prove it, “people who can afford it tend to have both.”  Yes, and people who can afford it have two cars, even two houses, hell, I have a friend with two tuxedos – I mean, isn’t that the height of something, two tuxedos? – but the cars and the houses and the tuxedos compete.   Having both tells us that 1) they’re relatively cheap, and 2) they allow the user to mix and match the services
she’s consuming.  So are wireline and wireless the “never the twain shall meet” affair that Bergmayer posits, or are they evolving competitors whose competition is continually moving up the ladder of more highly-valued tasks?

In fact, isn’t Bergmayer’s entire essay self-contradictory in this regard?  If wireline and wireless don’t compete, as he asserts, then who gives a rodent’s behind whether Verizon wireless and a bunch of cable companies are cross-selling services?  In Bergmayer’s world, that’s like going to the tailor and being able to get your hair cut or your  oil changed.  I saluted Senator Kohl – a great Senator and a great Brewers fan --   he owns a piece of the Club as well as the NBA Bucks – last week for being able to recognize what Bergmayer doesn’t – that the only reason to think about the Verizon-cable deal in the first place is because they compete.

But more fundamental is Bergmayer’s refusal to leave the Ma bell world and see the broadband market as it is – a “cage match” in which
connectivity companies (both wired and wireless), device manufacturers, operating system developers, and application and service providers continually compete and partner with each other, forming and reforming relationships to capture the bulk of the value created by the integrated broadband experience – the one that brings you cloud-based applications over wireless signals to devices that did not exist in the lifetime of a child not yet in school.  The world left Bergmayer’s view behind the day the iPhone was introduced and the world has never looked back.  Electricity was the platform that gave rise to hair driers and refrigerators.  But signal is not only the platform on which devices and applications sit, but the signal itself competes with those devices and applications for the consumer’s allegiance.  Do you have an iPhone so that you can use AT&T or Frontier or Comcast – or do you have Cox or Verizon or Time Warner in order to have marvelous devices and their applications?  When it comes to wagging, which is the tail and which is the dog?  Let me try it this way – who’s more likely to tell the other to piss off?  Any one signal provider to any one smart phone maker?  Or the other way around?  That is “cage match competition” – a struggle in which Verizon and AT&T, Comcast and Cox, Dish and DirecTV, Apple and Microsoft, Google and Facebook, Amazon and Twitter all compete to be the platform on which the others rest.  And the result is incredible innovation, new products and services, mutual price discipline, and a burgeoning adoption rate.  If this sector wasn’t competing, what would be better if it was?

And that’s the last point – so what?  What if Bergmayer’s right?  What do we do then?  I have great sympathy for this question.  My wife and I are building a retirement place in West Virginia and we have hillbilly broadband as provided by Frontier Communications, which is the official signal provider in zombie movies and coma wards.  Junkies get the needle to move faster than these guys.  But at least they charge what other providers
of comparable service charge because 1) there are anti-trust laws that prohibit predatory behavior on poor but deserving homeowners in remote locations and, 2) there’s always mobile.  Hell, I’d love a grown-up, big-boy, long-pants, high-speed connection, but I’m in a very un-dense location that doesn’t justify much more than what I get, and it’s hard to see why policy ought to subsidize me beyond that.  But Bergmayer lets us know where he’d like to go:

Broadband unbundling or open access rules like those common today overseas and the system that allowed thousands of competitive dial-up ISPs the flourish in the 1990s are examples of these sorts of policies. Rules about roaming would be another example.

Wow.  “Unbundling and open access rules” mean that a company builds connection infrastructure, and then has to share that infrastructure with its competitors at prices determined in a regulatory hearing.  It’s The Little Red Hen turned on its head – in which the Fox and Turkey Lurkey and the other lieabouts not only eat the bread the Hen bakes, but probably the Hen herself.  And roaming rules are a variant of that – as I’ve discussed earlier, smaller and rural wireless phone companies want the FCC to let them roam and send text over the networks of their larger
competitors.  For example, here’s a quote from a Sprint executive explaining why the FCC should force Verizon and AT&T to let Sprint use their networks so Sprint’s customers could roam them:

The expectation of consumers is their smart phone is going to work wherever they go. Data is not just an abstraction for onsumers now. They use it every day and rely on it more and more instead of voice.”

Meaning, in English, Sprint didn’t mill the bread or bake the bread, but now that these other companies have, they’d like a piece, thank you, and want to compete against these other companies using the other companies’ investments.  If Bergmayer knew the history of the industry, he’d  now that it was the presence of these regulatory restrictions that held the U.S. back from developing cutting-edge infrastructure.  In the 1990s, cable was not subject to these conditions and telcos were, so you got a lot of cable investment but little telco investment.  In 2003, the courts threw this business out, and the “telcos” started investing tens of billions in fiber systems.   Now Bergmayer wants to bring that regime back – what do you think will happen?  Who’s going to invest when your investment can be used as a hostage against you?  Back in the Ma Bell era, companies’
investments were guaranteed through regulation, so you could argue that this was what they signed up for.  But today the companies are betting tens of billions of their own dollars without guarantees – should we treat them as “public utilities” nonetheless?

Moreover, Bergmayer’s nostalgia for “thousands of competitive dial-up ISPs” suggests amnesia.  Raise your hand if yuou want to get rid of \the connection you have now and get Covad and Earthlink back?  Who cares that there were thousands of them?  They all did the same thing –
nothing.  They applied a technology they didn’t develop or improve, they made little in the way of investments, and the only reason they existed was because the FCC adopted the policies Bergmayer favors – they all had the right to force the phone company to sell them access to the phone companies’ infrastructure at a regulated price, and they lived like the barnacles who attach themselves to whales for their sustenance.  And once innovation took place elsewhere, Bergmayer’s paragons disappeared.  And that’s where Bergmayer’s ideas lead.

So the Kohl hearings really are important.  Are they going to embrace this view of the world?  Or are they going to lead the government towards a new understanding  of broadband competition and an agenda that works – broadband infrastructure expansion and adoption (particularly in unserved neighborhoods and such important sectors as education and health), eliminating obstacles to the system (like the mis-allocation of spectrum in the hands of broadcasters), guaranteeing users’ privacy and security, and allowing the market structure of this chain of industries to reveal itself through competition, as opposed to merging fully formed from the brow of advocates.

17Feb/129

Senator Kohl’s Hearing

Everybody loves a good Congressional hearing – whether it’s Joseph Welch asking Joe McCarthy if he had no decency, or Sam Irvin explaining the 4th Amendment – that the rain may enter, and the storm may enter, but the King of England cannot enter.

A hearing scheduled for later this month will not be quite so dramatic, but is nonetheless worth noting.  It is a review of a cross-marketing  agreement between Verizon Wireless and cable firms including Comcast, Time Warner Cable, and Bright House, to be held on the 23rd by the Senate Anti-Trust Subcommittee, under Senator Herb Kohl.

The anti-trust subcommittee is charged with investigating he state of competition in the economy.  But to do that job, it needs to know what competition is – which is why this hearing is worthy of our attention.  Because this will give us a chance to find out whether the Congress can recognize competition when it sees it, which brings us back to the broadband industries and the idea of “cage match” competition.

I’ve explained this idea before.     It comes down to this; many observers see broadband space as a series of ”stovepipe” or staccato markets – firms specialize and compete in providing signal, or in manufacturing devices or their operating systems, or in social media or other applications, and their competition is narrowly limited to that segment.

But that’s not how things work.  The broadband space is occupied a wide group  of companies that are competing to be the entity that integrates your broadband experience.  We know the starting points  for these competitors: Verizon and the cable companies bring you a mojo wire to  the home; AT&T, Verizon, Sprint, and others do the same using magic waves; Google, Facebook, and others help you find things or people; Apple makes devices that  let it happen; Amazon sells you stuff; Netflix amasses content.

But those are only their starting points, not a workable  definition of who these companies are, what they want to be, or where they end  up.  In the “cage match,” these starting  points give rise to an endless series of moves in which the players  alternatively cooperate and compete, forming and reforming alliances and  entering each other’s markets in an effort to be the last man standing in the cage.  Thus, Google gives handset device
makers open access to its Android phone system in an effort to team up against  Apple, then suddenly turns on them by buying Motorola’s handset operation and  making it the de facto favorite child  among Android-based mobile devices.  Or  Netflix cuts deals with the major content-producing studios to channel their  wares to consumers, then announces that it’s going to compete with them by producing its own, HBO-like, content.  Or  Amazon becomes a power in cloud.  Or  Apple turns its dominance over your phone into dominance over your living room  with AppleTV – now, just a box, but how long before it’s a flat panel that can  be controlled by your iPhone?  (And if  you haven’t considered it, don’t worry, Google has – today’s Financial Times  notes that Google is beginning a six month test of a device that would stream  content within the home and give Google “a central position in digital home  entertainment.”

And what too many observers miss is that this competition is  as vigorous and as pro-consumer, to the say the least, as is the conventional
view of competition – a sprint between static good producers, whether Coke and Pepsi  or Oreo and Hydrox.  It’s given us the incredible wave of innovation in connectivity, devices, applications, and  services that we all enjoy but all don’t associate with the fact that only competition produces this kind of innovation.  When Apple comes out with a new device, it forces the signal providers to improve their game in order to provide the capacity to make the device work  – consumers want to talk to Seri, and a carrier will be damned if they can’t  provide the signal strength to make it happen.  Alternatively, when the signal providers improve their signal, it allows  devices and applications to improve and to appropriate the value better signal  creates.  And the presence of each limits  the pricing of all the others, as the consumer is really only interested in  what the integrated package of all of these costs; too high a price for mobile  access, for example, means fewer iPhones sold, and backlash from Apple, which  is probably even more effective than backlash from Apple’s individual consumers.

So Senator Kohl’s subcommittee, if it’s going to review the  competitiveness of the broadband sector – or ecosystem, or constellation, or  whatever you want to call it -- has this fundamental conundrum to consider.  If the constellation of broadband industries,  from signal to device to service to content, is not competitive enough, then  how do we explain the burgeoning power, functionality, and outright pleasure we derive from the interaction  of these elements?

This view of competition and its benefits is of direct  relevance to the events that set this forthcoming hearing in motion.  On December 2 last year, Verizon and a group  of cable companies announced an agreement that did two things.    First, it let Verizon buy a bunch of spectrum  that the cable companies weren’t using.  And, second, it created a marketing arrangement in which the cable  companies would resell Verizon wireless services and vice versa.

If the subcommittee is unhappy with the spectrum component  of the deal, it should look to the FCC and spectrum policy.  While there have been a good number of lofty policy statements, we are yet to arrive at a system in which unused spectrum  can be reallocated among users through markets.  As a result, companies are making deals such as this one – or AT&T’s  proposed acquisition of T-Mobile – that are driven in large part by acquiring  the spectrum asset.  It’s unfathomable  that underutilized spectrum is still sitting in the hands of television  broadcasters, for example, when their bread and butter is no longer  over-the-air telecast but carriage on the nation’s cable systems.

But it’s the second part of the Verizon/cable deal that’s attracting the subcommittee’s attention.  Their concern, echoed by advocacy groups, is that a wireless operator  and a cable operator reselling each other’s products is anti-competitive.

Well, first, let’s congratulate the subcommittee for  starting with the assumption that wireline and wireless compete with each other.  That puts them squarely ahead of  the FCC and the advocacy groups, which insist that the two are separate, despite the growth of tablets, Kindles, and other wireless devices and of  “cutting the cord” either through mobile telephony or “over the top” (OTT) television.

But if the subcommittee is worried about collusion – or at  least the absence of competition – between Verizon and the cable companies,  then what do they make of last week’s announcement by Verizon and RedBox, in  which these two companies will create a video streaming service that will  compete with Netflix?    In fact, this new arrangement does far more  than compete  with Netflix – it means that Verizon is lining itself up with OTT  television delivery, which is a frontal assault on not only the cable companies  it’s supposed to be colluding with in the marketing venture, but with Verizon’s  FiOS-based cable delivery system itself.

That’s the point about cage match competition.  Verizon cooperates with the cable group in  one agreement, then gets in its face with the next.  It’s the entire pattern that needs to be  considered, not any one component of it.  Ultimately, it comes down to this – who’s going to enable you
to experience content on broadband devices?  And when I say “content,” I mean entertainment.  Sure, there’s telemedicine, digital  education, the smart grid, digital democracy, but for the average household,  entertainment and amusement are the key.  Television was going to enlighten us about the world around us, too, and  it wasn’t too long before it was belittled as a “vast wasteland.”

Who’s going to bring you a world of entertainment over the  broadband system, both wired and wireless?  Some observers think this comes down to a competition between telcos and  cable, which is like saying that the appliances in your kitchen will all be provided by your local utility, since that’s where the electricity they require  comes from.  The reality is that the competition to bring you a new era  in entertainment and, more generally, content, is a race among contestants with  many different starting positions.  Google and Facebook will help you find it, Amazon wants to sell it to  you, Verizon, AT&T, Comcast, and the other cable companies want to bring it  to you, Apple wants to sell you devices that let you enjoy it, Netflix wants to store and organize it for you.  And don’t forget the people who actually produce the content, whether it’s NBC or MTV or
the NFL – the billions spent building fiber networks or developing brilliant  handheld devices look meager without them. All of these contestants are competing to find the model that lets them  coordinate the consumer’s appetite for entertainment content.  And superimposed over this multidimensional  cage match is the question of whether the medium for this competition will be hard-wired, with its spectacular ability to convey bits, or wireless, with its  highly-valued mobility and rapidly advancing speed.

So you can pick the kind of competition you want.  Coke versus Pepsi got us New Coke, and Oreos  versus Hydrox got us double-crème Oreos.
The cage match is transforming life while generating new products,  growth, and employment (one study this week estimates that  applications built for mobile phones and  other devices, and for Facebook have already created 466,000 jobs since 2007.  One day you may watch Verizon-based  streaming television on a Google device that gets signal from an Amazon  cloud-based server – each company, driven by competition for the consumer’s  allegiance, performing a role completely unassociated with its “starting point.”  So which is the real, successful, form of
competition?  That’s the question the subcommittee ought to answer.

16Jan/125

Romney and “Creative Destruction”

Life is the process of finding out about yourself -- as the Buddhist at the cash register said, “I spend my life managing change.”  But this week’s   new spurt of self-awareness, for me, was shocking and abrupt.  Because this week, I found out that I was more committed to the free market system than Newt Gingrich or Rick Perry.

The dust-up over Romney’s career at Bain Capital is now on the record, and it cannot help but leave you with the impression that Gingrich
is an unprincipled opportunist, Perry a sad, empty suit, and Romney one hell of a leveraged buy-out guy.  Back to Romney in a moment.  More fascinating is the willingness of the first two to say something so witheringly stupid that it risks defining them for the rest of their careers.

Can life really be so sweet, so rich in texture and paradox, that Gingrich actually said:  “Is capitalism really about the ability of a handful of rich people to manipulate the lives of thousands of other people  and walk off with the money?"   The mind reels.   Newt, is Christmas really about Santa coming down the chimney and leaving presents for all the good boys and girls?  Is an apple pie really about a flaky crust filled with apples, cinnamon, and sugar?  It’s only out of respect for you, my reader, that I don’t take twenty of these free shots – I invite you to post your own below.

That’s the very point of capitalism.  The world has resources and the resources have to be organized so we can have material (and hopefully psychological and spiritual) comfort.  The capitalist  system “solves” this problem by defining resources as “capital,” meaning someone is allowed to “own” those resources and decide what to do with them – you can’t define “capitalism” without “ownership” any more than you can define  "orthodontist” without “teeth.”  The system is designed to let a handful of people make decisions that affect thousands – millions! – of peoples’ lives and then walk off the with the reward.  It’s not necessarily a proto-fascists plot, or a scene out of Metropolis – with the right tools of social development (education, respect for human rights, awareness of sustainability, competent regulation), the system can work pretty well, even if it has moments when it seems as scary as Newt described it..    But yes, Newt, that’s capitalism in a nutshell, although the part about “walking off with the money” at the end of the day isn’t guaranteed.  That’s what makes it a horse race.

As for Perry, I get the feeling that he was happy to move off of topics he felt uncomfortable discussing – which agencies get closed down, his state’s record on health insurance, his support for criminalizing homosexual conduct, his relatively pragmatic approach to immigration – and move on to a topic he understood – birds in trees.  Thus, he described Bain and private equity guys in general thusly:  “They're vultures that are sitting out there on the tree limb, waiting for a company to get sick. And then they swoop in, they eat the carcass, they leave with that and they leave the skeleton.”

Let me swoop down from my perch and feast on the carcass of the remark.  Let’s start here: what the hell are these guys talking about?  The fact that work the work of many private equity firms is sometimes unappealing – administering pain and suffering – doesn’t mean that it’s not  socially useful.  Otherwise, we wouldn’t have morticians and sewer workers.  Sometimes private equity firms build great companies, much as Bain did Staples, and sometimes they put a company up on blocks and strip it for parts, as is deplored in new Gingrich campaign ads.  Sure, it’s unattractive close-up, but so are maggots reducing a cadaver to something useful in nature.

When a buy-out firm, or private equity firm, comes in and strips down a company, it’s because the company has by and large failed.   There are two reasons why companies fail, broadly writ.  The first is that they don’t change quickly enough, wither for lack of wit, faintness of heart, or sclerosis of culture.  Look at Kodak, now filing for bankruptcy.  http://www.politico.com/blogs/burns-haberman/2012/01/perry-mitts-company-just-vultures-who-eat-the-carcass-110316.html   Kodak played a central role in inventing digital technology, and now digital technology has now ripped out Kodak’s beating heart and shown it to them.  And the delightful paradox is that, in order to raise enough money to allow the company
to continue in some form, Kodak will sell its patents, the more valuable of which probably relate to digital photography.  They simply hadn’t the wit, or heart, or culture, or presence to conclude that somebody was going to compete successfully with their dry-photography business, so it might as well be them.  Contrast that to, say, Amazon, which invited tis competitors on to its own site, allowing them to offer comparable, used
merchandise, as opposed to letting a rival emerge that did the same thing.  Change or die.  The private equity guys are usually doing what the old management didn’t or couldn’t do, but should have done, before it was too late.

The second (and often related) reason why companies go broke is that they run out of other peoples’ money.   Companies don’t go broke when they run out of money – they go broke when other people stop lending to them (much as it turns out for countries like Greece, too).  There are probably lenders who think “I’d lend to Blobbo Corp if they got rid of a few plants and product lines and cut 10,000 superfluous workers” and so on and so forth, but making that kind of a plan stick is not the bank’s job – the bank wants to lend money and move on, and if it can’t trust the management team in place to do the right stuff, then it’s  not worth the bank’s while.  That’s another role for private equity guys – to provide capital for companies that might justify having that capital placed in them if they made radical and dramatic changes, but are incapable of making them.  They provide both the capital and the change necessary to make the capital worth providing.

It’s unsurprising that Gingrich and Perry would resort to their depictions of private equity -- as a “values problem” or a flock of “vultures” – as both are more interested in the fabulist version of capitalism than the real workings of the beast.  In contrast, Romney obviously knows those
real workings well – Bain was spectacularly successful during his run with it.  In fact, Romney has associated that success with Joseph Schumpeter’s theory of “creative destruction,” not for the first time, which brings us to Schumpeter and the pressing issue of “how the
economy works.”

When I was in graduate school, someone quoted Schumpeter to me as having said, “Only two economists have even understood capitalism – me and Marx, and Marx was wrong.”  Alas, the Internet makes that quote appear apocryphal.  Like Marx, Schumpeter saw capitalism as dangerously unstable, but unlike Marx, who saw a capitalism crashing in an overproduction, Schumpeter saw innovation so pervasive and dramatic that it would create ongoing “gales of creative destruction,” ceaseless innovation and improvement so dramatic that it would be inherently unstable.  (Although Marx thought the proletariat would provide the coup de grace, while Schumpeter, like Velblen, thought the revolutionary class was
the engineer/technocrat/intelligentsia.)

But political dynamics were neither Marx nor Schumpeter’s strength.  Schumpeter’s broader realization, one that I credit Romney with  understanding, is that change and growth are inseparable – that the economy cannot grow unless it changes, giving up old things to do and ways of doing them and replacing them with new and better products and processes.

When I was busy Undersecretarying back in the day, my Chief Economist, Lew Alexander, and I went out to the Census Bureau and discovered an
amazing thing – the Longitudinal Research Database.  The Census people took about 50,000 manufacturing plants and tracked them (using the surveys they regularly produced pertaining to employment, output, investment, and the like) over time.  In contrast to the statistical “snapshots”
of the economy the statistical system produces, it was the first movie of the economy, and it revealed amazing insights into how the economy worked.  One good early summary of that work can be found here.

For example:

  • Even in years in which total employment doesn’t change, it’s reasonable to expect one in five jobs to disappear, and one in five to be created somewhere else;
  • About two-thirds of productivity improvement come from more productive plants and businesses displacing less productive ones – not from “everyone getting better;’
  • Similarly, two-thirds of jobs are lost at places that cut back production by 25 percent or more (or shut down), while two-thirds of jobs are created at start-ups or at places that grow by 25 percent or more.

That’s real “creative destruction” and I think it’s related to the point that Romney (I hope) wants to make – that Bain was involved in that change-and-growth dynamic – it’s “how the economy works.”  The problem is not that Romney is wrong, but that understanding that doesn’t tell us what
to do about it.

Knowing that growth and change are inseparable doesn’t mean that managing the economy is simply a matter of letting it rip – it’s not a reason to revert to laissez-faire.  On the one hand, it argues for free trade and  reducing regulations that limit consumer choice.  But it also points out how important a social safety net is, or the importance of designing social protections in a way that doesn’t make the firm the delivery system – health care, for example.  And it argues for neutral approaches to such urgent problems as climate change, using broad price signals to change behavior as opposed to a laundry list of directives to firms.

Which takes me back to Romney.  I have no doubt that he was a remarkably talented and successful businessperson, and that the way he thinks about business is nuanced and expert.  I have no doubt that private equity companies play a positive role in the change-and-growth dynamic that makes the economy work; if they’re stripping a company, it’s usually because the company’s prior management put it on the blocks to be stripped.

But being able to answer those questions doesn’t give you an answer to the question of where to lead the country – how to engineer a fiscal retreat, how to deliver health care, how to redesign the tax system.  Those are different matters.  And they’re subjects about which free market
types like Mitt and me – even if not Gingrich and Perry – can and will differ.

5Jan/125

Romney Is A Person, My Friend

I think Romney’s going to be the next President.  I think that because the economy is miserable, the 2008 electoral map can’t be reproduced, and the independents who decided to give Obama a chance are uninterested in giving him another.  Voters have shown their willingness to take chances when presented with these kinds of circumstances; in retrospect, Reagan beating Carter looks inevitable, but at the time, it was startling.  Moreover, just below the level of speaking painly, the folks who allowed themselves the experience of moving past our society’s legacy of racial division in 2008 don’t the need for a second shot, particularly if the alternative presents himself with a civil manner, a Romney specialty.

I also believe in location theory economics, and therefore do not believe the right will abandon Romney in a general election.  The only good example with which I can come up of a far-wing abandoning the nominee closest to its position is the Left’s ditching of Humphrey in 1968.  I was part of that Left and had my apostasy about Humphrey at around 11:30 on election night, when Nixon showed the country crewel work  Presidential Seal his daughter (I think it was Julie) had made for him .  But by then, it was too late.  Now, as I’ve said before, today’s Tea Party Right is a mirror image of the New Left of 40 years ago, so they might make the same mistake.  But given that Obama’s a known incumbent rather than simply an unknowable prospect, as was Nixon, I doubt it.

(My prognostication should give comfort to my fellow Obama supporters, as my predictions have only been right three times in this life – one that Gingrich would quit after the 1998 election (a prediction made to an audience in Chile, thus minimizing awe at my stunning success), second that McCain would rue the day he picked Palin (the political equivalent of “I got drunk and did what?”) and the third that Michigan was about to run a fake field goal against the Hokies the other night.  Beyond those three, I’m pretty much oh-fer-life.)

There’s another odd connection between Romney and Humphrey – they are two of the people in rock star politics in my lifetime who most desperately wanted to be President.  I mean, wanted it so badly that no inconsistency was insurmountable.  I might put Clinton and Nixon in this group, but neither took the same liberties with their core convictions; even Humphrey’s worst moments were “limited” to his peonage to Johnson on Vietnam (and his willingness to consider Wallace as a running mate).  See page 446.

Am I alone in the feeling that half of Romney’s ultimate voters will support him because they believe him and the other half because they think his conservative campaign is some kind of odd piece of right-wing performance art?  Half taking him seriously, half thinking "he's just saying that."

I have moments of sympathy for Romney.  To start with, his father was an interesting and self-made guy who was pilloried for saying he was “brainwashed” by the military when visiting Vietnam – as with Geroge H. W. Bush, I find myself crediting the son for the father’s dignity.  Romney saved the 2002 Olympics.  And his health care program was path-breaking, even if he now has to deny it (which is like Picasso saying, “Guernica?  That piece of shit!”).

But a new moment of sympathy occurred this morning, when I watched an Occupy protester jump on Romney in New Hampshire about what threatens to be a defining remark for the candidate – “corporations are people, my friend.”

Let’s calm down and parse that remark for a moment, because attacking it on its own face is a gratuitous evasion of what Romney meant (or, what I presume he meant – remember, it’s Romney).  The corporation is a legal form in which people can work together with certain  requirements and protections – so are the ASPCA, the Knights of Pythias, and the Houston Astros.  The people in the ASPCA think animals need
protection, the people in the Astros are talented ball players, the people in a corporation think its prospects are good enough that they commit money to it.

Romney’s statement carries with it two important implications, one of which is the one he meant, the other one he embodies in opposition.  The one he meant is about corporate taxation.   It’s easy to point to corporations that paid no taxes on substantial net income and argue it seems unfair.  That’s not due to the venality of corporate comptroller, but occurs instead because the tax code is a pinball machine that can be played within reasonable limits.  But a problem of even greater concern is that the money corporations make is taxed twice – the first time as corporate
profits, the second time when what’s left is distributed to shareholders. There’s an argument that something like this is fair, since being a shareholder in a corporation conveys a legal privilege, that of limited liability.  The company can do all sorts of illegal, stupid, or dastardly things and the most you can lose is the value of the shares you bought.  That’s a special protection and there’s an argument that the shareholders of a corporate entity ought to pay something for it – Theodore Roosevelt, every progressive’s favorite Republican, said it this way: Great corporations exist only because they are created and safeguarded by our institutions, and it is therefore our right and our duty to see that they work in harmony with these institutions.     But doubling the tax paid on earnings – even if the definition of earnings is a little jaundiced – seems pretty excessive, even by Roosevelt’s standards.  In fact, society benefits from having the corporate form, since it allows capital to be raised and used at a level that any one individual or partnership of individuals could not manage – nor would we want them to.  Take the name of the corporation you dislike the most and now imagine them as a group of private investors with no reporting or governance obligations.  It would be like the entire economy run by the Ewings and the Carringtons.

Which is why a goal of the tax reform that’s coming in 2013 ought to be eliminating the corporate income tax and melding it with the income tax paid by shareholders.  After all, “corporations are people” – the people who hold their shares.  That proposal’s not without problems.  For example, not all corporate income is distributed, so some shareholders have the risk of paying taxes on income they haven’t received as cash – imagine a widow in a print dress having to pony up for taxes on profits that were plowed into investment or research and development.

There are ways to manage this problem, and their cost in terms of complexity and compliance strike me as minor compared to getting rid of the double-taxation of corporate income and the inefficiencies and mis-incentives it can convey.  But at the same time, if corporations “are people” – that is, simple agglomerations of people, like the ASPCA or the Astros – then how can they have the right of speech independent of the individual members, as suggested by the Supreme Court in Citizens United?

It’s one thing for people to come together in groups that advocate – that’s the group’s mission, and the privileges of corporate form have nothing to do with this advocacy.  But the corporation exists only to limit the liabilities of shareholders – it has no inherent right to “free speech” other than the right enjoyed by its members as citizens.  Which means that you can say what the heck you want, but you can’t misuse the corporate charter to be your megaphone.  If an executive wants to hit up his colleagues to bundle money for a candidate, that’s fine, within the law’s limits.  But if the corporation itself wants to use money to act out its “right to speech,” there’s a problem.  Society benefits when corporations do what they’re supposed to do – raise capital and use it efficiently.  How is our collective interest in a meaningful political debate furthered – or not further abused? – by giving a legal fiction – a shell designed to limit liability to loss – a right to ‘speech” separate from that of its members?

The need for changing the way corporations are taxed and the need to limit their right to independent ‘speech” are flip sides of the same coin, the coin that Romney tossed in the air when he told a heckler that “corporations are people, my friend.”  He was right.  But not even Romney – a guy who can live on both sides of a flipped coin, and who's proved a master ofusing copious amounts of money as a political weapon – can have it both ways.

5Dec/111

Susan Crawford on the Digital Divide

Two weeks ago I ran a post about “Ten Buck Broadband” – a program out of the FCC to browbeat broadband providers into offering stripped-down, lost-cost wireline access to poor people who today don’t use broadband, even though they are  "passed” by a broadband system.  In summary, my argument was this: it’s all lovely, but it rests on the fundamental misconception that all broadband must be wireline.  And in fact, for many poor and working people, wireless is a better option.  It’s growing in speed and quality.  It travels with you, which is very important if you move frequently, or more generally, if you don’t own your own home and you’re hesitant to sign a contract with a wireline service provider or if your landlord hasn’t sprung for installing the infrastructure.  And thanks to blistering competition in the “cage match” among service, device, application, and content  providers, the functionality of wireless is burgeoning – the tablet and WiFi speak to that.

But no sooner than the ink dried on that post – does ink dry on a post? – than yesterday’s New York Times gave an essay by broadband gadfly Susan Crawford prominent space somewhere between the sinking of the USS Maine and Men Walk on Moon.  Susan’s essay – “The New Digital Divide” – argues that a new version of the “digital divide” is taking place in  America.  The old one, first identified by one-time Commerce Assistant Secretary Larry Irving, was the gap between those who had dial-up access and those who had none at all.   But the new incarnation, as Crawford has it, is not between some access and none-at-all.   It’s between “good” access – wireline – and “second-class” access – wireless.

Look, I know and like Susan Crawford, and once even commissioned her and a colleague to write a paper on Internet openness and the risks of overreaction to file-sharing and piracy.     But I think she’s just flat-out wrong about the major points in her argument, and that, even if she were right, her ideas about what to do about it – admittedly, these are more telegraphed than laid out in detail – go off in the wrong direction.

There are many ways into Susan’s wormwood, but let me focus on three:

First, are we talking about the present or the future?

Second, where does economics fit into this?

And, third, what should we do about it?

The first issue is Susan’s frequent jumps in time frame in her essay.  For example, here are a few quotes at the center of her argument:

As our jobs, entertainment, politics, and even health care move on-line, millions are at risk of being left behind.”

                “Within a decade, patients at home will be able to speak to their doctors on-line…”

                “Households will soon be able to monitor their energy use using smart-grid technology…”

                “Soon, job interviews will be held by videoconference…”

You get my point.  All of this stuff is just around the corner – in broadband world, we stand forever on the threshold of a dream.  I don’t mean to disparage that; these fantastic services aren’t some kind of digital fusion power – you know, great stuff that will happen one day but that day isn’t soon.  But Susan’s point can fairly be reduced to this – broadband connections on a smart phone won’t be able to do all this stuff.

Well, first, in many cases, I disagree.  Not only can I, but I’d rather that my home’s energy use was monitored on a mobile device.  In fact, I’m building a home right now and the vision is to control its energy use remotely from my phone – hell, the vision is to control the sound system remotely.  And if their prospective pool of employers is using mobile devices, then I wager that employers will figure out how to hold remote job interviews on mobile devices.

But the larger fallacy is that Susan’s comparing what might happen to tomorrow to what exists today.  It’s easy to spin out prospects for broadband-based services that might occur one day and compare them to a flip phone or even to a state-of-the-art smart phone.  But doing that is like going back ten years and arguing that one day people will be able to search for data and  images, and store music, and determine their location and the best route to where they’re going, and listen to entertainment or order a pizza, and watch videos or book an airline reservation on their computers, but they’ll never be able to do that on a wireless device because they’re just phones (and besides, they’re so little, how could you stick all that stuff in there?).

In fact, in writing off mobile devices, Susan misses entirely the real dynamics of the sector – the reality of “cage match” competition.  Wireless capability is burgeoning, and wireless devices are now capable of doing things that were unimaginable five or ten years ago – watch videos, determine location, book a flight – because the wireless space is benefitting from this kind of remarkable competition.  As signal gets bigger and better, devices get better to use the capabilities that better signal creates, and applications and capabilities grow to fill the better devices that better signal permits.  I made this argument only recently using the
example of iPhone’s Siri.  The reason why you can now talk to your phone – as opposed to through it – is not because we just  figured out how to do voice recognition.  Hell, you’ve been talking to that annoying female “welcome!” voice for years.  It’s happening now because now wireless signal in The Cloud is good enough to support the rapid exchange of data between the phone you’re talking to and the big, hog-ass boxes with enough compute power to figure out what the hell you just said.

So by comparing what will be in the broadband world tomorrow to what wireless devices can do today, Susan constructs a scary story with no basis – in fact, mobile devices can already do more today than Susan seems to admit.  Competition in the wireless “eco-system” –the cage match among signal providers, device manufacturers, and service and content providers -- is going nuts, as the phone in your pocket demonstrates, not to mention the tablet in your hands.  And the underlying engineering and economics
in many respects favor the wireless side over the wireline side.  For example, here’s Susan on why AT&T’s U-verse can’t compete with Verizon’s FiOS:

“…(U-verse) cannot provide comparable speeds because, while it uses fiber optic cable to reach neighborhoods, the signal switches to slower copper lines to connect to houses.”

Yes, that’s right – it costs a great deal of money to get the most out of fiber, right down to rewiring the connection from the pole to
your house and the wire in your walls.  But mobile devices get better instantly – get a new one and turn it on.  Which segues into the second point I’d make in criticizing Susan’s essay – where’s the economics?  They’re missing at two levels.

The first is practical.  As Susan notes, mobile broadband costs the consumer half of what wireline does.  Yes, people who use it
may lose functionality, but usually consumers choose to do so because they’ve made a conscious decision.  Wireline is great, so long as you have a computer and the software needed to use it, expect to live in a place long enough to justify the broadband  contract and the transaction costs associated with buying it, and think that it’s incremental cost is justified by the added functionality.   Many of those Susan would rescue from the wireless world chose to be there.

It’s all about what people “want.”  A mobile phone connection isn’t as good as a wireline connection for the purposes of making a phone call, but millions of people are shifting from wireline to wireless telephony because they like mobility and will sacrifice other attributes to get it.  (These, of course, are young people.  As I and my hearing ages, I appreciate it when my kids call me on the landline so I can hear what the hell they’re saying, particularly since they invariably call me when walking or driving somewhere and the background noise sounds like it was recorded at Big Sur.)   But there’s a big and important difference between what people want -- and need -- and what, in Susan’s view, they ought to have.

For example, Susan notes that “few people would start a business using only a wireless connection.”  Really?  Depending on what the business is, a tablet might be better than a wireline computer – it moves with you, it communicates adroitly, it’s “just like a computer.”  And the functions that make many a new business want compute power – marketing information, logistics, CAD-CAM, document or spreadsheet functions – aren’t about communications so much as data crunching.  Some people starting businesses would do fine with a wireless infrastructure, others won’t, but the way to sort this out is to let markets and those people decide, not to have Susan or anyone else announce that you have to have a wireline connection to start a business.  Or apply for a job, or talk to a doctor.

And in a broad sense that’s what’s happening in Susan’s argument.  Rather than let economic and markets work in broadband space and then deciding where we ought to complement those outcomes, Susan would rather impose the preferences of planners.  Look, I’m a proponent of regulation where market-based outcomes don’t work – financial crises, greenhouse gasses, worker
safety, and so on, although there’s an entirely separate issue about how to achieve regulatory objectives – but in order to drag her argument through the Eye of the Needle and into the Kingdom of Heaven, Susan has to make the kind of statements that, first, confuse the present and future and, second, assume that consumers can’t work this out on their own terms.

Which leads to a kind of broadband effetery.  Thirty years ago, when the “high performance workplace” was in vogue, I remember someone -- I think it was either the late and often-missed Bennett Harrison or the still-contemporary Dan Luria -- making the remark that the way to improve worker productivity was to dress them all up in white lab coats and send them back to work.  And Susan seems to endorse a variant – that if we give everyone a 100 meg fiber connection, not to mention a garage, then they’ll all start H-P or Microsoft or whatever.  But that’s not how things work.  There are plenty of aspects of the broadband world that require some kind of social reconciliation – privacy and security, extending the network, and so on.  But the idea that it has to be wired as opposed to wireless has no basis in economics or policy – it’s simply a vision that was arrived at without regard to cost, logistics, or what people appear to want.  Gosh, I wish I could think of another word for it, but it’s just so bourgeois – this is what “the right people” want, and you should want it, too.

And that raises the third issue – even if Susan was right about everything, what would we do about it?  Various hypotheses emerge in her writing.  For example, after noting that the OECD ranks American 12th among the industrialized world for wired Internet
access (raising a separate question about the measurements), she states that “it is safe to assume that high prices have played a role in lowering our standing.”   Similarly, FiOS “costs six tmes as much as comparable serviced in Hong Kong, five times as much as Paris, nd two and a half times as much as Amsterdam.”  Well, there’s plenty of work that suggests that the people who don’t buy broadband even when they could are motivated by more than price – they fail to see the relevance, they see it as a distraction.  Even if price were the only issue, the implication I get from this is that providers are price gouging.  But it’s awfully hard to reconcile that view with the reality that the stocks of service providers such as Verizon and AT&T are listless while the stocks (or valuations) of companies that ride those providers – Google, Apple, Facebook, and so on – are soaring.  If the problem were that broadband providers were the Standard Oil of signal, then wouldn’t we expect them to be valued as such?  Instead, the reality is reminiscent of a complaint my then-boss, Jim Unruh, the CEO of Unisys, made to me one day twenty years ago; “Two companies make money every time we sell a computer.  Unfortunately, they’re Intel and Microsoft.”  He grimaced as he said it.

So what would Susan do to fix that – to use competition to force prices down by reducing profit margins (leaving aside whether that was the real issue, or even true)?  Well, other countries “have required telecommunications providers to sell access to parts of their networks to their competitors at regulated rates, so that competition can lower prices.”

Here we get to the nub.  Susan once favored the government building a national fiber network at taxpayer expense, a project that would have cost nigh on to half a trillion dollars, using the same thinking – that only fiber will do, and that the public sector has to do it.   Now, with private investment continuing to pour into both wireline and wireless infrastructure, a nationalized fiber network seems a little silly, so she’s fallen back to “unbundling” – the idea that the Little Red Hens who build broadband infrastructure networks should be required by government to share it at government-set prices to the other critters who
would like to have some.

We tried this before, in the 1990s, and what we got was DSL, a result that Susan categorizes as follows, “And don’t even think about DSL, which carries just a fraction of the data needed to handle the services that cable users take for granted.”

I agree with Susan on this point – DSL is not remotely as good as fiber or cable.  But what she fails to consider is that DSL is what we got when the policy she favors was actually implanted.  All those DSL companies – Earthlink, Covad, those guys – existed because the policy at the time was that they could go to phone company networks and buy access at government-set prices, then resell the service.  They were free riders who offered services after regulators invited them to the party; they all sold the same service, none of them innovated, none of them improved what they offered consumers.  And this policy became the single greatest obstacle to developing new infrastructure – after all, if you have to share your facility with your competitor, not to mention at a price you don’t determine, then why the hell would you build new infrastructure in the first place?  And, therefore, why innovate and improve the very broadband infrastructure with which Susan's not satisfied?

So Susan’s policy failed.  When it was lifted, we got a new generation of infrastructure, and competition between fiber, cable, and wireless to bring signal to customers.  Investment and innovation took off. And now that these investments have taken place, Susan wants to freeze the process again, compelling companies to share what they built and making sure, as a consequence, that they never make the mistake of building anything again.  And what’s worse, at least you could argue that some of the old phone lines from the DSL days were built in the Ma Bell days of rate base regulation, and therefore under the expectation of a guaranteed, regulated return.  Who guaranteed Verizon a return when it put out tens of billions of dollars for FiOS, or AT&T for U-verse, or the various cable companies, for that matter?   We should be improving the incentives to build infrastructure, not obliterating them.

The transformative nature of broadband is undeniable.  But that transformative nature is the flip side of technology and market structure that are changing and improving  rapidly.  The idea that wireline is good and wireless is second-class could be undone by events in a few short years.  We have no idea what innovations – in signal, in devices, or in services – will come to pass in the next few years, much as we could not have predicted the state of today’s wireline/wireless balance a few years ago. Deciding which of these technologies “wins,” and then radically restructuring the industry to enforce that choice, is a bad idea, even if the intentions that gave rise to it – a concern for the social enfranchisement of poor and working people – are commendable.

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24Nov/118

Clark Kent

The failure of the Super Committee to reach a comprehensive, long-term budget deal is the most startling, unanticipated outcome since the Sun rose in the east this morning.

The idea that the Congress could design a “trigger,” or some other kind of event, that would compel it to give up its power to undo whatever it did is reminiscent of the philosophic debate that compelled the attention of pre-teen boys in the early 1960’s, that is, could god create a rock so heavy that He couldn’t lift it, or in the lay version, what would happen if Superman fought himself?  The difference is that now the question goes from Zen koan to policy debacle.  The answer may be found in a different allegory, this one being the cigarette case that Leonid Brezhnev had made for himself as an aid in his battle to give up the killer weed.  It had a time-sensitive lock that would only dispense a smoke every 30 minutes.  And it worked, except that in the time between clicks, the First Secretary would bum smokes from his guards, his driver, or anybody else who was around, while he tried to pry the thing open.

And so, the Super Committee shadow play ends, with enough time to regret the outcome and avoid the consequences. In such a circumstance, trading accusations of blame is a half-hearted exercise.  The two sides blame each other, and my disagreement with their positions is not that they’re both wrong, but that they’re both not specific enough.  It’s not a matter of whether Republicans or Democrats are to blame, although you can critique the heck out of either side.  Sure, Republican obstinacy about taxes, and their specific reference to progressive taxation as “class warfare,” is particularly problematic.   But there’s more to it than that.

Being “blamed” for the Super Committee’s failure means taking the blame for the dynamic that led to this futile exercise in the first
place.  How’d we get into a situation in which the two sides of the debate – even if asymmetrically – would rather disagree than agree?  In this sense, I’d “blame” two people for the nation’s – and the Super Committee’s – failure to rise to the challenge of resolving long-term deficits.  The first is Grover Norquist, and the second the President.

You can’t help but be impressed at what Norquist and Americans for Tax Reform, a conduit for yet more Scaiffe and Olin money into the national political process, have accomplished.  Its “Taxpayer Protection Pledge” is the single most important reason why the Super Committee failed – because its Republic members were afraid of the well-financed wrath that would confront them had they supported a compromise.  I’m sure that even Norquist and his funders know that sometimes the Pledge is atrocious policy; for example, their opposition to removing the odious tax incentives for ethanol must have given them pause.  But they’ve drawn the line expertly – once you make thinking about raising taxes a thought crime, you’ve fenced off the issue.

The Pledge has been particularly counterproductive in that it has given rise to the stupid stuff that’s said about raising taxes.  And I mean legitimately, straightforwardly stupid.  Stuff like progressive taxation is “a tax on job creators,”   or that increasing the top rate in the personal income tax structure is “class warfare” that “divides us.”   I don’t think people are racing off to sign the Pledge because they believe this stupid stuff.  Heavens, did you watch every Republican candidate raise his or her hand and swear they’d never sign a budget compromise that was only dime-on-the-dollar tax revenues?  My guess is that half that crowd knows they’re doing something stupid – Romney and Huntsman certainly, probably Santorum and Gingrich, who’ve been around long enough to remember reality.  The belief that advocating a higher top rate is “class warfare” begs Socratic inspection – would a larger zero bracket be class warfare?  Is the Earned Income Tax Credit class warfare?  Is progressive taxation in its own right?  Oh, for Pete’s sake.

I can forgive this kind of rhetorical flourish as I tolerate it is those with whom I more often agree – in an age in which media is ubiquitous, Orwell’s view of politics as the art of contorting language has been borne out.  The point here is that once politicians take the Norquist cum Faust Pledge, they need something to say to explain this view, much as other proponents flail around looking for a reason why they support commodity grain programs, or subsidies for “American bottoms” in the merchant marine.  And so the rhetoric meets a need – class warfare, taxes on “job creators,” and so on.  And when the material conditions of
the public debate change – as they always do – the rhetoric will be shucked off like an escaped con ditching his prison-issued outfit.

But for the moment, the Pledge has money behind it, a few recalcitrants have been shot in the town square as a warning to the others, and the rhetoric, therefore, will persist.   As for Norquist, this Facebook post makes clear his victory and speaks to
his objective:

Today in The Guardian, ATR President Grover Norquist wrote the super committee has set the stage for the battle for the soul of America regarding the size and scope of the federal government. The 2012 elections will be round three in this historic
fight.

Back to the battle for the soul in a moment.  If Norquist is responsible for taking part of the political spectrum off to Terra  Incognita, then the president is responsible for failing to isolate them there.  I don’t need polling data to know that the American people feel that the value of the Tax Pledge is not infinite – that there’s some point at which they’d accept some kind of higher taxes or greater progressivity in the tax system, particularly to preserve some portion of Medicare and Social Security, if not some public investment.  The “grand bargain” is waiting to be struck.  But the President doesn’t seem willing to be its advocate, which takes us to his culpability here.  The Bowles-Simpson Commission gave him an opportunity to plant a flag on the “middle” and he wouldn’t take it.  He stayed away from the work of the Super Committee in a way that was reminiscent of his arm’s length approach to the Congressional deliberations on health care.  Once again, he appears to be the Great Presider on domestic policy,
hoping to extend the civility, the composure, “come, let us reason together” approach that worked at Law Review to the great issues of our time.

Well, that’s unfair, perhaps, because the President must surely realize that Norquit’s Facebook post is exactly right – the debate is leading up to a national referendum on whether to preserve the core elements of what has been a social consensus since the Depression – progressive taxation, government support for some services (health and public investment) and some claimants (the poor and elderly).  The Super Committee was doomed to fail because both sides would rather have “a battle for the soul” of America than reach a compromise that made that battle moot.  The President must get that, but he’s yet to claim the center and isolate the Pledge advocates.  Perhaps he believes that the center will go unclaimed until he’s ready to claim it.  Or that taking a real position risks putting a thousand bulls eyes on your back and becoming a policy Saint Sebastian.  Or, and here my level of concern rises, that the President’s real vision is focused on how we relate to each other and less on how society is supposed to work.

The next election is going to be exactly what Norquist says it’s going to be, and that’s probably all to the good.  And there’s a big
difference between letting the Super Committee twist and not being ready to lead one side of a great debate.  The President needs to draw a line by becoming an advocate for the grand bargain, perhaps starting next January’s budget submission.  The Super  Committee wasn’t Super and we didn’t need it to be, but somewhere under the President’s mild-mannered exterior, we need
to find Clark Kent.

 

18Nov/1114

Ten Buck Broadband

I am knocked out by a report I just came across from the Joint Center for Political and Economic Studies, probably the leading entity that focuses on public policy issues of concern to people of color in America.   They paper  that changes likely preconceptions on the part of the public – and policy makers – about who’s using broadband, particularly mobile broadband, and why.  It’s embarrassing to think you have preconceptions, but it’s redeeming to have them changed by evidence.

Let’s start with an earlier report that puts the Joint Center’s work in context, one by the Pew Research Center, that was released last summer.    That report was also startling in its insights into who’s using mobile broadband.

Here are the headlines.  More African-Americans (87 percent) own cell phones, compared to whites (80 percent)  the difference looks bigger when the income differential between the two roups is considered.  And specifically, more African-Americans and Latinos use phones to access the Internet – 46 percent and 51 percent, respectively, as compared to 33 percent of whites.  This also jives with results from Nielsen from earlier this year, showing that African-Americans and Latinos were also more likely than  whites to own smartphones – 45 percent of Hispanics and 33 percent  of African-Americans own them,  compared to 27 percent of whites.

But the Joint Center report, which was updated a few weeks ago, goes further.  According to the Joint Center’s surveys, 48 percent of African-Americans and 41 percent of Latinos report using wireless broadband service as compared to their white counterparts  (38 percent).   And then there’s what people do with their devices; 41 percent of African-Americans and 35 percent of Latinos, as opposed to just 21 percent of white Americans, report using wireless broadband to keep in touch with doctors and other healthcare providers. And perhaps the most interesting finding is that 78 percent of African-Americans and 64 percent of Latinos went online to look for information about finding employment, as compared to just 48 percent of whites.   In fact, when the study focused on people with incomes of $20,000 or less, it found 92 percent of African-Americans went on-line to look for work, as compared to 63 percent of such Latinos and 54 percent of such whites.  That’s interesting not only because of the differential across groups, but because the percentage of both African-American and white respondents responding that they use mobile broadband to find work goes up when income goes down.

In one sense, this is nothing new.  When I was busy Undersecretarying in the 1990s and was deeply involved in the decennial census, one of the most pressing issues we faced was the pattern of non-response, which contorted the allocation of political representation, federal spending, and the like.  There was an obvious pattern of racial and ethnic differential response, but the
single most important variable in predicting whether a household responded to the census was whether they owned their own home.  African-American and Latin respondents were disproportionately underrepresented in the decennial, but often because they were more likely to not own a home.

But of course.  People without stable employment or adequate income move a lot.  They split and merge family units, they live in residences that aren’t – what’s the right word? – “zoned” or “permitted,” they change addresses as they find a job or a better deal.  “No fixed address” is supposed to mean an itinerant -- a hobo – but if you take its meaning to be weeks and months, not days, it captures much more of the population than simply the homeless.  It deals with millions of working poor who, in the memorable words of Jesse Jackson at the 1988 Democratic Convention, “catch the early bus.”

This reality about the economy and its participants hasn’t changed, but the milieu in which it operates has changed, dramatically so.  Mobile phones and mobile broadband access are the best alternative for working people who are likely to move soon, for either
good (find new job) or bad (lose old job) reasons.   Why even bother with a landline or a wireline broadband connection when you have to endure the fixed and transition costs of setting those things up – often with a contract – when you’re not sure how long you’re going to stay at that place?  You can carry that kind of access in your own pocket.  The latest release of a regular survey by the Center for Disease Control   shows the same thing – 43 percent of adults living in poverty and 35 percent adults living near poverty lived in households that had “cut the cord” – only wireless – compared to 35 percent of higher income adults.

So forget the images of middle-class kids lining up in front of Apple stores to get the latest iThing at the stroke of midnight.  The
middle class’ toy is the working poor’s object of necessity.

These results came to mind when reading this story about Federal Communications Commission Chair Julius Genchowski announcing last week that he had enticed a group of cable companies, in concert with other businesses, to produce a program that would have the leading cable companies give poor families – defined as those with a kid in the federal school lunch program
– access to cable-based broadband for $9.99 a month or, as we used to call it, ten dollars, for two years.  In addition, they will have access to a $150 computer, a Microsoft operating system, and access to microfinancing to make it work.

Now look, I’m not opposed to anything eleemosynary that a company does, God bless them.  And the origins of this program go back to Comcast, which agreed to it when they were given regulatory dispensation to acquire NBC.  It would be brusque to call
that a shakedown – it’s more like “street policy,” the equivalent of police dispensing “street justice.”  A company comes through wanting something, like a merger approval, you have the right to hit them up for something like this, so long as you keep it reasonable.  No harm, no foul.

But the question is whether we’re shaking the wrong tree.  That wireline connection and computer may not be what the  "unconnected” want.  In fact, in some ways, it reproduces what they can get already.  For example, here’s a write-up of a service
from Republic Wireless, which offers  unlimited voice, text, and data for twenty dollars a month and an upfront investment of $180, as I read it.  (It’s a tricky proposition, though, as Republic’s devices go looking for Wi-Fi to rest on before they go to the mobile phone network.)  But remember, it’s also a phone, so its package is priced pretty well, even when compared to what the cable companies are offering under this charitable effort.  And will it be slower than the 1 meg rating the cable offering includes?  Doubt it.

In an unintended way, the cable $9.99 broadband program makes a larger point – wireline and wireless compete, increasingly so, and focusing on wireline to the exclusion of wireless misses what’s happening.  And it’s happening so quickly that pronouncements made only a few years ago – perhaps this one, calling for a nationalized fiber network --  look pretty silly.  Fiber’s going to be
the broadband backbone for some time to come, but when you think about what’s happened in the two or three years since these “national fiber” proclamations were made – the iPhone, the iPad, Android, the cloud, for Pete’s sake! – they look way off base.   Wireless is no more about taking on the phone than wireline is about watching television.  They compete to deliver the broader connectivity the modern economy requires, and that customers demand.

So I appreciate the effort on the part of the companies doing this ten dollar broadband thing, but can’t blame the ones who aren’t.  If we want to have “universal access,” we need to be better regulators and spend money.  We need an open market for spectrum that allows it to go to its most highly-valued uses, as opposed to letting a bunch of broadcast oligarchs hold on to it, a souvenir of a bygone era.  We need to put money into helping schools, hospitals, and local governments use broadband as the way they do business, so that the “pull” of functionality attracts those who have some access to broadband but don’t choose to use it.  And we need to help states fund plans to deploy broadband within their boundaries by letting wireline and wireless provides compete to offer infrastructure.

I admire Chairman Genachowski for keeping faith with the folks who take the early bus.  But the underlying economics are compromising the impact he wants to have.  The “digital divide” is real – greater use by people of color of wireless technology is
their attempt to get over it.  But the theory that wireless and wireline are separated by another kind of “digital divide” is undercutting our approaches to fixing the original one.

3Nov/118

Where Have I Been?

With apologies to Sid Caesar, it’s a good question.  It’s been some while – isn’t a great euphemism for two months? – since my last entry.  Readers who know me know I’ve been preoccupied with other work (principally, baseball) and interests (principally, baseball -- Game Six!  Are you kidding me?  Wow!)  Readers who don’t know me will have to take the other group’s word for it.  But I’m bored, broke, and back, and tanned, rested, and ready (and tall, tanned, and talented – no, those were the Temptations), and ready, willing and able.  On with the show.

Two months!   And what a pair of months they’ve been – Steve Jobs died even as the first new iPhones are being shipped, Europe floundering (and foundering – they’re different, but for this list, both work), jobs legislation floundering, the deficit-reducing Wise Man Committee floundering, Jon Corzine floundering (Karma’s a bitch, isn’t it?), and Gadhafi found in a sewage drain (Karma, the Sequel).   Don’t think I wasn’t sorely tested to comment on any and all of these events, or that I won’t when I get around to them.

But let’s start not with world affairs.  Let’s start with the focus implied by today’s title – where I’ve been.  One place was speaking at the House Rayburn Building two weeks ago, at an event hosted by Internet savant, Google scourge, and chairman of Netcompetition.org , Scott Cleland,along with my economist friend and colleague, and antipodal doppelganger, Jeff Eisenach.

The panel was on competition in broadband space, which gave me the opportunity to talk about my favorite explanation of how competition works in that constellation of products and services – the wrestling cage match.  That is, all of the product and service providers in that space – whether fiber, cable, or wireless access providers, device manufacturers, content providers, service providers, social networks –the whole lot of them – are in an ongoing contest in which they form and reform alliances, adversarial relationships, vendor-client relationships, and other forms of conflict and co-operation, with the end result being a sector that innovates and serves consumers like crazy.  I’ve written about it on this site a few times, most notably here. But here was a chance to speak about it.

I’m posting my talk here, and you can also see Scott and Jeff’s presentations and the question period that followed.  Much of that question period was dominated by audience concerns about the prospective merger of AT&T and T-Mobile.  It’s a good example of an issue that would concern you, if you never thought about the cage match.  That is, at one level, you can argue that the market is more “competitive” with four major suppliers rather than three because – and here is the analysis that supports this view – “four” is a larger number than “three.”

But this view is trouble by three different arguments.  The first is that T-Mobile is doomed – it’s not going to survive as a competitor.  Its owners – principally its German government – aren’t that interested in competing here, and it already lags behind ATT, Verizon, and Sprint here.  So T-Mobile faces the fate of a building that collapses because no one takes care of it – “constructive demolition.”   In contract, ATT can use T-Mobile’s resources – including its spectrum – to improve its service.  Arguing that we’re better with “four” rather than “three,” as I’ll say in the video, is like saying we need a fourth for bridge, but that one of the players is a zombie.

Second, T-Mobile already makes no difference in the market.  I’m often told that T-Mobile underprices the other competitors.  Well, sure it does – it offers less.  But more importantly, T-Mobile’s pricing doesn’t affect what Verizon, Sprint, and ATT does – if T-Mobile were to drop their prices, the other three would hardly care – they’re already being underpriced by T-Mobile and don’t respond.  But T-Mobile’s prices, in contrast, are determined by what the other three major providers charge – T-Mobile observes those prices, and then slips in underneath them.  Opponents depict them as one of the dog’s “four” legs, but they’re really the tail.

And, finally, and most importantly, there’s the real nature of competition – the cage match.  T-Mobile will never compete with the other three wireless providers more than does Apple, Facebook, Google, and the other components of the total value proposition created by the broadband experience.  When the signal providers such as ATT improve their product, the device manufacturers turn that added capability into new services and usurp the value that’s created.  Or, in the real world, the signal provides invest in 4G, make signal terrific, and Apple responds by building voice-recognition into the 4S phone.  Because that voice-recognition is not built into the phone – when you ask Siri a question, it doesn’t turn to a microprocessor or memory device in your phone.  It beams the question up into the cloud, where Apple’s mega-processing power addresses it and beams back a response.  It’s the strength and quality of the wireless connection to the cloud that makes Siri possible.  Voice recognition has been there for a while – think of all the businesses that use it – but putting it in a mobile device is a wireless connection trick, not some Merlin-esque innovation by a gnome in the bowels of Apple.  Meaning that as companies such as ATT and Verizon improve their product, Apple rides it and incorporates the new functionality into devices, and earns the rewards.  The problem is not that there’s not enough competition in signal – the problem is that signal is in a dicey competitive position vis-a-vis devices and services.  They are on a treadmill – if they don’t innovate, consumers will abandon them, but when they do, other competitors in the broadband cage match skim off the value they create.

So here’s a video clip of that event, complete with my colleagues, audience participation, and my favorite gold tie.

That’s, in part, where I’ve been.

9Sep/119

In Your Head, You Know He’s Right

Forget the other stuff, like his invocations of people at kitchen tables and what a great people we are.  The President seems at his worst to me when he tries to empathize with the oppression of working people.  His temperament and presentation make him a lousy populist.

Because, otherwise, he’s right.

For supporters such as am I, this is the sorrow and the pity.  You can applaud his style or cringe about it, but on every substantive point the President made in his Thursday night speech, he was more right than are his critics, and sizably so.

The most important of these points was the subtextual one, the central question confronting economic policy.  That is, what’s the problem, why aren’t we growing and creating employment again?   One side blames crushing regulation and the looming deficit crunch.  The other – to which I subscribe – holds that the problem is the absence of demand.

To my thinking, the problem is obviously not massive future deficits – the bargain basement rates on long-term Treasury bonds speak to that, and even though deficits are a crisis waiting to happen, they’re not the issue today.  Nor is the problem the crushing
burden of regulation.  My colleague Jeff Eisenach, who disagrees, pointed me to a paper in which he played a leading role, which argues  that unemployment insurance can be shows to reduce hours worked.    Larry Summers writes that unemployment insurance induces people to defer going back to work, so much so that its elimination would lower unemployment by half a percentage point.  Those are big numbers and well might be the best case about regulation and job creation.  But what I take away from them is that reasonable reforms will have a big payoff, even if not fix the economy.  And if Michelle Bachmann’s best example of crushing regulation is a restaurant owner who needs to downsize from 60 to 50 this summer because of an insurance mandate that might take place in 2014, it’s time for a reality check.

The focus on regulation and government’s role in the economy being the central obstacle to growth is a bedtime story, and its shame is twofold.  The first is that it’s being propogated by people who chillingly either know better (and don’t want effective policy to be made) or who don’t know better (but say things that get crowds to cheer much as pigeons step on treadles for  rewards).  The second is that there are plenty of opportunities out there to improve regulation – off the top of my head,  eliminating the ban on short-selling stocks, blowing off net neutrality, making auto fleet economy standards tradable --  and they’re all diminished by the wholesale assault on “bureaucratic socialism that can't find the baby in the bathwater.

The economy’s problem is insufficient demand.  The best way to solve this problem is to help shore up households’ balance sheets by letting them refinance their mortgages at a federal window.  That’s better than spending, better than tax cuts, better than all of it.  That Fannie and Freddie have to be brought into this is an odd and regrettable choice, but whatever.  Banks are not going to refinance a family that owes 120 percent of their home’s value, particularly when the mortgage holder is getting 6.5 percent annually.  Their Moms made them venal, not stupid.

Federal refinancing of mortgages would require the Treasury to hold trillions of household assets – at least for a while (I’d hope that we could combine creating thee assets with some kind of break-up of Fannie and Freddie, but more on that later).  No one likes trillions of anything.  But this is the solution to the problem – it frees up purchasing power, capitalizes on dirt-cheap funding, and helps stabilize the downward spiral in the housing market.  And it solves the problem because it addresses the problem – weak demand.

A second thing the President’s right about is the role of the public sector.  Forget the gratuitous language about how “we’re all in this together” of “that’s not America.”  The substantive point is that rational public sector investment is a predicate for private investment, always has been and always will.  The sad paradox is that the critics who see public investment as wasteful posted their criticisms using a computer with microelectronics on a broadband network all brought into being early-on by the government, drove to work on federal highways, probably attended land grant colleges, and one day will have their lives improved or extended by a therapy involving monoclonal antibodies, rejection-proof stents, or SSRI drugs, all of which came out of the National Institutes of Health.  I remember a discussion I had with a farm state Senator back when I was in the Administration who questioned why we had the National Weather Service when he could turn on the television and find out what the forecast was.   I bit my lip.

There are ample opportunities for the federal government to continue its productive role in the economy’s development.  The first and obvious one begins with the National Broadband Plan the Administration has already put forward but done little to implement.  I’ve heard people deride it as “Data Stamps,” but the better analogy is to the highway system.  Extending broadband coverage – by working with states and localities to extend mixed wireline and wireless coverage and to ensure the network connects to schools, health care providers, and local governments has important social value.

A study released by Deloitte last week about the economic benefits of extended 4G networks is beyond compelling.  In their view, investment in extending 4G networks could lead over three-quarter of a million additional jobs before we consider the services providing on those networks and the opportunities those networks allow – the business creation, efficiency gains, and the like.  Companies are investing billions annually in an effort to build these networks, but there’s a benefit to be had by accelerating their efforts.

Infrastructure itself is another of these areas, and as a Founding Father of the infrastructure bank concept,   it’s exciting to see it move forward.  And it was encouraging to hear the President talk about the Bank as being a place where public and private money can come together and that its operations would be immune to earmarks.  Because, beyond the general problem of underfunding infrastructure investments, the Bank was dreamed up to rationalize the disparate and often bad choices the individual modal programs now make, and to find a way to bring eager private risk capital into the sector without compromising important public policy goals.  (What does that mean?  Try this.)

The President’s also more right than wrong about progressive taxation.  The argument that we’re taxing “job creators” is a remarkable one – it argues that income at the top of the spectrum leads jobs to be created in a way that income at the bottom doesn’t.  In fact, if I was worried about disincentives to work, I’d focus tax cuts on the bottom of the income distribution, perhaps by expanding the zero bracket, since that’s where eliminating the disincentive to work or otherwise improve one’s self would do the most good.

(On the other hand, I felt for Mitt Romney when he says “Corporations are people, too, my friend,” and gets pilloried.  His poorly-expressed idea is that corporations are a way in which people – stockholders – gather to get things done.  We’d be better off figuring out how to tax those underlying people rather than the corporations they form, just as we’d be better off preserving the First Amendment rights of those “underlying” people and not extending them to the corporations they form.)

I could cherry-pick the other parts of the President’s speech in which, whatever else you want to say, he’s right, but let me focus on two of them to conclude.  The first was this remarkably straight-forward sentence, which seemed to go entirely unnoticed:

We should have no more regulation than the health, safety, and security of the American people require.

If there was ever a first sentence towards finding a workable consensus on this issue, that was it.  Sure, it begs lots of questions, like the best approach to achieve that simple end.  But it’s a sensible response to both tails of the spectrum – those who see government’s existence as the primary if not sole obstacle to progress and those who never saw a market that worked without supervision.  And as a corollary to that, if regulation is going to go beyond that standard – like systemic risk regulation, or net neutrality, or greenhouse gas limitations, then it ought to come out of law, not bureaucratic whim.  (And yes, I even think that’s a reasonable standard regarding climate change – any solution EPA comes up on its own for the vast problem of carbon dioxide is going to be half-vast.)

And the other high point was the President’s straightforward admission that Medicare, unchanged, is – allow me to use the phrase – a monstrous lie.  There is no budget problem in America; there is a Medicare problem – how is it going to work and how will we pay for it?

Again, avoiding this basic reality creates two problems.  The first, of course, is that you can’t solve the problem so long as you avoid it.  But the second is that the things we need the public sector to do – the highways and the land grant colleges and the Internets and the spectrum availability and tomorrow’s monoclonal antibodies – are going to be the victims as we slash everything else because we’re unwilling to act on what the root cause of the problem is.

We could replay the last three years and parse out where the President’s been strong and weak.  If that amuses you, go ahead.  And we could speculate about how he’s positioning himself for his date with Romney (can I get a bet during the Perry bubble?) next year.  Or discuss the President’s successes or failings as a leader.

But when you listen to him and cut away the crap, in your head, you know he’s right.

 

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