Ev Ehrlich's Everyday Economics

The New Radicalism

I was going to write about Greece this morning and the emerging fiscal crisis that threatens the very existence of the Euro. 

It was really going to be a good entry, I swear, replete with historical references and elliptical propositions that all somehow land in the right place and in the end make sense – the more I thought about it, the more excited I got.  I even had a great title for it – Greeced PIGS – you see, the four countries with the biggest fiscal deficit problems in Europe are Portugal, Italy, Greece, and Spain, or PIGS. 

Actually, Ireland belongs in this group, but that would upset the acronym, and, besides, princess Margaret told us long ago that the Irish were pigs already.    (Please do not climb on my rear end about this last reference.  I am, as my late, sainted mother-in-law used to say, IBM – Irish By Marriage.)

Well, that was the plan, until I opened today’s New York Times and went apoplectic over my bran flakes once again.    Here’s the second paragraph of the article that got me going;

In Kentucky, a bill recently introduced in the Legislature would encourage teachers to discuss “the advantages and disadvantages of scientific theories,” including “evolution, the origins of life, global warming and human cloning.”

And this bill is actually called The Kentucky Science Education and Intellectual Freedom Act.  It was written by a state representative named Tim Moore, who joined the Annals of Phenomenology with his remark, “our kids are being taught theories as though they were facts.”  Take that, Copernicus!

There are any number of places to go with this, but I’m going to limit myself to two.

The first is this; science – indeed, reality – has become the new radicalism. 

This is a remarkable switch in the morphology of the political landscape.  Forty years ago, when I was a New Left agitator, the essence of the political left was a rejection of reality.  Sure, some of it was the drugs, but it was far more than that.  It stemmed from a conviction that the agenda was too dominated by the world around us, that we should spend less time discussing “what is” and more time discussing “what ought to be.” 

In fact, perhaps the pinnacle of the Left in our lifetimes – OK, my lifetime – the pinnacle of the Left in some of your lifetimes was Dede Scozzafava dropping out of her Congressional race  – the Presidential campaign of Robert Kennedy, was premised on his aching quest for a better world that couldn’t be found except in his imagination --   There are those that look at things the way they are, and ask, 'Why?' I dream of things that never were, and ask 'Why not?'  Contrast this to, say, President Obama, who might have said, “I look at things as they are, and think, how the hell do I fix this mess?”, or, say, the new right-wing radicals – like Kentucky’s Tim Moore – who dream of things that never were – like an intelligent designer whose creations filled The Ark – and say, “Sounds right to me.”

And this new line-up – the Left as the champions of scientific reality[i] and the Right as adherents to a shared, alternative fantasy – is a complete reversal of the historical norm.  The Left has traditionally been an inwardly-directed, cultish social force, one based on a shared, separate view of the world, one that sees the starting point of what is here and now as a distraction.  Whether it was Maoist hare-brained Leaps Forward that envisioned making steel in backyard ovens or the citizenry of the French Revolution, and later the Paris Commune of 1870, who renamed the months of the year,  the Left has always been good at ignoring what’s going on in real life and pressing ahead with its own agenda.  And that has traditionally given the Left in America a kind of “otherness,” as if they were in a secret Club of sorts with a secret handshake and a subscription to the Nation.

But that cultish quality has now been completely usurped by the Right.  Part of this transformative switching originated with Reagan, who brought idealism and a Kennedyesque sense of “why not?” to conservative politics that you didn’t associate with such realpolitik Republicans as Nixon, Dole, or Ford. 

Not only did Reagan bring this kind of vision to the Right, but as reality began to confound him – tax cuts didn’t pay for themselves, weapons dealing with Iran, the disappointing absence of any real welfare queens driving Cadillacs, that sort of thing – it became convenient to abandon it.  When Reagan’s successor, Bush the Father, opted to deal with budget reality at the Andrews Air Force Base budget summit in 1990, his own people turned against him, and the role of reality in Right politics disappeared. 

Perhaps Pat Buchanan – who defeated Bush in the latter’s 1992 re-election effort despite losing to him at the convention -- was the real landmark in the Right’s de-tethering, the first conservative politician to be evaluated purely on the quality of his vision.  But as hard as his 1992 speech was – Dick Cavett famously remarked that he liked it better in the original German – it’s mild compared to what we hear in recent weeks.         

But without Buchanan, there’s no Palin, no Tim Moore, no dismissing climate as a “hoax” or calling evolution or the Big Bang one of many competing versions of events.  And the line of descendants include the folks who call the president a Socialist, or call what proves to be an innocuous health bill a government takeover of health care, or cling to fantastic visions of markets fixing the health care sector or the crisis-riddled financial industry, when, as The Roosevelt Institution puts it so well in the latter case, the point is to let markets function properly, as opposed to cutting them loose.

I’m writing about this today not just because Kentucky State Representative Tim Moore reminds me of a friend of one of my kids who, in middle school, once told him that “you can put a monkey in a cage for a million years and it’s not going to turn into a person.”  I think I was also set off in this direction in part by a news item I saw earlier in the week about an organization called “The Coffee Party,” an alternative to you-know-what. 

The unfortunate name speaks to the problem.  Many of those who identify with the Tea Party “movement” are already in a political and social cocoon of sorts, one with precise boundaries that define their orbit.  Fox informs them, Limbaugh provokes them, perhaps some religious institutions nurture their separation.  In this manner, they resemble the Left of decades past, which lived in a similarly self-defined cocoon. 

“The Coffee Party” is an attempt to mirror this self-contained isolation, driven in part by (begrudging and unspoken) admiration for their discipline and success in turning a bizarre vision of Mao and Gramsci under beds into a functioning organization.  (Yes, Gramsci!   He was the Flavor of the Month in my Godless Communism Study Group in 1973!  See this report from the New York Review of Books…)    I hear this all the time – why can’t progressives have a Limbaugh, or a Fox News, or Tea Parties?  Why can’t progressives develop the discipline and cohesion reflected in these people and institutions? 

MSNBC satisfies this yearning to some extent – it’s the intellectual equivalent of having dessert -- but it will never be the equal of Fox, or Limbaugh, or the other institutions of the Right, because those institutions provide a much-needed alternative framework for their participants. 

The Right needs this “alternative framework” to believe that climate science or evolution is a hoax or “just a theory” (like, say, gravity), or to live through the dissonance of being against “government-run health care” while supporting Medicare, because reality is too dissonant.

The Left needed this kind of framework in its incarnation of 40 years ago – it needed the badges, behaviors, and other paraphernalia (a well-chosen word) to be a “counter-culture” much as the Right has become one today.  But the Left doesn’t need those today, and for that reason it strikes me that efforts to emulate the Right’s cocoon are going to fail. Because today, the Left is integrated into the world around itself – it needs no cocoon.  It is in touch with science, rationalism, empiricism, and the other tools of civilization.  Its level of dissonance has never been lower.

The Administration, loosely part of the Left (hysteria about Bolshevism notwithstanding), has to play this hand out.  Like the Little Red Hen, it’s busy dealing with reality – failed military adventures, a financial crisis, a foundering health care sector, a planet rapidly moving towards potentially cataclysmic change. 

The disadvantage of that position is that it has to have its hands in the mess and take positive action that exposes it to criticism.  It can’t sit back and wait to play a rhetorical finesse.

The advantage is that the cocoon that sustains its opponents is inherently self-limiting and takes more effort to maintain.  And when the terms of debate are about a shared fantasy, competition for leadership and attention naturally leads to the tendency to float away.  Witness the CPAC convention, where cocoon denizen Glenn Beck derided the idea that Republicans needed “a big tent,”  or the Tea Party speakers who rattled on about Bolshevism.  It’s a competition to see who can float away the furthest the fastest.

My former boss and mentor Alice Rivlin once described herself as a “raging centrist.”  But she defined her centrism in the context of how to respond to reality.  That common starting point is absent – the Right, which once nurtured it, has walked away from it.  Science – once the starting point -- is the new radicalism. 

And that was just the first point I wanted to make.  The second – still about Kentucky State Representative and Flat Earther Tim Moore – goes to the economy, and will have to wait.

 

 

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[i] With the exception of their opposition to genetically modified food, which I can’t get over – Jack, you’ve been eating genetically modified stuff since before you were weaned – everything has been genetically modified – the only person who doesn’t understand that life on Earth is a process of ongoing, long-term genetic modification is Kentucky State Representative Tim Moore!

Sports Talk

If you want to put your finger on the pulse of the world around you, there’s no better place to start than with one of my favorite publications, the SportsBusinessJournal.  And let me point out that’s not a typo --  the title is one word, like TheNewYorker of CahiersduCinema.  I think it has to do with a translation from the original German.

Regardless, this week’s issue is dominated by a special, In-Depth section on wireless telephony, entitled, “What’s the Right Call on Wireless?”   (The link might not work for you, as it’s a subscription thing, but here it is.)  And if you read it, you learn a few very interesting things, which I will now present as a series of random facts.

• Major League Baseball Advanced Media, the Internet and “other” media arm of MLB, has built apps for the iPhone, Android, and Blackberry.
• The NHL has an exclusive wireless arrangement with Verizon, NASCAR has one with Sprint (is that a pun?), the NFL got $200 million for a five-year audio exclusive with Sprint,  and the NBA tries to mix it up, but keep one hand on its sponsor, T-Mobile.
• MLB, the NBA, and the NFL all deliver out-of-market games on wireless platforms.

And here’s a quote from Bob Bowman, the mastermind of baseball’s league-leading strategy on  advanced media strategies (witness baseball’s ahead-of-the-pack website, or its cable station placed in the basic tier with 50+ million households), about these deals with Verizon, Sprint, and T-Mobile;

“I don’t get it.  To the extent you did a network deal with any of those three, you’re giving up a lot of folks.  And there is no evidence that anyone has switched to any of those carriers for content.  They’ve switched for a device, called iPhone, but not for content.”

Now some of you are at this very moment delighted that we’re talking about something fundamental in their lives – getting sports on their cell phones.  But the reason I’m mentioning all this stuff isn’t because sports on phones is that important; instead, the reason is this – the smart phone market is an incredible competitive success story.

Look, let’s go back to the top.  We’re talking about the different approaches sports leagues are taking to distributing their content on mobile phones.  Go back and read that sentence out loud – we’re talking about watching professional sports on your phone!  A few years ago, that idea was shared by people who were hallucinating and Dick Tracy.   Today, phone video is ubiquitous.  So there’s one point that the SBJ article makes without making it – the rate of innovation in mobile smart phones is breath-taking.

A second thing to notice is that baseball makes apps for three types of phones, and that the number of smart phone brands and models is proliferating.  And the race is to the swift – Google’s Android is about to overtake Palm only a few months after its introduction.  Blackberry, Windows, and Android phones have all innovated rapidly in response to the iPhone challenge.   And, as Bob Bowman’s remark implicitly noted, they have done so with the encouragement and support of the wireless carriers, because we now have learned that people will switch carriers to get the good devices.  Or, to put it another way, providing new and remarkable devices is part of the competition among carriers.

That’s an important point, even if it seems belaboringly obvious, because to some people, it hasn’t sunk in yet.  Consider the FCC, which, in a landmark policy statement that sought to extend the principles of “net neutrality” to the wireless market, advocates requiring that devices be interoperable – if ATT and Apple want to do a deal that ties the iPhone to ATT’s network, tough noogies for them -- they can’t, because it would be anti- competitive.

It would be what?  In fact, the ATT-Apple deal for iPhones spurred an incredible round of competition and innovation that made it possible to talk about getting ball games on your phone without seeming like a hallucinatory cartoon character.  Imagine, for a moment, what the world would look like if the theoreticians behind “wireless neutrality” had their way.  Leaving aside the technical difficulties of making an iPhone that worked with every wireless provider, Apple’s introduction could well have handed them a far larger share of the market, inhibiting competitors and, more importantly, giving them a formidable hold over application development, which is ultimately what competition and innovation in wireless telephony is all about.  Bob Bowman and his baseball app now have three systems – maybe more – hosting his content.  What if there was only one – Apple – and if you didn’t cut a deal with them on their terms, you were shut out of the market?  That’s where interoperability would lean, and what’s competitive about that?

In fact, as I’ve argued in a paper with two colleagues you can find here, using devices to differentiate themselves is an important part of competition among wireless providers.  I don’t know the terms, so I don’t know if their deal with Apple was “worth it,” but there’s no question that the introduction of the iPhone brought subscribers to ATT.  And by integrating devices to the technical specifics of their networks so they work better, wireless systems have found a new and important way to create customer value.  Consider the “connect to any provider” iPhone that the neutrality types wish they had.  Who would be responsible for its functioning – Apple or your carrier?  After all, there are technical differences among these systems.  Imagine the runaround you’d get when something didn’t work correctly.  And that’s the FCC’s apparent plan!

Here’s a third point that flows directly out of the article.  Baseball doesn’t have an exclusive arrangement with a carrier.  Other sports do.  Other sports have something in-between.  Maybe some of these guys are clever and maybe some are stupid – it’s really a fine line between the two --  but ultimately I don’t know which.    But the fact that the people making these decisions disagree is a good thing, because it means that we can have an experiment to find out what consumers want.  When the FCC’s neutrality principles talk about how “consumers are entitled to access the lawful Internet content of their choice” – a blanket statement they would extend to wireless – do they imagine prohibiting those deals?  Does the FCC intend to put out a regulation saying that if the NHL signs a deal with one mobile carrier it has to sign with all of them?  After all, it wants all iPhones to be interoperable, why not all hockey games?

And that’s just what’s so God-awful stupid about this idea.  I don’t know if everyone wants a hockey game, and I don’t think anybody else does.  I think that consumers want “tied” devices like the iPhone, but I didn’t know that before it was introduced.  The point is that the market, as it evolves, in answering these questions through competition, but the FCC and the neutrality types want to pick an answer they like and skip the competition that will get the answer right.  Why the devil are we going to regulate what’s working out pretty well?  Why assume the answers that competition is working out even as we speak?  Where’s the harm – are cell phones causing banks to fail or Toyotas to accelerate or the climate to change rapidly?   Those are all good reasons to regulate something – show me the equivalent problem in mobile telephony!

And there’s a last point worth mentioning in the SBJ article.  It says; “a report from Morgan Stanley predicts that within five years, more consumers will connect to the Internet via mobile than do on desktop computers.”  In fact, as Long Term Evolution – the “4G” successor to “3G” access – sweeps through the mobile phone world in the next several years, through telephony and Clear’s WiMax, a richly competitive mobile market is going to challenge anything with a wire in.  And yet we’re talking about “net neutrality” (or worse! we haven’t talked about “unbundling” yet – the idea that anyone who builds a broadband network has to share it with their competitors!) as a solution to the problem of not enough competition.

Baseball enthusiasts are well known for losing their minds and saying things like “baseball teaches us a lot about life.”  That’s why people shy away from us, particularly during the season.  I’m not sure sports teaches us much about life, but it does teach us a good deal about what’s happening in the mobile phone market, and what it teaches us is that it’s competitive, innovative, and that it’s working.

The Year of Cheap Money

First, the Winter Olympics.  I have the highest regard for the inherent athleticism of, for example, an ice dancer or mogul skier.  But you know what the Winter Olympics needs?  Ice boxing.  Think about it – 19 year old George Foreman, fresh out of the Job Corps, pounding Russian favorite Ionas Chepulis in 1968 – on skates.  No, you can’t fight on skates, that’s ridiculous…ever been to a hockey game?

And, again, I’m talking about people who put their life on their line for an athletic competition, I know, but I feel like I’m watching the Jackass Olympics.  When is Johnny Knoxville going to run one of these skeleton sleds down the chute?    Cut to the ice boxing, please.  Or…ice kick boxing!       Nick Ehrlich would go for that.

OK, maybe I better move on to the economy, even if the videos aren't as exciting.

Last Thursday, the Federal Reserve’s Open Market committee – the group that sets monetary policy and that you think of as “The Fed” – announced that it would begin to consider how and when to raise interest rates, and as a demonstration of what’s to come, they raised the “discount rate” from 0.50 to 0.75 percent.   The discount rate is the interest rate the Fed charges banks when they borrow from it.  If your credit card was the Fed and you were a bank, the “discount rate” would be around 18 percent; if a mob loan shark was the Fed and you were a desperate borrower, the “discount rate” would be a bunch of points a week and a broken long bone if you were late. 

The point of this announcement is this – the Year of Cheap Money will soon be over.  Oh, interest rates are going to stay reasonably low for some while, but the arrow is now up.

A couple points at the outset.  First, this wasn’t all that surprising, although it was probably a little sooner than many people expected.  Second, it was the right thing to do.  Third, the announcement wasn’t as interesting as the next few moves that follow it will be.

Regarding the first point, Chairman Bernanke said a few weeks ago that interest rates would remain “extraordinarily low” for a long time.  Now he announces that the direction for rates is up.  But the two aren’t inconsistent; whether the rate is 0.50 or 0.75 percent, there’s plenty of room to raise it before we would regard interest rates as anything other than forgiving.  The most interesting part of the timing is that the announcement was made between the Fed’s regularly scheduled meetings to decide such things.  It’s a good way to make sure you get everybody’s attention.

Bernanke’s announcement makes clear that the Fed is focused on the important difference between creating credit conditions that support a growing economy and job creation, on the one hand, and conditions that allow banks to make more money to restore their capital, on the other.  Up to now, the latter has been an important part of the mix – with so many banks having taken a bath on the collapsing value of their mortgage-related and other loans, a major objective of monetary policy has been to help these banks get on their feet.  The Year of Cheap Money has let them earn very big profits and helped to restore their capital – capital being the money under the floorboards that ultimately secures their business.  After all, banks can borrow from the Fed at less than a percentage point and then buy the safest government bonds for about 3 percent.  Like it or not, subsidizing these guys has been a conscious objective of policy.  And that policy has worked, and worked well. 

So it’s time to move on.  The Fed is signaling that it’s going to shift, slowly, steadily, and as circumstances warrant, towards a more neutral policy, which probably means a federal funds rate of 2.5 percent or so by the end of 2011, a gain of a little more than two percentage points.  By saying that, I’m really saying that I stand by my view that the economy is going to rebound more energetically than we think right now and that employment gains will be surprisingly strong, soon.  If it does grow the way I think it will, you won’t mind the rate increases.  And if there are any signs of the economy going back into the tank, all this talk about gradually raising rates is going to be put to the side.  But there won’t be, and it won’t be, or so I’m betting.

There are critics on both sides of this policy, and to me, the very symmetry of their criticism is good evidence that they’re both wrong. Some claim that the Fed is already too late – that all this easy credit and cheap money mean that we’re going to have a round of rising if not severe inflation.  I don’t get this at all, for reasons that probably deserve more space than I’ll give them here.  But to imagine that with one out of every ten American job seekers out of work, millions more waiting to go look for a job when it won’t be a waste of their time, and tens if not hundreds of millions of people in the world economy producing goods and services we can buy here at home, believing the idea that “inflation happens when too much money chases too few goods” in almost a compulsion rather than a framework for understanding the economy.

The other critical perspective is that raising rates and ending the overt subsidization of bank profits is going to lead to bank failures and throw us back into the soup.  I don’t disagree that making it a little harder for banks to borrow on the cheap down the road will lead some smaller, regional ones to be pressed, and some flattened.  But life is unfair.  I’m not opposed to some banks failing – I’m opposed to all of them failing at once.  Now that we have some devils walking around, they can go back to taking the hindmost.

But all of the back and forth about the end of The Year of Cheap Money has this context – why has (and still does) the Fed lend to banks at these miniscule rates to help restore their profitability while there are tens of millions of Americans that are still suffering in large part because of these same banks’ behavior?  I was having dinner with a friend the other night – a guy who had a pretty successful career and has some fairly conservative instincts -- but he suddenly told me that, as moral proposition, the difference borders on corrupt.  Why must we tolerate it?

Because your rear end is spot-welded to those banks, at least for now.  Losing the auto industry, for example, would be a severe disability for the economy.  But people learn to accommodate and rise above disabilities.  A collapsing financial system is like an acute cardiac crisis – you don’t survive it.  Had the banking system collapsed – as it was on the verge of doing – there would be no lending for payrolls or materials, no financing for investments, no nothing.  There are probably free market devotees who argue that some new lenders would emerge and that the major institutions that dominate our economy would soon not be missed if they were allowed to fail.  That looks good in chalk on a board, but to imagine that the economy could make a transition to a new set of institutions, or the wholesale reorganization of the wreckage of the old ones, without a profound dislocation is laissez-faire pie-in-the-sky.

And that takes us back to financial regulation and the role of markets.  Markets are very good at balancing competing views – bulls and bears, buyers and sellers, optimists and pessimists, eat-no-fat and eat-no-lean.  But when everyone stampedes in the same direction, or has the same problem, markets don’t work as well.  Sure, some contrarians make money – I proudly tell you that I bought Citigroup at a dollar a year ago, my theory being that if Citigroup wasn’t worth more than a dollar a share, I’d be burning money for heat in a cave somewhere pretty soon, so I might as well buy the stock – turn a low BTU dollar bill into a high BTU share of stock.  But the success of contrarians isn’t proof that markets alone can get the economy to grow and sustain our standard of living when it hits the fan.

Which goes back to seizing the moment and passing financial regulation that assumes that crises are going to happen as opposed to being shocked – Shocked! – when they do.  And if that means passing the Volcker Rule (a good idea, as I’ve said), or putting limits on their size relative to the economy, or even enacting the much-disliked (by economists) “Tobin Tax” – a miniscule charge on all financial transactions that would fund, in part, a pot of money that could be used to shut down broken banks and keep the economy going while they rot and vultures pick their flesh – then let’s go.  I trust the market at Sears, I trust the market when I hire people or am hired, but I don’t trust the market to prevent the kinds of disasters we’ve just seen. 

That’s not a call for any and all approaches to regulation, just a statement that it’s time to get real about what type of regulation we need.  Because if the alternative is to have The Year of Cheap Money so that men in suits in tall buildings can borrow cheap and lend dear, then we can’t do much worse.

Snowmageddon

Like everyone else in the DC area, my consciousness this week has been massively diverted to snow.  I love snow, always have.  I was giddy when the first storm hit, more so when the second was forecast.  I’ve searched myself for the roots of this attraction, and there are many – from winter’s part in the annual journey of spiritual renewal inherent in the four seasons, to snow’s enabling role in my latent agoraphobia.  And the pleasure I derive from snow is compounded by my dislike of weather-whining. 

People love to whine about the weather.  Have you ever noticed that every adjustment “they” make to temperature makes it more extreme?  In the summer, we add humidity to temperature to get a heat index.  In the winter, we factor in the wind chill factor, to show it’s really colder than we thought.  Where’s the index that measures the breeze in summer?  It’s pandering, if you ask me – an opportunity to kiss up to people’s instincts to complain. 

Here again, my buttons are pushed.  I come from a long line of complainers – my family worked in affliction the way Rembrandt worked in oil.  I see my life’s work as reversing this perspective, and snow gives me a chance to take my equanimity for a walk.  Too cold?  Dress warmly.  Don’t like shoveling?  Exercise and fresh air.  Troubling getting places?  Plan ahead and don’t go anywhere.  Power outages?

Ah, now there’s the rub.  Because power outages in a snowstorm are not just an inconvenience.  They’re a form of time travel, a return to previous centuries, and a good way to understand an important economic reality – that the average person today has a higher standard of living than the Kings and Queens of prior centuries. 

We talk about “modern conveniences,” and think about the quantum improvements in our standard of living in big bites – medicine, communication, mechanical work and power, and their stepchild, transportation.  Medicine is an easy one – many people I know, like myself, can count the number of times that they would be – had they lived in prior centuries – dead today.  It is amazing to recall stories of my family’s ancestors back in Europe, a century ago, and consider the things that killed them – scarlet fever, high blood pressure, and the like.  Or to consider the regularity with which people experienced the loss of a child, a burden that robs one’s soul today.

That’s all relevant at a level other than maudlin because it demonstrates that our rising spending in health care isn’t just “health care inflation.”  It’s real product.  Sure, there’s gold-plating and inefficiency in the system – defensive medicine, pay-per-procedure, absence of preventive medicine and inattention to public health issues such as obesity, and so on.  But the tripling in health care’s share of household consumption from around 6 percent fifty years ago to over 19 percent today is also about the ability to treat disease, which argues against being able to solve the health care “problem” by squeezing inefficiency alone.  There’s plenty of medicine being practiced in the economy today.  The issue is whether it’s being distributed both fairly and justly.

Communication and transportation also combine to be an important source of your regal standard of living.  Until the advent of trains, transport of both ideas and things were limited to the speed of a horse.  The average person reading these words will have journeyed greater distances and seen more of the world than all but a subset of the merchants and soldiers of past centuries.  And will be exposed to orders of magnitude more knowledge.  I used to give an information pep talk when I was back at Unisys 20 years ago about how if you know one fact about a person, you can talk to them instantly – their phone number – and that one day if you know a similar “fact,” you’ll be able to know anything.  I thought it was wild futuristic stuff, and within a decade, it was true – their Internet address.

I raise these examples not out of some triumphalism –this “wonders of the modern world” stuff often ends up concluding that the poor have it pretty good and ought to content themselves, which isn’t the point.  The point is that the secular, long-term trend in the world is not inflation, but deflation.  And that’s because it’s easy to identify inflation when it occurs – the cash price of one thing or another goes up – but it’s far more difficult to figure out the change in price of a product or service that’s changing rapidly or hadn’t existed before, which is where much of our deflation comes from. 

Darcy, the aloof, sometime-dickhead hero of Jane Austen’s Pride and Prejudice, was considered pretty well off in 1813 (when P&P was written), because he had an income of ten thousand pounds a year.  (Let’s let Brad Delong, one of my favorite economists, go over how much that is “today’s dollars.”) 

A pound is worth around $1.56 or so today, so that’s $15,600.  If Darcy was rich back in 1813, then inflation must have eaten the value of that money up in the intervening two centuries -- a dollar was worth a dollar back then, right?

Tell you what – let’s use a thought experiment once suggested to me by the late Ned Gramlich,  who ascribed it to Richard Ruggles, to figure out whether Darcy was better off than, say, you.   Austen’s Darcy was a pretty rich guy.  Let’s double his income, meaning $31,200 a year.  Now which would you rather have that $31,200 in 1813 but only be able to buy what was available in 1813, or would you rather have that $30,000 today, but be able to buy what’s around today, even if it’s in limited quantities?

Think about it!  Are you prepared to give up the mobility, the ease of access, the medical improvements, all of the components of our modern standard of living for what Darcy had – a house in the country and a place in town with flue-based heat, a bunch of servants to spare him from having something to do, no running water or sanitation, a provincial life without exposure to the outside world, ideas that travel at the speed of horse, and so on? 

It’s an easy choice – being poor today is better than being rich 200 years ago, and if that’s true, then prices have fallen over that time period, not risen.  A dollar goes a lot further today, because it has somewhere to go.  And if you don’t believe it, stay home during the next Snowmageddon when the power goes out.

Question Number One

Five days after his State of the Union address, the President of the United States gave a live interview on YouTube (Google) in which viewers nominated and selected questions for him.   So much for Walter Cronkite.  To their credit, viewers eschewed questions about whether the President was born in a mud hut somewhere or how the death panels would work.  But in a nation with over 10 percent unemployment, record and growing home foreclosures, a deficit that tithes the economy, and  -- gosh darn it, I’m going to say it – 46 million people without health insurance before the recession – here was what the YouTubers (dare I call them couch potatoes?) selected as the “number one question” to ask the President about the “Jobs and the Economy” category:

An open Internet is a powerful engine for economic growth and new jobs. Letting large companies block and filter online content and services would stifle needed growth. What is your commitment to keeping the Internet open and neutral in America?

Well, skip that other stuff about the unemployment and the deficit and the people losing their homes and so on (I think I’m unconsciously writing like Governor Schwarzenegger).  Let’s get right to it – large companies have the desire to block and filter online content and services, and make the Internet other than open and neutral.

The President got right on it:

…we don’t want to create a bunch of gateways that prevent somebody who doesn’t have a lot of money but has a good idea from being able to start their next YouTube or their next Google on the Internet.

Well, that’s quite an exchange.  But my worrying about whether somebody’s going to block and filter on-line content is considerably further down the list than my worrying about being killed on the road by a runaway Toyota or whether the writers of Lost really have a plan to end this thing in a way that makes sense.

I’m not sweating this “filtered” Internet because it’s not going to happen.  Yes, an open Internet is good, in fact, let me be more specific – really good.  And if large companies blocked and filtered online content, that would probably be bad.  For example, Comcast wants to buy NBC so they can meet Alec Baldwin at their corporate retreats – perhaps they think he’s one of them.  And in the minds of the people who are agitated about the question posed to the President, the danger is that Comcast is going to start muddying your ability to get, say, competitors to Hulu.com (an NBC venture) or perhaps the on-line feeds of the other networks.

Yes that would be bad for you, but it would be even worse for Comcast.  Are you telling me that there’s anybody who would pay $43 a month for the privilege of letting Comcast deny you your right to watch The Simpsons?  OK, aside from Jeffrey Zucker.

So the questioner might as well have asked the President if the Coca-Cola company was going make us all drink New Coke.  That part of this debate simply eludes me.  It argues that companies that have invested tens of billions in broadband distribution networks are going to jeopardize those investments by giving consumers what they don’t want.  There are probably some people who want “branded” Internet – only show me Rachel Maddow, only show me the Creation Channel (no, it doesn’t exist yet, but do you want to bet against it?), let me buy music from iTunes but not from Rhapsody and eMusic  – but the right place to address their problem is at the FDA, not the FCC.   It reminiscent of Congressman Bobby Rush’s description of “net neutrality” as “a solution in search of a problem.”  

So the question itself has a kind of word salad feel to it, particularly the comingling of two descriptions of the Internet – “open” and “neutral.”  To me, “open” means you can find anything you want, so long as it’s legal.  That’s unequivocally good – it’s what I pay a provider to do for me.   But neutral means that everything that’s carried on the Internet travels on the same speed and the same terms as everything else, and I’m not convinced that’s as good as seeing everything I want to see.

I’ve talked about this before –not everything should travel at the same speed and on the same terms.  I’ve used the example (in other postings) of a medical device that’s attached to me at one end and a hospital on the other via the Internet, and how I want that signal to travel faster than a download of a cat playing the xylophone.   I thought I was being literary – you know, cats can’t really play the xylophone – but then I found this clip, which isn’t exactly the same thing, but nonetheless a good example of something that I want my heart monitor to go faster than.    Are you telling me that the economy would be worse off if companies like Comcast or Verizon or ATT or Clearwire or whomever else could let the hospital pay to have an uninterrupted connection to my thorax and let that connection take priority over the cat video if there’s congestion on the Internet?  That’s awfully hard to believe.

And then there’s the President’s answer.  Specifically, he’s concerned that if you could buy your way to the front of the Internet line – like a heart monitor, or a live broadcast of a concert or sports event, or perhaps a videophone-for-a-fee service that provides a better-than-Skype connection for my wife and I to talk to our kid who’s playing football in Spain this Spring and writing a sensational blog about it  that you can read here   -- that would somehow be bad, and that somebody with a good idea but no money wouldn’t be able to find his audience on the Internet.

The people who worry about that don’t get the fact that big websites, or as Theodore Roosevelt would have called them, Big Website, already can smoke their upstarts because they use caching.  Caching is remarkably close to ka-ching, and for the Googles of the world it is based on the same idea.  When you go to Google.com, you don’t go to some remote citadel of Googleness off on an island somewhere (attention, Lost!).  Instead, you’re directed to any one of a number of servers that have been placed around the world so that there will be one close to you.  That way, Google stays fast, just like consumers like it, because they’ve put these servers everywhere on the Net.  The only difference between spending a lot of money to cache your content and paying for a premium (non-neutral) broadband connection is that the non-neutral one is quicker and probably cheaper to achieve.  In fact, neutrality doesn’t allow new challengers to compete with Google and its dotty step-child, YouTube – it protects Google by making it harder for competitors to replicate its size advantage.

The President is a very intelligent guy and I’m a big fan of his.  But he doesn’t get this.  I have three theories about this – supporters always have theories when their leaders don’t go in the direction they want.

One is that Big Website is well-connected and often popular – Google, EBay, and so on, everybody likes them.  So when they walk around Washington and announce that they support a policy that makes it easier for competitors to challenge them, people think they’re saints and figure if it’s “neutral,” it’s good. 

A second theory is that it’s easier to talk about theoretical issues like neutrality – I mean, tell me a bad thing that’s ever happened because the Internet hasn’t been “neutraled” yet – than it is to address the real problem – closing the digital divide.  The Administration has a process in motion to create a plan that will get us closer to that goal, but it’s late in coming and will cost more than the amounts now set aside for it.  So an alternative is to focus on the neutrality issue and slow-steam extending the Internet to the unserved.

Even if that’s not the intent, that’s the result.  If “an open Internet is a powerful engine for economic growth and new jobs” then shouldn’t the first thing we do be extending the Internet to neighborhoods where people need jobs, so they can start using the resources they find on it?  I’d like to think that’s what Bobby Rush is thinking when he stays away from the theoretical angst about openness.  Instead of having the debating team argue about “neutrality,” we could be building a true “universal” Internet our priority.

And then there’s a third theory.  It’s that the people in the Administration who know better – the economists – Summers, Geithner and his folks like Alan Kreuger or Lew Alexander, Jason Furman, Christine Romer, Peter Orszag, or Commerce’s Becky Blank – all are focused on saving the country from its worst crisis in a lifetime and can’t really be bothered right now with this stuff.  So long as nothing happens – no new rules enacted, no new meddling undertaken – they’re happy to let debating points be made while the real agenda is elsewhere.

Or at least so I hope.  Because the “number one question” about jobs and the economy today has nothing to do with what happens to a video of a cat playing the xylophone.

Jobs Are On The Way

                First off, I am told that one aspect of this blogging thing is to link your blog to the blogs of others.  OK, here goes – click yourself over to this blog and have a good time.  I know the guy who writes it pretty well, and he’s a piece of work.

                Now, back to business.

                I have a warm spot in my heart for Gross Domestic Product, or GDP, which is, as young school children are taught, the value of everything our economy produces.  Back when I was Undersecretaryin’ in the Clinton Administration, the Bureau of Economic Analysis, which estimates GDP, was under my purview.  Substantively, my major responsibility was to champion (within the Administration, the Congress, and the community of GDP information users, like investors) improvements in the measurements – maybe we’ll talk about that one day.  But the really cool part was that the people who calculated GDP would appear in my office an hour before the data were made public to explain the estimate to me.

                This was really a courtesy more than a necessity – if I looked at them and told them they were God’s own idiots and got the whole thing wrong, they’d have shrugged and made an effort not to laugh in my face.  Besides, back then – mid-1990’s – GDP was estimated by perhaps the greatest GDP estimator who ever rested a coffee cup on a CD of regional economic data, Bob Parker.  I remember once being shown a chart that showed the average error in GDP estimates, and there were two years when it suddenly rose and then returned to its previous level.  When I asked the reason, I was told “that was when Parker took another job.”  It reminded me of a story my wife, who has a Ph.D. in hydrological engineering, told me about rain gauge readings that changed suddenly when a new person started reading them, because that person was shorter and looked at the gauge from the wrong angle.  Measurements depend on the person doing the measuring.

                Back to GDP.  Friday’s announcement told us that the economy grew at an annual rate of 5.7 percent in the fourth quarter of the year.  To the churlish, this growth is the proverbial “dead cat bounce.”  After all, about 60 percent of the growth came from increases in inventories, which had been drawn down to unprecedented levels in many industries.  Once those inventories have been rebuilt, the pessimists argue, we can go back to a jobless, stagnant miasma.

                In fact, the GDP data tell us something different.  They tell us the economy is entering a recovery.  And while we have a very long way to go before we reach the levels of unemployment we enjoyed in recent years, jobs are about to follow.

                Invariably, companies stop producing things because there’s no demand for them.  So the restocking we’re seeing in the economy, in and of itself, is an indicator that businesses expect and are beginning to see an upturn in that demand.

                Moreover, this restocking means more production and, therefore, more income in the system, which means more demand down the line.

                But what’s even better about the new GDP information is the pattern it presents.

                Let’s start here – American consumers are going to consume less and save more in the years ahead.  No way around it.  Their jobs are less certain if they exist.  Their homes are worth less if they’re still in them and the stock market that supports their pensions – if they exist – is still over a quarter below its peak value.  And the GDP data show that household savings rose to 4.6 percent of total income in 2009, up from, for example, 1.7 percent two years ago.  So that’s happening.

                But if households are going to save more, something else has to pick up the slack to keep the economy going.  In the short-term, the answer is government, which is what the stimulus is all about – remember, companies make things because there’s the prospect of demand for them.  But you can’t prime a pump forever.  At some point the alternatives to consumer spending are really only two – investment and exports. 

               And that makes perfectly good sense.  If we’re going to be a society that saves more, then we’ll have more resources available for investment in stuff like software, computers, communications gear, machinery, new buildings – well, forget the new buildings for a while, we’ve got too many buildings lying around as is and no one wants to lend for new ones -- but the other stuff stays on the list.  

              The same is true for exports.  People and politicians love exports -- they get all chesty about sending our goods around the world, like they were scoring touchdowns or hitting home runs.  That’s fine, but the underlying reality is that exports are things you worked hard to make and then didn’t get to enjoy.   After all, if we shipped everything we produced off to Europe, China, and the like, would we be better off?  So rising exports aren’t an unequivocal blessing.  But if we’re going to save more, then we’ll have more stuff around to export.  There’s no avoiding that .

              Here’s the good news -- the hard evidence that this is all more than parable and footwork can be found in the GDP report.  After five consecutive negative quarters, business investment resurfaced in the fourth quarter, with rising investments in computers and automobiles – yes, automobiles! – overpowering continued declining investments in buildings. 

              And there’s every reason to expect more of the same.  Technological progress keeps producing more powerful and useful computers, communications systems, and other digital wonders, making the old ones more obsolescent.  Moreover, the wherewithal to pay for that investment – profits – are high and rising, particularly now that the economy is starting to grow.

               Exports are also growing – after four consecutive negative quarters, they grew at an annual rate of about 26 percent in the second half of the year. 

               But perhaps the biggest surprise is that the economy grew this substantially in the fourth quarter without government help.  Both the federal government and state and local governments were flat, although the stimulus probably let some states and localities avoid cutbacks.

               So the economy is giving off the right signals about growing again.  And if it does, then jobs are going to start coming back.

               In fact, there’s a pretty good argument that companies fired more people than you would have expected them to last year.  You can tell that by using an old saw economists call “Okun’s Law,” a rule of thumb developed by the late Arthur Okun that tells you how much unemployment to expect if the economy shrinks or grows.  If you use this rule, which has worked pretty well over the years, you’d expect the unemployment rate to be about 9.0 percent instead of 10.2 percent.  And in fact, the job picture is worse than 10.2 percent – if we accounted for the two million people that quit looking for jobs in the last year, the unemployment rate would be pushing 12.

                Why did businesses fire so many more people than you’d expect?  Part of it was panic – a year ago, the stock market was in free fall, big banks were failing, and the world was widely reported to be going to hell in a handbasket.   But there’s a more specific reason.  With banks failing and trying to cover their losses, they stopped lending to small and medium size businesses.  So if you were running a business and had to make a payroll or otherwise pay your bills, you had to raise the cash yourself.

                 And there are really only two ways to do that if you have to do it right now.  One is to fire everyone who isn’t hiding under a table in the coffee room – the more people you fire, the less cash you need.  And the other is to sell everything you have on the shelf already for whatever you can get for it, which is why inventories were drawn down to the lowest levels in some while, by some $125 billion in 2009. 

                  Lincoln one told a story about an ancient King who asked his wise men to write a sentence that would be true regardless of time and place.  Their answer was: “This, too, shall pass.”  The economists who predict no growth, no jobs, no nothing need to go back to that sentence.  Yes, the economy has been abused by tax cuts, wars fought but not paid for, and a financial free-for-all in the housing market.  But it’s about to come back.  Jobs are on the way.

Read All About It

What an incredible news day!  The most exciting newspaper I've enjoyed over my bran flakes in a long time.

Let’s recap.

First, after the most startling confession since Mark McGuire’s, it turns out that it’s John Edwards’ baby.  Check. 

Next, Conan O’Brien and his staff are going to get a substantial amount of money -- $45 million.  Welcome to the world of content, Brian Roberts.   (No, not that Brian Roberts.)

Did anyone else enjoy the remarkable coincidence that Comcast’s acquisition of NBC took place the same week as Gerald Levin’s admission that, as CEO of Time Warner, the merger he architected with AOL was – in his words --  "the “worst deal of the century?”  Levin, in retirement, now runs an addiction rehabilitation center called Moonview Sanctuary, which sounds more like a lycanthropy treatment facility than an addiction center, but whatever.  

Perhaps one of the addictions that Levin treats is the addiction of infrastructure-connectivity-signal providers to acquisitions of content providers, as seen in ABC/Cap Cities’ Jonesing for Disney, or Time Warner’s acquiescence to Steve Case’s money-laundering, crack-dealing stock swap, or now Comcast buying NBC/Universal.  Good luck.

Moving on, more human misery in Haiti.  The only comment worth my making, beyond encouraging charitable giving, is to congratulate the economists who argue that aid made Haiti poorer on their timing.    There is no argument that aid has often been administered poorly , and it’s even more true that we know more about how to do that than we once did – witness that CARE (an organization to which my wife and I contribute annually), once the epitome if not caricature of sending food in boxes (“CARE packages”), is now a leader in microfinance among the world’s poor.But is aid the problem, as in the cause of Haiti’s squalor?  That might be going too far. 

You know what was a bitch for Haiti, in terms of the economy's long-term structure?  Slavery.  I bet it was worse than aid.

Next: the Supreme Court has decided that corporations and labor unions have freedom of speech even if they lack the convention apparatus for delivering speech – lips -- and can spend fortunes producing ads for candidates, although they cannot give money directly to candidates, meaning they can bribe candidates, but not hold a formal deed to them.  That’s because, in the minds that produced this opinion, corporations are legal “people” and have the same First Amendment rights as – what’s the right retrogressive neologism here? – “human” people.

Now the first thought that will occur to most people (“human” people, thanks) is that pharma and banks and energy companies are going to go Biblical in the next election cycle on those who opposed their views on health care, or the bank bail-out and subsequent financial sector reform, or climate change legislation, or whatever, and that labor unions will do their equivalent, lower-budget deal – not quite Biblical, maybe just Apocryphal – job on those who didn’t back card check legislation.

But my first thought is the corporate income tax.  Economists in general, and conservative ones in particular, don’t like the corporate income tax.  It’s double taxation – a corporation makes money, pays taxes on what it makes, and then sends dividends to its stockholders or invests what’s left in projects that help the firm grow, which leads to capital gains.  Stockholders then pay taxes on those dividends and gains.  You don’t have to be a handmaiden of corporate malfeasants to think that’s a bad idea.  We’d be better off if we somehow attributed what corporations make to their stockholders and let the stockholders incorporate that into their own taxes.  They might even be “better” shareholders  – more interested, more involved, more offended by bloat, pomp , and obfuscatory BS  –  if that were the case.

One counterargument to that view is “the hell with it, soak the rich.”  A more sophisticated view is that corporations acquire the right to become “legal people” when they incorporate, and that a special tax on them is like a payment for that special status.  I disagree – I’m with the folks in the last paragraph who argue that we’d be better off attributing what corporations make to their stockholders.  But now we have Justice Roberts – who told us that his job was to “call balls and strikes” and that he wasn’t out to overturn “established law” – overturning established law to not only call balls and strikes, but determine that the corporate team gets four outs when they come to bat, all because corporations are “legal people” with First Amendment rights.

It’s a clear cut case of having it one way and then the other when it suits you.  That it comes from a majority with an ideological axe to grind is unsurprising.  But the part of me that wishes the Consistency Fairy would somehow wave its wand at this type of thing is deeply hurt.  And the part of me that worries about the quality of democracy is afraid.  I might be proven wrong – perhaps the Internet-based waves of organized small contributors, which boosted Howard Dean, President Obama, Ron Paul, and Scott Brown, will produce more resources than their corporate equivalents.  Right now, I doubt it.

But the topper in today’s paper has to be the announcement of the “Volcker Rule,” as embodied in the regulatory framework put forward by the White House yesterday, and that will define the future of banking as surely as Glass-Steagall did almost 80 years ago.    For those of you who demand that complex phenomena be stripped down to their essence (a questionable rule for financial regulation, a good rule for sentences), I think it comes to this – first, banks can’t invest (gamble) their own money in hedge funds, private equity, or other more speculative investments, and, second,  there would be limits on the size a bank could reach (perhaps no bank could account for more than 10 percent of total bank liabilities – deposits, other borrowings by the bank, and so forth).

This stuff deserves its own discussion, and time and space don’t allow that right now.  I was encouraged when reading today’s paper that Senator Judd Gregg, an important Republican on the Senate Banking Committee, said he was attracted to Volcker’s thinking was interested in considering it.  The fact that banks are now stock-character political villains might make them an easy target, but at least it will save us from some predictable cant about “excessive regulation” and blah blah blah.

I consider this cavalier tone justified.  In the past 30 years, we’ve had financial crises driven by the recycling of petrodollars leading to the Mexican/Third World debt crisis in the early 1980s, the savings and loan crisis of a decade later, the Asia/Russian financial meltdown of 1997-98, and now the mortgage-led race to the precipice, and I’m leaving out the 1994 Mexico bail-out and the dot.com bust, which are more tangential to the main point.

And the main point is that financial markets are prone to crises – not only does the market mechanism fail to protect us from them, it actually leads to them.  And I say that as someone who thinks that markets work very well to sort out what happens in the markets for goods and services and even such financially-related phenomena as the market for corporate control (corporate mergers and takeovers and the like).

But there’s a big difference between a market for things you buy to use and a market for things you buy so that you can sell them again.  Panic, herd mentality, and the other behaviors that humans universally demonstrate across time and place don’t do much damage when we’re talking about goods and services.  Yes, it’s amusing to see people stock up on bread and milk and leave grocery stores denuded before a snowstorm, but it’s harmless.  But when the same mentalities produce whipsaws of euphoria and dread, or leave markets without either buyers or sellers, there’s no inherent limit save for crises.  Moreover, the financial market is the cardiac system of the economy.  I’m happy to leave most other social functions to the whim of markets – do people want paper or plastic, or wire- or wireless telephony?  But finance is different.   The question isn't whether to regulate, but how.

All of these topics – well, except who’s a baby daddy – deserve more mention.  What’s the future for signal carriers such as Comcast versus content producers such as NBC?  How should we tax corporations and how should we regard them as social entities?  How should we regulate financial markets?  And given enough time, we’ll get around to all of them.

 And that’s why nature invented time – so that everything doesn’t have to happen at once.

The Rabbit Test

The latest entry in the ongoing analytic debate over net neutrality comes from the New York University Law School’s Institute for Policy Integrity – love the name, guys – and their report, Free to Invest: The Economic Benefits of Net Neutrality.   To its credit, this report uses the tools of economic analysis to approach the issue.  And, again to its credit, it correctly depicts the net neutrality issue as whether we should subsidize content providers at the expense of infrastructure providers on the Internet. 

I’m going to spend the rest of this entry talking about how screwed up this paper is and how these guys missed the boat.  In fact, I wonder if the authors themselves realize that their analysis depends on a misconception they execute early in the analysis and then carry through to their conclusions, much like a rabbit stuffed in a hat and then pulled out later by its plucked ears to the wonderment of the crowd.  Still, at least they’re trying to present the argument in economic terms, which is a refreshing change from the all-too-frequent stuff you hear about net neutrality will stop broadband infrastructure providers  who want to censor free speech, corrupt the content of competitors, stop you from listening to Pearl Jam, and otherwise pillage the Internet. 

A flawed analysis is better than bizarre rhetoric any day, I say.

The Rabbit Enters

Let’s get to the heart of the matter.  Here’s a quote from page 12 of the report (and my ellipses are only to spare you from reading and me from typing);

                The Internet market exhibits …the “network effect.”  The effect occurs when the value of a good or service increases as others purchase the same good or service.  A telephone...(is a good) example…a single person who purchases a phone does not reap benefits unless others buy telephones and use them…(I’m on page 13 now)…This means the Internet becomes more valuable to each user as additional users are added.

Now that is simple and straightforward, and all economists agree.  It’s one of the reasons the old Bell phone system was a regulated monopoly, and a reason why universal broadband access is a policy goal that’s shared by rational people everywhere.

But then the authors stuff the rabbit (page 4, right at the top of the Executive Summary):

                The Internet…(is).. both…the physical infrastructure as well as the content and

information moving along that infrastructure

Now wait a gosh darn minute.  No.  The Internet is the medium by which content is distributed to people who want it.  No infrastructure, no Internet.  No content – empty Internet.  Big difference.  The reason why the Internet has a “network effect” is that when I get access to it, it’s better for my friends Stan and Marv, because they can communicate with me.  We call this “network effect” an “externality” because when I get access, I create benefits that are “external” to me – Stan and Marv are better off without paying to be better off, because now they can do more with their connection. 

Now, let’s say there’s a new website – content – that shows videos of cats playing the xylophone – xylophonecats.com.  That makes the Internet more valuable to me, Stan, and Marv, to be sure, because who doesn’t like a video of xylophone-playing cats?  But there’s nothing “external” about that.  If I like cats who play like Milt Jackson, I’ll be willing to pay more for broadband.  That’s just about me.  And the entrepreneurs who created the site will get whatever they were after – let’s hope it was money.

And that’s the point – you can say that the Internet is one “eco-system” of infrastructure and content, but the content rides on the infrastructure.  The medium is the message, as they used to say in a different context.    The only “externality” is the connectivity of the infrastructure.  The Internet is like the phone system – if I get on, Stan and Marv can send me e-mail and share stuff with me.  But websites are only like stores – Amazon is like Sears, EBay is like the Stock Exchange, and Google is like the Encyclopedia Britannica, the Automobile Club, the Phone Book, and the Prophesies of Nostradamus, only much, much better.  If I use Google, Stan and Marv aren’t any better or worse off, because they can use Google whenever they want irrespective of what I do, just as they shouldn’t (and don't) give a rat’s behind if I go to J. C. Penney this afternoon.

The Rabbit Appears

But the NYU authors don’t get this, because they want to show that ­subsidizing content is important and desirable.  They want to do that because “net neutrality” is a way to subsidize content – it prohibits any website from buying a faster speed than its competitors, much like they can buy express mail rather than regular mail to send letters.  So the NYU authors need to show that “content,” like “infrastructure,” generates “externalities.”  If they can’t show that, then making content providers compete for the “best” Internet speeds makes good economic sense – just like letting people use express mail versus regular mail, or buying Sears’ “Good” versus Sears’ “Best.” 

To show that, the NYU authors must resort to saying this, (page 13);

                If a potential user does not connect to the Internet because she does not find enough valuable information on it, the value of connecting to the Internet is reduced for everyone.

Think about that statement.  NYU is arguing that it’s OK to subsidize content because more content will induce more people to get on the infrastructure.  Let’s parse that for a few moments.

First, it’s a straightforward admission by the authors that they’re flat-out wrong, that only infrastructure conveys net work effects.  It admits this by noting that the significance of content is that it leads people to access the infrastructure.  That is, a user finding valuable information doesn’t generate any “external” benefits unless she connects to the Internet.  The connection is everything.

Second, do the NYU folks really think that  subsidizing content – Google, etc. -- is the best way to get more people on the Internet?  How about putting out contracts to build broadband infrastructure in neighborhoods that don’t have it – you know, rural areas, and/or where poor people live?  The Obama Administration is for this – perhaps the NYU guys could support that instead of making Google richer.  Or maybe we could give tax credits to companies that build new high-speed broadband (whether cable, fiber, wireless, or whatever else works) in currently-unserved areas.  But nothing about that from NYU – letting Google and EBay send their stuff out for free is apparently a better way to build new infrastructure than actually going on out and getting the job done.

The NYU authors have to confuse the information (and products and services) on the Internet with the Internet itself because they want to support “net neutrality,” and net neutrality is about whether Big Websites can stop the infrastructure providers (Verizon, Comcast, ATT, Cox, and so on) from buying faster connections, the way it allows you to buy a faster connection at the other end.  In order to reach the conclusion they want, the NYU folks have to argue that’s bad;

(“Net neutrality”)…may increase Internet service providers’ ability and incentive to invest in …broadband lines…but would decrease content providers’ ability and incentive to invest in…the Internet’s content.

Not only do they argue that subsidizing content leads to more infrastructure, but they now are arguing that a rational economic system for allocating the Internet would be bad!  Let’s say somebody wanted to create an alternative to Skype that was faster and that never froze up, but charged you ten cents every time you made a call.  They could do that by offering Internet infrastructure providers a payment to assure that their “packets” (the zero and one “bits” that make a Skype call) always go ahead of xylophonecats.com.  That would increase both infrastructure and content.  But you can’t do that under “net neutrality” because it’s not neutral.  In fact, “net neutrality” prohibits this kind of new content.

There’s a reason why Google and the other Big Websites are paying for the net neutrality campaign.  It’s because they are already the biggest and fastest providers on the Internet – they’ve “cached” their content all over the Internet like squirrels hiding acorns, creating server farms somewhere near you so you’ll reach them more quickly.  For someone else to come along right now and pay the infrastructure providers for the right to reach you at a comparable speed -- by buying an express lane on the Internet’s tubes – is good for you, bad for Google.

The NYU report is right in noting that “net neutrality” is about a boodle of money being shipped from internet providers to content providers.  But they’re wrong to argue that we benefit from that.  And they’re wrong to argue that changing the system would produce less content – it would simply let new kinds of content challenge the old.  And they’re wrong to argue that the economics of content and infrastructure are the same.  Let’s just say they failed the rabbit test.