Ev Ehrlich's Everyday Economics

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.

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.

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 12^th 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.

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.

 

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.

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.

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.

 

A Kick to the Head

I’ve written before about “cage match competition” in the broadband space – “space” seems like a better word than “industry” – in which the companies that deliver some part of the integrated broadband experience compete with each other like wrestlers in a cage match, forming and reforming alliances and engaging in head-to-head confrontations on the fly.

Well, this week, the fans who paid to see the match got their money’s worth, when Google, which seemed to be busy locking up Facebook looking for a surprise take-down in a clash over the fuzzy boundary between social media and search, suddenly disengaged and delivered a roundhouse kick to Apple’s head in devices by spending $12.5 billion – in cash, thanks – to acquire Motorola’s handset company.  It’s a classic example of life in the broadband cage.

And from this swift and sudden change in tactics, I take away three points.

The first is that the “cage match” model of competition is real, and that policy makers and industry analysts need to get with the program when thinking about the broadband space.  This isn’t some treadmill sprint between Hydrox and Oreo or Coke and
Pepsi or boxers and briefs – it’s something far more complex and, despite its stylistic differences, something that delivers all the benefits of “classic” Coke-Pepsi competition and more.  Much more, if you look at the margins on soft drinks.

The second point is that wireless is the future.  Again, nothing new here, but when Google’s CEO, Eric Schmidt, tells you that Google is a “mobile first” company, or when Larry Page, Google’s Romulus, says on the front page of the New York Times that
“even if I have a computer next to me, I’ll still be on my mobile device,” it’s time to stop thinking about whether wireless competes with wireline, and start thinking about what the future of wireline is going to be in the face of burgeoning innovation in wireless.

And the third point I take away is that, as Jolson used to say, “you ain’t seen nothin’ yet.”  (Although Jolson said in blackface, which gives you pause about what he was about to show you.)    Specifically, Apple has plenty of money – more than our country, as it turns out –   and plenty of opportunities to respond to Google.  In fact, let me telegraph my punch – if AT&T doesn’t get T-Mobile, Apple could.  And if T-Mobile isn’t available, Apple may well look to Sprint or another wireless infrastructure provider and create a true “walled garden” global wireless system that levers Apples amazing iDevices, and that would lay the idea that competitive” must mean “open” in its grave.

(I have a fourth point, too.  It’s that when a presidential candidate calls monetary policy “treasonous,” and discusses how the Fed chairman would be dealt with “pretty ugly” down in a state where only recently a man was dragged three miles off the back of a truck to his death in a hate crime, there’s something very, very wrong, and it’s not monetary policy.)

Let’s start with the news.  In 2007, Google set forth upon this planet Android, its operating system for mobile phones, and made it
“open,” meaning any manufacturer could use it to support their handset or device.  To date, 39 manufacturers (per Google) have done so, among them companies such as Samsung, HTC, and other manufacturers, who have climbed aboard Android and survived the Apple flood.  But Google’s announcement turns his dynamic by ninety degrees – rather than encouraging these Android-enables anufacturers, Google’s new step-child, Motorola, will now compete with them.   Larry Page’s press release (which ominously welcomes “Motorolans” to the family of “Googlers” – who’s writing this stuff, Gene Roddenberry?)  says that Android will remain “open,” meaning that HTC, LG, and the other 36 manufacturers who are not Motorola can continue to use Android and will be treated fairly, which sounds the right thing to say, but which still is like saying that you’ll get a fair shot at Little League playing time, even if you’re at the same position as the coach’s kid.    Like most successful alien invasions, Google’s incursion into devices may seem harmless at first for the indigenous population, but that’s rarely how the movie ends.

Here, again, I drink from the bittersweet wine of age and experience.  Back at Unisys twenty years ago, we pushed UNIX as the “open” alternative to IBM and Microsoft operating systems, but everyone knew that UNIX was owned by AT&T, and they laughed us off the field.  Android, like UNIX, is open and proprietary, and the contradictions again may come home to roost.

Time out – there’s also this: there are also patents in the mix.  Motorola has 17,000 patents, although given the mess we confront in patent policy – what with “strategic” and “defensive” patenting contorting the system  – 17,000 patents begs inquiry as much as
does 73 home runs.  But having these patents strengthens Android’s position against challenge, and that’s got some old-fashioned value to it.

Back to the point.  In fact, there were three points, and the first was the cage match.  We used to think of competition as being like a sprint – Oreo and Hydrox, Pepsi and Coke, that sort of thing – fast, straight-forward, and one-dimensional.  But the broadband space – or eco-system, or sector -- I’m not what term is both “technically” accurate in the province of economic argot and still conveys the dimensionality of the thing – isn’t about that.  It’s a space in which a consumer integrates signal, services, devices, content, and applications, and no one makes the whole slate.  So the providers of all of these “pieces” of the broadband experience have to compete to be the “platform” on which the others rest.

The best way to understand this is to go back to when it wasn’t the case.  Earlier in the Internet’s development, the signal provider held sway.  Handheld devices were pretty standard, and the signal provider subsidized them to attract users to their networks.  Applications for the device were few and rare.  The device was an ornament on the carrier tree.

What changed?  What changed was that signal providers innovated like crazy, making signal better and more reliable and cutting its effective price rapidly – charging you hamburger prices for filet mignon.  They raced into fiber and new cable technologies and through 3G into 4Gin wireless, all the time adding signal strength and reliability, and facilitating a dramatic expansion in the capabilities of the devices.  Once the iPhone arrived, devices turned the model on its head – where devices were once an attachment to the network, the network increasingly became the stage on which the device did spectacular things.  And as devices grew in power and sophistication, an entire new industry in applications emerged, competing with the devices that spawned them much as the devices competed with the service providers that allowed the device guys to exist in the first place.

So now, rather than an edifice built on the signal of Internet providers, the broadband experience is arranged, as a pivotal paper by
my friend Jonathan Sallet has it, as a “value circle” in which, signal, devices, content, and applications all compete to be the
organizing framework for the consumer’s experience.  While each of these were once “layers” built on the platform of the network, now each is a platform in its own right – each competes to be the part of the experience to which the consumer bears allegiance, whether it’s “Verizon has the best signal,” or “the iPhone is better than all the others,” or “Google organizes the Web for me,” or “I’m on the Internet so I can use Facebook” (or the aptly named Twitter).  Each is competing for a larger slice of the “pie” of value the consumer assigns to the integrated broadband experience.  In fact, a few months ago I posted a note on Eric Schmidt’s  comment that there were really four companies that were exploiting this “platform strategy” very well – Google, Apple, Facebook, and Amazon.   Leave the nuances to the side for a moment -- what’s conspicuous about his comment is that the signal providers who were once the gateway to Webworld  don’t even appear on the list.  Ten years ago, there was much wringing of hands about the “cable-telco” duopoly.  Now, the CEO of perhaps the most important platform that rests on the broadband Internet – Google – doesn’t regard them as worth a mention when he sizes up the future of broadband competition.

But this “platform” competition is working the way competition should, and then some.  Innovation in signal leads to better devices, which leads to more applications, which leads to better devices to deliver the applications, which leads to better signal to attract the users of devices.   It’s happening right in front of you.  Google is a ‘search company,” right?  Lives off advertising that accompanies searches, right?  The algorithm is the “Coca Cola secret formula of the new millennium.

Well, no.  Google has now made clear, even if Android itself didn’t, or its dalliance with spectrum auctions didn’t, or its cutting-edge high speed networks in isolated places didn’t, that it is much more.  It wants to be the entity that organizes your total broadband experience, both wired and wireless, to be the “platform” on which you put your network, your devices, your  applications, your content, and everything else.  It competes with Facebook, with Apple, with AT&T, with Amazon – with every other platform seeking the same objective.  Which is the point of this latest move in the cage match.

So that’s the first point – the nature of competition in the broadband space has changed.   And the second point is more of the same – it’s time to recognize that not only do wireless and wireline compete, but that wireless may have the upper hand in that competition.

This isn’t news to people thinking through how they want to manage their broadband connection, trying to figure out the  difference between their iPad and their laptop and their desktop.  It’s not news to the growing number of people who have “cut the cord” and use only mobile telephony.  But it is news to the Federal Communications Commission, which is still trying to figure
out if wireline and wireless compete for voice.  Yes, voice.  A year ago, in a case involving Qwest, the FCC confessed that:

The increasing percentage of residential customers that rely solely on mobile wireless voice service suggests that an increasing percentage of voice customers view wireless and wireline services as close substitutes, increasing the likelihood that wireless service may materially constrain the price of residential wireline voice service.

And remember, this is for phone calls, not for data-based services.  But in no less than the next sentence, the FCC continues, “the record here does not enable us to make such a finding…”

But everywhere else, the finding is being demonstrated in real terms, real time.  My favorite indicator, sports websites, confirms this – mlb.com recently reported that over half its hits last month came from mobile, and landline, users.       A recent Nielsen study shows that 74 percent of smart phone users, and 78 percent of tablet users, watch video apps at home, even if they’re next to their TV.    To some, that seems like playing with a flight simulator in a cockpit, or a great birthday card my wife got for a friend that had a picture of an old lady sitting in a rocking chair holding two Wii controllers in front of her with the caption “Wii Knitting.”

Your mobile phone doesn’t deliver as good a signal as your landline, but you use it anyway when both are in reach.  Your mobile data device will do the same.  I could play Scrabble with you at my desk station any time I wanted to, but I’ll pay for the privilege if I can hold a device in my lap.  Google owns a big piece of desktop space, but its plans are for mobile, because mobile is the future.  I’m not sure how wired and wireless divide the future, but before I ask the question “Does wireless compete with landline?,” I’d ask “what are the landline uses that wireless can’t replace?”

And the third point is that the cage match continues, and the most amazing moves, holds, and throws await us.  Back to Apple, which has a Treasury with more in it than the GDP of Chile or the Phillipines.  They have gone from a device and application – the iPod and iTunes -- to devices that extend themselves beyond the individual application, like the iPhone and iPad.  They made AT&T their cost-sharing partner in their effort to launch and teach consumers about the device, but are now so important in the device world that Google is prepared to spend $12 billion to buy the ability to do what others are willing to do already – that is, make really cool Android phones.

Google’s response to Apple was to be “open,” but as the Motorola purchase implies, “open” isn’t working.  People like “open” – it sounds so, well…open – but they don’t necessarily buy it at the store.  Apple is winning by being “closed” – by being the shepherd and steward of everything that comes within its orbit.

So it would be logical for Apple to buy T-Mobile, or Sprint, or perhaps Clearwire, or perhaps the seeds (or is it remnants, or
shards) of hedge fund manager Phil Falcone’s planned network, and turn it into a network dedicated to Apple devices.  Oh, I suppose you could run your Blackberry on it, just as you can run your Windows on your iMac, but why bother?   It’s Wii Knitting.

A network engineered to Apple’s device specifications and tailored to run its apps – your iPhone and iPad and all the content and applications and services that follow them on iNet!  The heck with open – it makes a great slogan, but customers don’t want it so much as they want a quality experience.  In fact, the only reason why we have “open” is because customers demand it – that’s why the Internet is “open” but you don’t get E.D.-fixing, Nigerian lost money partner nonsense on your cell phone.  Moreover, a “closed” Apple network would put more competitive pressure on other carriers – both landline and wireless – as any new, “open” network would.  “Open” doesn’t mean competitive.  Making customers happy means competitive, and an “iNet” – forgive me, company that already has that name --   could make many customers very happy.

Will it happen?  Maybe not.  Could it happen?  No question.  And do the circumstances exist that would allow it to be considered?  Yes, because in the broadband cage match, Apple already competes with network infrastructure providers, device manufacturers, application developers, and content providers, just as Google does.  Google’s Motorola buy ups the ante, putting new life into Eric Schmidt’s vision of “platform” companies that with each other across alleged boundaries in the broadband space.  As the FCC  dithers over what “competition” is and “neutrality” critics bemoan the absence of competition in broadband, competition is happening all around them.

 

Substandard and Poorer

Markets are a loop – they take all the information out there that somehow relates to economic outcomes – “the cloud” before  "the cloud” – and turn it into a torrent of individual decisions made by individual people, which in turn creates more information and more and new decisions.  Given the massive scale of this undertaking, rules, institutions, and habits develop.

One of those is rating agencies, which quickly takes us to Standard and Poor’s downgrade of U.S. government securities.  Rating agencies began in response to the blizzard of securities offered by railroads in the second half of the 19^th century.  There were many of them, many weren’t legit, and information about them moved at the speed of book.  So a guy named Henry V. Poor  started providing information about them in an annual volume.   His efforts turned into the first rating agency.

Our ability to process information has burgeoned since then, but the amount of information to process has more than kept pace, which maintains the need to have an entity such as the one Poor began.  Of course, the central contradiction of the agencies is obvious -- if you’re a company or an institution that wants to sell a security to investors, and those investors want to know how you’re rated, then you pay the agency to rate you, which means the rating agency has to deliver a judgment on someone that’s giving them money.

We now all get that this contradiction lay at the root of the 2007-08 mortgage crisis – banks brought lousy mortgages to the rating agencies, paid them, and got AAA ratings for them.  The agencies, to some extent, can point to the information the banks gave them, but the bottom line is they hid behind this veil and  acted corruptly, and their actions were part of the sweep of events that led to the crash.  Were they solely responsible?  No.  To some extent, many market participants knew what was going on, but as Citigroup’s CEO, Chuck Prince, famously said before the crash, “As long as the music is playing, you’ve got to get up and dance,” and the rating agencies had the first tenor seat on the bandstand.  Their malfeasance was hardly  unprecedented – it was almost a clone of the accounting and auditing scandals of earlier in the decade, when companies (such as Enron) paid auditors (Arthur Andersen) to bless their books.  To tie the point up, I don’t think there’s a way around this central contradiction of paying guys to decide if you’re honest (or valuable) or not.    Investors need to be responsible for their own decisions but, once again, there’s just too much to know, and you’re going to need agents to filter the information for you.  You just have to shoot one in the town square every so often to capture the attention of all the others.

Which takes us to Standard and Poor’s downgrading of U.S. government debt, from AAA to AA+.  (When I first heard this news, somewhere between my thirteenth and twenty-second thought was, “Gee, there must now be some corporations with a better chance of paying their debts than has the U.S. government,” since they’re still AAA.  And there are – specifically, four of them -- Automatic Data Processing, ExxonMobil, Johnson and Johnson, and Microsoft.)

Standard and Poor’s has taken a lot of heat for the downgrade, much of it deserved.  They got some of their numbers wrong and they bungled the resulting release in their haste to release the downgrade at an appropriate time (Friday afternoon, after the stock market had closed – although the idea that the stock market “closes” is a misnomer – for the weekend, giving people time to process.  (Which they did, and decided to go apeshit on Monday morning, but we’ll return to that.)  Frankly, I think S&P’s weakest link is that David Beers, the head of their sovereign rating division, sounds like a less amusing version of Jim Backus’s
character on Gilligan’s Island.  Someone needs to media-train this guy.

Ezra Klein, a very good economics writer in the Washington Post, goes after S&P today, taking them to task for the math errors they made in developing their position, essentially adopting the Administration’s line.  I agree with everything he has to
say except his conclusion and their implications.  S&P was right to downgrade the U.S. as an issuer (and remember, a shift from AAA to AA+ is a shift from “cosmic certainty” to “mortal lock”), and it did so for the right reasons.

When Henry Poor put out books about the financial performance of railroads, they filled a void.  Ratings agencies still fill a void – there’s still too much information for investors to process, and despite the almost infinite supply, they need more, not less.   Companies don’t tell you everything about themselves, only what the law requires, even the good ones, like ExxonMobil and
ADP.  Ferreting out the truth from the companies’ releases takes work and adds value when done correctly.

But there’s nothing secret or unknown about the government (except in Greece, where Goldman Sachs taught the government how to manipulate its finances so its public sector borrowing could be hidden from the world – how come no one was shot in the town square on that one?).   When S&P delivers a view that the U.S. government is now marginally less likely to repay  everything it owes, it’s basing that on what you know and I know and they know.  Which is why the outraged parties in
Washington are socked – shocked -- that S&P would take the two plus two that everybody knows and announce that
it’s four.

I’ve heard S&P criticized for making a “political judgment” about the prospects for meaningful debt reduction.  Your point being…?  It’s a more overtly political judgment than that made about companies, but that’s because the government is obliged to hash out its business in full view of the (disbelieving) world.  If the public could turn on their televisions and watch live broadcasts of the Board of Directors meetings of ExxonMobil or ADP, they might – I mean, I don’t know, but they might – see arguments as obtuse and counterproductive over dividend policy or management succession as the budget debate we saw in the past few weeks.
When you think about the government honoring its obligations on any front – repaying government debt, paying your Social Security, funding Medicare (although these last two stretch the idea of “obligation,” but don’t compromise my point) – don’t you look at C-SPAN and think “I’m screwed?”  What the hell is wrong with somebody forming a judgment about the country’s future based on how its political leaders behave?

And let’s leave aside for a moment the scene that will soon ensue when the politicians who criticized the rating agencies for yielding to the muscle of the mortgage issuers start to muscle the agencies for downgrading them.  Oh, you’ve got to love the irony.

And there is then the argument that S&P is taking an inherently political position by saying, in essence, that action on the budget isn’t credible unless it includes action on entitlements and revenue.  No, that’s not a political position – that’s reality.  Let me go further.  The budget debate comes down to this – do you want Medicare and how are you going to pay for it? There’s plenty more to the budget than that, but if we resolved that one question, we’d be most of the way home.  Because Medicare accounts for the lion’s share if not all of long-term expenditure growth and if you want it, you’ll have to find some way to increase the revenue coming in to pay for it.  To his credit, Paul Ryan answered the question – I’m willing to get rid of Medicare and give people a check, to the extent we can afford a check.  It turned out that his answer was unpopular, but at least we got an answer.  Getting a workable answer to that question will be hard because of the legacy of lies and slander that accompanied the debate over health care reform and that will make it impossible to discuss in an adult fashion restructuring the health care market.  But that doesn’t change the reality that the atrocious budget deal arrived at just before we hit the default precipice did everything but answer the central question.

For an instant, earlier in the year, I thought the Administration had found a new route to “the question.”  When they were talking about “winning the future,” around the State of the Union, I thought we were going to see them propose trimming Social Security and Medicare so there would be resources left to invest in infrastructure, energy and environment goals, universal broadband, education, NIH and other health spending, and so on.  They would argue that “winning the future” was the number one priority, and everything that happened next was about achieving it – even if that meant cutting Medicare and Social Security to fit.

Well, that lasted about ten minutes – the future got dropped like a bad habit.  Instead, we got the budget deal, and a deep  commitment to keep the economy from growing through the rest of the President’s term.  Moreover, the budget deal buries a sleeper in the “wise man” committee that will come back with a budget plan that gets an up-or-down vote.  S&P is betting that the wise men won’t answer “the question” – that is, address the Big Daddy of entitlements and reform the tax system.  If they’re right, and the wise men get nowhere, S&P is going to look pretty good.  (And the argument that they will be right is that if the “wise men” don’t reach consensus, there’s an across-the-board sequester of spending, which many would prefer to a more comprehensive deal.)   On the other hand, if a comprehensive deal emerges, they might well have to backtrack.  But they made their judgment and will now find out if it was a good one.

Arguing that assessing the prospects for repaying government debt is “political” is like arguing that rating the debt of General Motors is based on about knowing something about cars.  Duh.  And if either the Administration or their Republican counterparts don’t like the political judgment, let them address it on its own terms.  Tell us why we should see the recent circus and walk away inspired that we’re capable of making the difficult choices that we expect everybody else – Greece, Ireland, Spain, and so on – to make.

The Administration might quietly welcome the downgrade, since it substantiates their view that a budget deal must have  revenue and entitlement components.  Complaints about “politics” from the other side, however, may be more heartfelt.  When you get down to it, the Republican side of this argument has not been about cutting deficits – it’s been about dismantling the public sector.  The showpiece of their position – the Balanced Budget Amendment – not only demands that the budget be balanced come war, depression, or asteroids crashing into St. Louis, but that federal spending be capped at 18 percent of GDP.  In essence, this means cut spending now and never let it expand or, to answer the central question, no Medicare (or Paul Ryan’s
substitute check), let alone the federal investments in education, health, infrastructure, and the like that predicate growth.  It’s not a plan to reduce borrowing, it’s a plan to gut the public sector and sever people’s relationships to it.  The downgrade we received from S&P is nothing compared to the downgrade of our future inherent in this approach – it’s a plan to make our economic future substandard and poorer.

A Tip of the Cap

There’s an editorial in today’s New York Times called “To Cap, Or Not” and you have to wonder who writes this stuff.

In a nutshell, this money line in the editorial is this:  wireline usage data caps warrant a close look by federal regulators.

Let’s start at a high altitude.  Some wireline providers impose a cap on the amount of data a user can pull down, but more common is a “pay for what you  eat” approach.  The Times editorial, in fact, mentions an AT&T plan to charge users $10 for each 50 gigabytes of use over a 250 gigabyte limit.

Well, what do they imagine?  That everybody pays one price and then can use all they want?  Is there anything on Earth that works that way?  The wireline broadband network is finite, even if growing rapidly, and allowing each user to consume as much bandwidth as they want is recipe for a congestion disaster on the network.  And, of course, the Times’ concerns about charging users for what they use comes on the heels of their concerns about charging websites a premium price for premium service.  So there’s the Internet in the mind of the Times’ editorial writers: users should be able to use as much of it as they want, regardless of capacity, and when their free use of it on the margin creates congestion or otherwise overloads the system, everybody should suffer equally.  In short, encourage congestion and disallow any attempt to ration it or relieve it.  Just when you thought we’d escaped the Tragedy of the Commons!

What is it about the Internet that makes people forget what they used to know about economics?  It’s almost as if people think it happens like magic, and that human rules don’t apply.  I’m sure there are some people at the Times who chuckle about how out of touch Ted Stevens was when said the Internet “was not a big truck.  It’s a series of tubes.”  But is their view any more sophisticated?  They seem to think the Internet is some magic mojo wire that  appeared out of nowhere and is free, and that once you set it up, it effortlessly runs itself.

For example, the Times says that “adding capacity is cheaper than putting up a network, and becoming cheaper all the time.”  So apparently the Times thinks that if there is contagion, then the ISP simply ought to make the investment in expanding capacity without any hope of compensation.  I mean, that’s what they’re saying – they’re wary of pay-for-what-you-use, but want providers to provide more as if users were willing to pay for the additional capacity.

The Times then concedes that there is contagion, but argues that “peak demand is the problem.  But caps make no allowance for this.”  Fine, how would you make such an allowance?  When there’s an emergency drought, for example, water districts announce curbs on “non-essential” uses, like lawn watering.  But when Comcast tried that – by cutting back on Bit Torrent use, since it was predominantly for file sharing, which is the lawn watering of broadband traffic – the FCC took it to court and the Times supported them.  Or, we can do what Con Ed is doing right now in New York City – I was there yesterday, and there was a notice in the elevator of the building I was in telling people there to curb use and be ready for brown-outs.  Can you imagine a notice appearing – where?  on your screen? – telling you to please do your broadband stuff later?  Or “rolling blackouts” of service?

And then there’s what utilities at the cutting edge are doing – smart metering and using peak-load pricing.  My electric bill tells me how much juice I use during peak and off-peak hours, and it’s no sweat to run the dishwasher or washing machine before I go to sleep.  I mean, I’m an American.  But does the
Times want smart metering on broadband hook-ups?  Time of day use?  Do people want a pop-up on their screen (I don’t know if that’s possible, so don’t get on me if it’s not) or an app in their tool bar telling them what the cost of a gig is at that moment?  Let alone the fascistic optics of a pop-up telling you it’s time to use less information….

But the real issue on the Times’ (collective) mind is probably competition.  It keeps coming around to that.  For example, the Times says that some users have a choice between a cable and a telco, but others “have no choice at all.  Caps should not just be a way for Internet providers to extract monopoly rents.”

Sure, but…  For one, broadband is becoming a market in which wireline and wireless actively compete, even more so as wireless speeds catch up to their competitors.  Second, the market power of ISPs is checked in part by device, content, and other service providers who together comprise the integrated package of broadband services, as I’ve argued before.    But even more important, if providers have monopoly power as the Times fears, they’re already using it, one presumes; they don’t need the pretext of use caps to exercise it.

The Times then ponders whether AT&T has a conflict because its U-Verse product offers television and other entertainments that compete with Netflix.  The Times admits that Netflix on its little old lonesome “hogs” – their word, not mine – 30 percent of peak Internet traffic in North America.  So U-Verse does not appear to be a major competitive problem for Netflix – I doubt anybody at Netflix is staying up at night worrying about U-Verse.  Moreover, the cost and congestion effect of an AT&T, internally-sourced, entertainment stream is likely going to be less than that of a Netflix package brought to the network backbone by Level 3, distributed over the network, and delivered to the local loop.  And let’s remember that we have a century of anti-trust law that prohibits predatory behavior.  If AT&T is acting in a predatory manner, use it.

There’s an ongoing technological race between the ability of the broadband network to carry more stuff and the development of more bit-intense stuff for them to carry.  Consumers have been the beneficiaries of that race.  But those benefits are won at the expense of the ongoing tension between usage and network capacity.  Paying for what you use is the solution – it’s one that’s worked in every market on Earth.  The Times is worried about caps, but if they have a better answer, we’d tip our cap to them.