Hook ‘em, Horns
First, this. About a month ago, I posed the question, “What are dogs saying when they bark in movies or television programs?” and invited my regular readers (both you and the other guy) to come up with an answer.
One reader did – my daughter and favorite child, Alice. “It’s easy,” she told me. “Right behind the actor at whom the dog is barking,” she said, before syntactical remediation, “is a trainer with a piece of steak on a stick. And the dog is saying ‘Holy shit! Steak! Steak!’ And that’s why Eddie (our dog who goes nuts when dogs bark on television) goes nuts – because he hears the dog on television shouting ‘Steak! Steak!’ and he’s saying ‘Where? Where? Where’s the damn steak?’” Although she didn’t say damn.
Well, you can keep your kids who start their own businesses or go to Harvard or whatever the hell else the Junior Achievers are up to nowadays. How can you not be proud of a daughter with this kind of native (dare I say it, canine?) common sense.
A good number of my friends have kids with this kind of strength, and as we age and life becomes a valedictory, it’s a source of ever-growing pleasure. One of my lifelong best friends’ daughter, for example, just decided to go to the University of Texas (for whom I rooted unsuccessfully against Alabama -- Hook 'em, Horns!) next fall and was invited into its Honors Program, which was a source of much happiness for all of us – until, at least, we read last Sunday’s Washington Post.
In it, UT economist James K. Galbraith (and therefore putative prospective mentor of the kid in question) argues for getting rid of the Congressional Budget Office, much as he would tell a man with cardiovascular disease to fire his cardiologist – because the news he brings is not to his liking. And in a world in which the inability of a third-tier tourist-and-remittance economy like Greece to manage its budget takes us to the edge of a global shitstorm, the idea that anybody – let alone the CBO – is “fear mongering” on the deficit needs to be scrutinized carefully.
OK, full disclosure – I worked at CBO from 1977 to 1988 and am proud of the time I served there. And the place has had a number of smart and honest Directors, people I admire, from all across the political spectrum -- Alice Rivlin, Rudy Penner, Bob Reischauer, Doug Holtz-Eakin. I wish I could tell you that I’d have written these notes even had I not worked there, but that’s unlikely, as working there gave me an insight into what they do there and why, an insight that appears to have gone unshared with Professor Galbraith.
His piece in the Post reads like this:
…CBO's projections are indefensible, internally inconsistent and economically impossible. …The CBO predicts that unemployment will fall to near 5 percent by 2014 and stay there. It also expects a rapid recovery in the next few years, followed by a steady 2.4 percent GDP growth rate thereafter. Inflation is expected to stay below 2 percent indefinitely. But …CBO also projects that short-term interest rates will increase from less than 0.2 percent now to 4 percent in 2014 (and higher later), while rising health-care costs will drive Medicare expenditures ever higher.
Well, let me start there. In fact, I’m fairly optimistic about where the economy is headed, and I don’t think that’s a bad forecast at all. The economy has a lot of pent-up demand, credit availability is just getting going again, business are flush with cash, and with burgeoning technological progress and ever-increasing world trade, it’s awfully hard to tell a story about why we’re going to see inflation any time soon. And even if I didn’t feel that way, at least I’d understand how CBO gets to its forecast – its usual practice is to assume that, regardless of where we start, the economy returns to its long-term trends (the 2.4 percent number that Galbraith derides) and stays there.
Not good enough for Galbraith:
These things cannot happen together. If the CBO's happy growth scenario is right, with low inflation and low unemployment, why would short-term interest rates rise?
What part of it don’t you get? Because the country is in hock, son, and as when you borrow a great deal of money, the vig goes up. Ask Greece. Besides, if the economy does grow over the next four years, enough to take us back to five percent unemployment, then “real” interest rates – the spread between interest rates and inflation -- are going to take off like a rocket. That’s because government deficits will still be high, but private investment will have been resuscitated – you can’t have sustained, high growth without it. With the public and private sectors competing for funds, there’s really no way interest rates couldn’t rise by 4 percent. If CBO hadn’t pointed out that sustained growth in the face of the deficit is going to lead to higher rates, they’d be a candidate for a urine test.
But Galbraith isn’t done.
Conversely, if the CBO's assumptions about health-care costs and interest rates are correct, how can inflation stay low? Ballooning interest payments and health-care spending would spur the economy to full employment and drive up prices -- but also slow the rise in debt as a proportion of the nation's gross domestic product.
Hmm...higher interest payments and rising health care costs are forms of economic stimulus? They seem more like paying more for the same thing, which sounds more like a drag on the economy than a spur. And as to driving up prices, health care costs have increased sizably in recent decades, but they haven’t led to general inflation – our economy has been free of significant inflation for years despite health care. And Galbraith appears to think that higher interest rates lead to higher growth and inflation, instead of reflecting higher growth and inflation. having it the other way is like saying that your pain caused your headache.
Besides, according to the Bureau of Economic Analysis, which adds up Gross Domestic Product, net interest payments by the nation’s nonfinancial corporations totaled $227 billion in 2009; in an economy worth over $1.4 trillion, these could double in the next four years and add no more than 0.4 of a percent per year to inflation under the asolute worst of conditions.
…That miraculous return to full unemployment and those higher interest rates both come from thin air. More likely, given the passivity of today's banks, high unemployment and low interest rates will linger, unless the government moves on a real jobs program. And that won't happen, because of fear-mongering about the debt -- buttressed by the CBO.
Ah, well now we get down to it. Galbraith’s concern isn’t that we’re getting the deficit wrong. It’s that we might be getting it right -- that is, it's big, but needs to be bigger. His concern is that we haven’t run a larger deficit-spending program than the one the Administration did last year. And by pointing out what that kind of a program would cost, CBO is an obstacle to his own policy preferences. And those preferences are revealed in his last remark:
If we'd had a CBO in the 1930s, Franklin Roosevelt could never have gotten the New Deal off the ground.
There are all sorts of reasons to be concerned about that remark. For one, it’s just not true. The largest deficit during the Depression was 4.76 percent of GDP in 1936, less than half of today’s, and lower than the deficit was in 1985 and 1986, during the height of the Reagan Boom, when CBO was in full flower. Second, we’re seeing in Europe what the consequences of too much borrowing – even if for important policy objectives – can be. So while the human cost of slow growth and unemployment is frighteningly large, another round of deficit spending might create a crisis of its own.
In fact, the Administration has had it right, Galbraith’s views notwithstanding, just about from Day One. It had the courage to implement a massive stimulus program last year that probably saved us from unemployment rates at 12 percent or higher. We are going to have to pay for that program, and the Administration rightly should be judged on how they deal with it. But if we have the maturity to confront the problem, restoring some fiscal balance is well within our ability. Moreover, the Administration’s commitment to “financial stability no matter what it took” worked pretty well – the financial system was pulled back from the abyss and the cost of doing so turned out to be far smaller than expected. It wasn’t pretty, and we’re still waiting for the kinds of financial regulation that restructure the system to prevent a recurrence, but it worked. And, again, those who characterized their program as insufficient -- some of whom advocated nationalizing the banking system -- were wrong once again.
Galbraith is among the "didn't do enough" group, but he can’t figure out which side of the argument to take. The risk in the economy isn’t that rates aren’t going to rise – they’ve got nowhere to go but up. The real risk is that the economy doesn’t grow the way CBO assumes it will, which means that CBO’s forecast isn’t fear-mongering – in fact, it’s unbridled optimism. If CBO wanted to fear-monger, they could depict a slower economy with smaller tax receipts, more transfer payments, and less wages, capital gains, and corporate profits to tax. Instead, they’re showing us what happens if the economy returns to trend.
If Galbraith thinks they’re being overly optimistic, then deficits are going to be larger than CBO projects. So it’s on him to make the case for more stimulus even though our fiscal mess in even worse than he thinks. But to argue that the deficit is really going to be smaller than CBO says it will, but that the economy is going to be slower at the same time, and for that reason we ought to have a larger deficit right now, is hard to square. And throwing out CBO with the spring cleaning won’t make it any easier.
Way 2.1
On April 6, a federal appeals court ruled that the Federal Communications Commission did not have the legal authority to implement “net neutrality,” meaning that it could not require Internet service providers to treat all traffic the same – meaning that everything on the Internet – whether a cardiac monitor or a video of a cat playing the xylophone – would have to travel at the same speed.
The ruling was a blow to the FCC and its Chairman, Julius Genachowski, who argued that the Commission’s broad mandate to promote public welfare (under Title I of its enabling legislation), gave it all the fishing license it needed to impose this principle, consumers and entrepreneurs be damned.
As I discussed back then (April 7, “You Bet Your Life”), the FCC and its Chairman had two options – they could acquiesce to the ruling and define a new role as an honest broker in the Internet’s development, or they could go back to court and argue that Title II of its enabling legislation, which gives them the explicit authority to regulate the prices and terms of telecommunications services, applies to the myriad of content and services offered by the Internet today.
The problem with the second strategy is the risk. Many if not most courts would quickly laugh off the argument that the Internet is really just another phone system. In fact, the proponents of “neutrality” have made a living pronouncing that the Internet is so special, and so multifunctional, and so historically unique that it requires this bizarre mandate to have only one flavor – it’s like a law requiring all mail to travel at one speed, or Sears to offer “Better,” but get rid of “Good” and “Best.”
But now those very same proponents must resort to argue that “the Internet is just like the phone company” and that it should be regulated under the same laws that congress first passed to regulate phones almost eighty years ago. I can’t see it washing, and when the Courts decide that it’s hooey, the FCC will have nothing on which to base its relationship to broadband. It would be out of the game for good.
Which is why it’s just amazing to me that Chairman Genachowski has gone for Plan B – he’s decided to argue that the telecommunications provisions of Title II apply to the Internet, but he vows – like the Iranian nuclear power program -- not to use his omniscience to bad ends. That is, he’ll argue that he has the authority to regulate the Internet, but won’t apply this authority to a variety of purposes that many “neutrality” advocates also champion, notably, “unbundling,” the idea that companies who build broadband infrastructure have to sell space on it to their competitors at subsidized rates. But he will apply certain sections of Title II to broadband transmission, and only, in essence, to implement “neutrality.” He refers to this as a “third way,” but it’s really “Way 2.1” – a repackaged Option Two, and it’s going to end in disaster.
I pride myself on not being a lawyer. When I was a senior in college I took the law boards in a stately room at Columbia’s Law School and decided, looking around the room, that I couldn’t hack fifty years with these people as my colleagues. (Contrast this to the hundreds of people in the lecture hall taking the Graduate Record Exam a few weeks later, where the attendees were as delightfully aimless and immature as I was.) So take whatever I say with a grain of salt – after all, as a non-attorney, all I can do is tell you what words say as opposed to what they mean. But here’s what Section 201 of the Communications Act of 1934 – a section specifically cited by the Chairman as part of his “limited authority” – says:
“All charges, practices, classifications, and regulations for and in connection with such communications service shall be just and reasonable…” and now get this “communications by wire or radio subject to this Act may be classified into day, night, repeated, unrepeated, letter commercial, press, Government, and such other classes as the Commission may decide to be just and reasonable, and different charges may be made for different classes of communications…”
So Section 201 of the Act specifically says that the FCC can permit different charges for different types of traffic and levels of service – the exact opposite of net “neutrality.” The reason the law mentions day and night, and repeated and unrepeated, and so on, is because “day” and “repeated” meant high-volume, peak loads, while “night” and “unrepeated” meant less congestion on the system. But that’s exactly what the “neutrality” guys oppose – their position is that when there’s congestion on the system, everybody has to sit and languish together. The only way to avoid this faux-egalitarian traffic jam is to do what Google and the other Big Websites already do – cache their content all over the web. It’s a revisit of Orwell’s famous dictum that “all of the animals are equal, but some are more equal than others.”
Moreover, Section 202 – also specifically cited by the Chairman – says it will be unlawful to “make any unjust or unreasonable discrimination inc charges, practices, classifications, regulations, facilities, or service for or in connection with like communications service…” and a carrier can’t give “undue or unreasonable preference” to anyone or subject anyone to “undue or unreasonable prejudice or disadvantage…”
What I just read doesn’t say that you can’t put prices on the wall for different classes of service. For example, if the Post Office were operated under this language, would different prices and conditions for regular mail, “express mail,” and “priority mail” be regarded as “undue or unjust?” In fact, what the language says to me is that it’s perfectly fine to have a “non-neutral” world, so long as the prices you charge are “just and reasonable,” and not “undue or unreasonable” – that is, so long as the prices are posted on the wall and “you pays your money and you takes your choice.”
Now imagine that the FCC decides to follow this route and argue to a judge that this very language is what allows it to implement “neutrality,” meaning that one day it will specifically prohibit a deal between Verizon, or Comcast, or ATT and a hospital, or an up-market version of Skype, or an on-line gaming provider, or a live, high-def concert program and claim that this language justifies its actions. The companies involved will go to court and argue that their deal was “just and reasonable,” because anybody who wants that treatment can come get it – the prices are posted on the wall. The FCC is going to lose, just as it lost last month.
The “neutrality” camp argues that, absent this kind of enforcement, you’ll see stuff like Comcast only showing NBC programs and slowing down traffic from other entertainment providers. But, first, if they did, would you subscribe to them? Did they really just spend billions of dollars buying NBC only to piss off their customer base? And second, if they did, there’s a whole history of anti-trust law that applies.
And this is where it all comes together. The FCC, by abandoning everything (starting with price regulation and unbundling) except its commitment to “neutrality,” is pretty much admitting that the broadband market is pretty competitive and structurally sound. Their agenda is now built around one principle – preserve the advantages and the low costs now held by the Big Websites. In a non-neutral world, Big Website would face greater competition and might have to pay more – YouTube uses as much bandwidth as the entire Net did in 2000, and Google owns YouTube. Hence, Google is the driving force behind net “neutrality,” because in a “neutral” world, sites like YouTube won’t have to pay for the congestion they create. Should they travel the Internet under the same terms as your e-mail to Grandma or a start-up company?
And that’s the great tragedy. Chairman Genachowski can talk about the aspects of regulation he doesn’t want to embrace, but by insisting that he has the authority to do so, he creates uncertainty about the future that will preclude the kinds of investment needed to achieve his goals for the broadband Internet. His Third Way is really Way 2.1. The real “third way” for the FCC and Genachowski would be to accept the court’s ruling, keep the nuclear option in his pocket, and then position himself as a honest broker between two camps with different business models – the Big Websites who want a low-cost ride on somebody else’s infrastructure and the broadband providers who, in essence, want to do what newspapers do – charge the reader and then allow some content (advertising) to pay the going rate for premium space. That kind of settlement – stripped clean of the Orwellian rhetoric about a “neutral” Internet -- would produce a real resolution to the neutrality question, eliminate the regulatory risk that could impede investment, and realize the Internet’s true potential. Ultimately, the choice isn’t between the First Way and the Second Way, but the Right Way and the Wrong Way. And Way 2.1 doesn’t get us there.
One For You, Nineteen For Me (II)
Don’t you just hate it when you’ve invested an hour in a television program that you know is waste of time in the first place, only to find out at the end of the hour that the program is TO BE CONTINUED? I pulled this stunt last week, setting up some ideas about reforming the tax system, only to stop at the apogee of my orbit.
This week, I outline a proposal – using a broad brush to be sure, but it’s a beginning.
Let’s start with this question; what is the right basis for the tax system? There are any number of possibilities. Income is a good one, as it represents material well-being. But it poses two problems. One is that when you tax it, you reduce the incentive to earn it, even if that idea has been carried to extremes in some corners. Second, we have a system based on income, and it’s failed, due to the holes we’ve poked in, and the contorted definitions we’ve attached to it.
Which takes us to consumption. For one, consumption’s like income in that it’s a good measure of well-being. Moreover, there are times when our incomes are lower than our consumption –as a student or in retirement – or vice versa – like when we’re saving in the peak earning years before retirement – which means that what we choose to spend might be a better measure of our long-term well-being than our actual income.
These aren’t the only two options. Property is another. But real estate is too volatile and limited a basis to run a tax system, and a broader tax on “wealth” may be attractive as a measure of who’s really got what, but we’re not there politically by a long shot. And, to be technical, income and consumption are flows, while wealth is a stock – it requires us to tax someone’s wealth and then tax essentially the same wealth all over again next year?
There is also the idea that we should tax things that are “bad” -- carbon taxes, or taxes on cigarettes or transfats, for example? We’d be better off if we had a tax on pernicious greenhouse gasses and used the proceeds to fund Social Security instead of the asinine, regressive, anti-employment payroll taxes we now deploy. But, the problem is that these taxes are designed, if successful, to do away with themselves, which makes them a poor choice as a basis for financing the country.
So, with all that said, there’s a strong argument for shifting the foundation of the system away from income towards consumption. Of course, consumption taxes, such as the Value Added Tax used in many industrialized nations, are often criticized as being regressive, for the obvious reason that people with low incomes consume a higher share of their income than people with higher ones. But this is not a reason not to consider them; it is a reason to implement them as part of a larger program.
That’s because of the advantages a consumption tax offers. Taxing consumption reduces the incentive to spend and conversely induces saving. And the broad incentives to save provided by a consumption-type (VAT) tax are far fairer and probably more effective than the archipelago of IRAs, special accounts, and other pinball gimmicks and features that give folks who generally already save a break for doing what they would have done anyway. While the roots of saving are cultural as well as economic, these broad-based incentives stand a good chance of moving the needle on our saving rate.
Taxing consumption rather than income has other advantages. Since consumption is usually more steady from year-to-year than is income, government receipts are steadier as well, and less prone to the stage of the business cycle we’re in. And while fraud and circumvention are always going to be a part of the mix, they’re harder to carry out in the world of buying things than in the world of getting paid – you can avoid income taxes by working for cash, but sooner or later, that cash must be spent. No less an economic seer than Frank Zappa embraced them for that reason.
But a consumption tax alone cannot be the entirety of the system, in large part due to fairness considerations. For one, as stated, consumption is a declining share of income as one’s income rises – that much is inescapable. A massive switch to a consumption tax would also be unfair to today’s retirees, who saved income when it was taxed, only to consume it when that became the tax basis.
Moreover, it’s one thing to save, but it’s another to save without effort – some people may never consume all the income their assets generate. There is a meaningful difference between someone who defers consumption through savings to finance their children’s education and their own health and retirement, and the well-to-do whose clipped coupons exceed their needs, or even desires. A consumption tax, for such an individual, is a social license to steal.
Given these realities, a consumption-based tax must be accompanied by two other components. The first must be a relatively flat and very broad income tax with a very high personal exemption, which offsets some of the consumption tax burden. Moreover, preserving the income tax in this fashion would provide a vehicle for maintaining some important and readily-justified features for the working poor. For example, the Earned Income Tax Credit, child care credits, and other tax-based income support features for this group should be joined into a single, rebatable treatment and administered through the tax system.
And this system should be completed by maintaining an anti-dynastic inheritance tax. Much has been made of the inequities of the “death tax,” but the inheritance tax has already been loosened aggressively in response to these concerns. Moreover, the sorrowful stories of, for example, families forced to give up their farms in the face of an inheritance tax bill stemming from the passing of a parent turn out to be just that – stories. It is very possible to imagine such a situation, but it is nigh on to impossible to find one.
Adopting this three-legged stool of the income tax, a consumption tax, and an inheritance tax means abandoning many of the special and popular tax provisions referred to above. The home mortgage interest deduction would be capped and phased out – simply going to the new system would reduce its importance. (But the phase out must be long enough to allow the already weak housing market to stabilize.) Special savings accounts would be unnecessary since all savings would go untaxed. Employer health-care contributions would presumably be part of taxable income. Income and all forms would be treated equally (partly because the rationale for their different treatments would be eliminated).
And this system would also allow us to abandon the corporate income tax. There is, however, a genuine double taxation problem in the code – the taxation of corporate income. Think of it this way. The newly-activated Supreme Court recently decided that corporations’ status as legal “people” entitled them to freedom of speech. The counter-argument is that corporations are distinct entities only insofar as the corporate form defines the limited liability of shareholders, and that granting them “freedom of speech” extends their status as distinct entities beyond reasonableness. But if progressives believe that argument, then they should question whether corporations should be taxed separately as well.
Some (again, usually my fellow travelers) see the taxes paid by corporations as the price of the privilege of limited liability. But there are ample opportunities, through a variety of judicial and regulatory means, to balance that privilege. In fact, the corporate income tax simply taxes revenue as it makes a pit stop on its way to its ultimate destination, the stockholder. There are any number of way abolish the double taxation of corporate income – the one favored here (for administrative simplicity) would tax corporate income before dividends were paid and then exempt those dividends from personal income.
Good ideas – such as these purport to be – are the bottom of the policy food chain. Before the tax debate – or at least this round of it -- is over, people with far greater probity and credential than I have will issue important and well-reasoned reports in the hope that their ideas provide a benchmark in the policy process. But those people know, as does everyone else, that calling on the system to enact good ideas because they are good is both naïve and futile.
The question, then, is who will, should, or even could be the champion of such a newly designed system? An informed and involved citizenry is always best, but let’s get serious. The best answer may well be – the forward looking elements of the business community. That’s because they are in a unique position to appreciate and understand how a better tax system leads to a better business environment.
Policies such as these determine to a great extent our nation’s competitiveness. Our lattice-worked world economy has eliminated virtually every traditional source of “national” economic advantage – capital, technology, education, skill, and everything else can be accessed anywhere in the world if they are unavailable at home. If any resource can travel anywhere, what makes a nation’s economic environment unique?
What remains “national” in this context is the environment in which these factors are integrated, and that environment includes among other factors, our system of corporate governance and finance, the culture of our business enterprises, the rationality of our regulatory system (including the questions of whether to regulate and how), and the economic policies we pursue. Taxing and spending decisions are obviously a part of that: encouraging residential construction means discouraging other investments; requiring businesses to be responsible for providing health care will burden them when competing with those freed of that burden; and, most relevant to this case, if we run endless fiscal deficits and ask the people of the world to lend us their dollars, they will have fewer left over to buy our goods.
The business community is in a unique position to fathom this reality and the failings of the current tax system. Moreover, a balanced approach to taxes can bring their interests and those of the “average American” far closer than before. And business is in a similarly unique position to demand that the two political parties abandon their scorched earth tactics and come to Jesus on this issue. One such group has already done so.
There is a “center” in the tax debate. The question is whether anyone will occupy that center when the debate takes place.
One For You, Nineteen For Me (I)
The health care debate was a walk in the park.
Don’t believe it? The Bush tax cuts of 2001 expire at the end of this year, and if the accusations of death panels and socialism seemed excessive, as Al Jolson would have said, “You ain’t heard nothin’ yet.”
Because taxes go even deeper into the woods of ideology and doctrine than health care did.
The Bush tax cuts were passed in 2001 with a “sunset” provision that makes them expire at the end of this year; this was done to avoid accounting for them in long-term deficit calculations, while sardonically betting that no one would have the nerve to take them back. Given the calamitous path of deficits since, this gaming was conspicuously wrong-headed.
So now the issue of whether and in what form to extend these cuts must be joined amid the nation’s worst fiscal crisis in our lifetimes.
Even if we weren’t presented with the expiration of the Bush tax cuts, the time would still be ripe for a rewrite of the tax code. By next year, the expansion will be well underway and employment will be in an extended climb back to something like normalcy. The economic debate will have shifted from stimulating the economy and making credit effortless to secure to finding an “exit strategy” that avoids the widely-feared outcomes of goods and services inflation (overrated), hyperliquidity-driven asset bubbles (not so overrated), currency stampedes (oversold, at least for some while), and undue risk taking and profound moral hazard (a genuine concern so long as financial regulation goes unaddressed), and a return to greater systemic risk (ditto).
Moreover, we should remember what Peter Peterson and other budget scolds have repeatedly warned – that we had a long-term fiscal crisis before the 2008-09 economic collapse. The government’s contingent liabilities, when estimated before the current deficit projections, were already as large as all of American private wealth – they were already the equivalent of financial anti-matter capable of destroying any and all matter with which they came into contact – in this case, all the wealth our society has produced to this moment in history. From that perspective, all the 2008-09 crisis and the response to it did was move this moment of financial conflagration up in time.
But as the tax debate gains traction, we will inevitably confront the reality that the tax system is broken beyond repair. By “broken,” many mean “unpopular,” or “impenetrable,” but the situation is actually worse than that. That is, our tax system is increasingly incapable of generating revenue, either effectively, or at all.
That is because the tax system is so shot through with holes as to be porous. Irate critics from all political perspectives speak of “loopholes” for “special interests” and, however egregious these may sometimes be, the great bulk of the holes in the system were put there, and are kept there, with broad, bipartisan, and usually enthusiastic support. Among them are:
- The home mortgage interest deduction, an unindicted co-conspirator in the 2000s boom and bust of the mortgage market, but which has nonetheless left the rate of American home ownership not appreciably different from other advanced nations that lack such a feature;
- The tax-deductibility of employer-provided health benefits (admirably put on the table in 2008 by candidate John McCain), which helps blind users to the cost of their care and surely pushes up insurance prices while counter-productively tying workers to particular employers and employments;
- The myriad of tax-privileged savings accounts – IRAs, Roth IRAs, 529 and 527 college plans, health savings accounts, education and training accounts, and others. None deliver benefits as efficiently or as fairly as would be hoped; consider the audacity of telling a worker making $30,000 or $40,000 a year that a college or health savings account is the answer to the problem of limited access and affordability;
- The differential capital gains tax rate, which leads to a multi-billion dollar struggle by lawyers and accountants to redefine more highly-taxed “conventional” income as more lightly-taxed capital gains, much as early missionaries discovered that their native converts had baptized their meat as “fish” and ate it on Friday. Special capital gains treatment makes the tax code complicated if not bewildering, reduces its progressivity, and does much to change the form economic activity takes but little to change (positively) its absolute level.
The base of the current system, therefore, is so limited that it is incapable of delivering adequate quantities of revenue. In fact, under the current arrangement, increasing tax rates to bring in more revenue would increase the desirability and importance of these features, as well as bolstering the political will to preserve and expand these features, making the system even worse.
In short, the tax system is an old grey mare that ain’t what she used to be. Its weakness begins at the ends and is spreading to the center. Capital income is disappearing through capital gains treatment or is sheltered in special accounts. Meanwhile, the zero-bracket, the Earned Income Tax Credit, and remaining progressivity all provide some (justifiable) relief to the working poor and the lowest strata of the middle class. Thus, our tax code is rapidly devolving into a tax on the wages and salaries of the upper reaches on the middle class.
And if the middle-class had any thoughts of escaping this burden, it finds its avenues of egress blocked by the Alternative Minimum Tax. As many taxpayers learn each April, the AMT claws back a rising share of the total value of itemized deductions – principally the aforementioned mortgage interest deduction and the value of state and local income taxes paid. It, therefore, falls primarily on families with big mortgages in high-tax states and localities – Good Morning, New York! – and thereby ensures that the burden of taxes falls not necessarily on those with the greatest income or wealth, but on this group. What is even more galling is that, decades ago, when this feature first entered the code, the deductions it reined in were capital gains and the like, the beneficiaries of which were those who had a greater normative obligation to pay something. But like the rest of the tax code, the AMT has been turned to train its guns on the middle class.
Thus, even if we were to accept these the system as fair, it would be impossible to raise rates on this ever-shrinking base to levels remotely commensurate with the problems we confront. As I recall Rudy Penner once casually but accurately saying in a CBO staff meeting coming on 25 years ago, “the more we ask the tax system to do, the less it will accomplish.”
And then, we would encounter the traditional sloganeering and shibboleths of both the left and right. These merit review.
From the left, we start with the championship of tax-free accounts or special tax treatments regarding education, renewable energy, or what-have-you. The goals are admirable, but the results are often not. Expanded Pell Grants, for example, would give more money more transparently to needier students. Direct spending on to support research, development, and demonstration in the use of renewable resources and carbon capture and sequestration -- and an effective cap-and-trade regime -- would provide a better and, ultimately, cheaper way for the renewable industry to gain scale, reduce costs, and make investments than substantial tax credits for homeowners for digging geothermal wells. Forgiving taxes on employer health insurance drains away resources that could be used to create true universal coverage and health care security. We have, in short, tried to morph unpopular spending increases into popular tax cuts, and it’s not working.
On the right, discourse about a “simpler” tax system is directly at odds with their advocacy of different treatment for different types of income, meaning capital income. These differentials are the driving reason why the system is unduly complex and why its compliance costs are so large – because of the hordes of lawyers and accountants who area hired to explore, expand, and exploit these crevasses in the system.
The conservative analysis behind the different treatment of capital income deserves mention. It holds that capital income, if taxed, would be subject to “double taxation.” For example, consider a fellow who makes a dollar, saves a dime, and who earns a penny on that investment – taxing that penny, it is argued, would be “double taxation” because the source of that income – the dime saved – has already been taxed.
I don’t get it. If the penny in this example results from saving rather than work, why should it escape the system? Saving represents the foregoing of consumption, but work is the foregoing of leisure. And if the goal is to let the fruit of saving go untaxed, how can we distinguish between saving and inheritance? And what of the person who uses the dime to pay for a skill-building education and realizes more income as a result? Why favor those who invest in one factor (capital) but not another (skill)?
And despite claims that taxing the returns to saving deters saving itself, there is little convincing evidence that tax features affect the propensity to save the last dime of the income dollar; witness, for example, the strikingly low U.S. savings rate during the various (and significant) tax changes during the Clinton and George W. Bush years.
The greater concern is, and should be, the rate at which the dollar, not the penny, is taxed – the incentive we give people to work and earn, and to do what they want with what they get when they do. And, again, not taxing the penny forces us to raise taxes on, and reduce the incentive to earn, the underlying dollar.
Both the left and right, however, make some good points on tax system goals. Let us all exhale deeply and attempt to acknowledge and concede these merits, whether promoted by our adversaries or not.
First, you cannot raise tax rates forever without interfering with the incentive to earn. The “Laffer Curve,” so fittingly first drawn on a cocktail napkin, has led to undue belittling of this reality. But, there is truth in the premise that, as I once heard the late Jack Kemp say, “there is only so much blood you can squeeze from the turnip.” But I don’t think this principle means that we should bribe the indolent rich to go back to work; it’s probably more important for second-earners in families, retired or semi-retired workers, people under the Social Security ceiling, and others for whom the rewards of additional work would be substantially taxed away. Meaning it’s probably true to lower rates than higher ones.
Second, on the other side of the debate, we need a progressive income tax system. The idea of one rate for all payers has a Steve Forbes-ian and Ayn Rand-ish sophistic virtue to it – it’s great if you think of it wholly out of context. But it fails on all counts in the real world. In fact, as basic as these institutions may be, the rich benefit disproportionately from the existence of a state that promotes security, the rule of law, and, most importantly, the protection of property using its monopoly franchise for sanctioned punishment. And while interpersonal comparisons are odious, Engel’s Law and the principle of diminishing marginal utility tell economists that a tax of a given percentage disadvantages the rich much less than the poor. So a “flat” tax can safely said to be, in reality, a regressive one – one that provides more benefit to the rich than the poor.
Third, “simplification” and a “reduced cost of compliance” can’t occur without purging the tax code of its special treatments. It costs a great deal to administer the tax system not because taxpayers are compelled to pay preparers, but because some taxpayers choose to pay vast amounts to capitalize on the availability of these treatments, starting with the idea that one “kind” of income deserves a different status than does another.
Fourth, saving is a good thing. In fact, it’s so good that its importance should be more than a pretext for favoring traditional savers (the rich and profit-earning entities), and most of our efforts to promote savings have disproportionately benefited these groups. But saving is the vehicle through which we provide a higher standard of living to future generations, by putting away resources that finance investments that embody invention and innovation. Moreover, if a society wishes to invest, it has to save – the alternative is to rely on foreign savers and to take on the debt-service obligations their lending entails, as well as to give the lender a voice in U.S. economic policy, as we have China.
I am as pessimistic as the next fellow about resolving all of this in anything remotely resembling a rational fashion. But I am hopeful that we can have a discussion that lets a true center emerge in this debate, even if many lawmakers have little interest in coalescing around a center. Unlike health care, there is a center in taxes, and it could be reached.
In my next entry, I’ll try to take these goals and criticisms and use them to construct a program that could allow both the Left and Right to see their handiwork in it. Beware the pennies on your eyes! Come back and let’s continue then.
You Bet Your Life
Today’s papers report an important and unanimous decision from the U.S. Court of Appeals for the District of Columbia that the Federal Communications Commission lacks the authority to implement “net neutrality.” The FCC argued that it had this authority, since “neutrality” was “ancillary” (the law’s term, not a value-laden description) to its mandate to protect the public interest.
The Court differed. It agreed that if an agency has a mandate and new issues arise, “ancillary” authority is a perfectly fine premise to take action. But “neutrality,” they found, was so far afield from the FCC’s rate-making regulatory mandate that it failed to meet this (rather less than formidable) test.
First, let’s review the case that got us here. A few years ago, Comcast’s network was experiencing (short-term) congestion, so Comcast decided to slow down the traffic of users using BitTorrent to run file sharing applications.
I think that decision on Comcast’s part was completely defensible. BitTorrent is used for file sharing, and file sharing is lovely, but it’s generally not as pressing a use of bandwidth as are most other applications – information gathering, e-commerce, personal communications, and so on. As I’ve said before, I think of it as being analogous to water districts announcing prohibitions on lawn watering during droughts. No one likes a brown lawn, but as a first-order, simple way to manage a temporary reservoir shortfall, it beats policies that cut into water uses related to hygiene or commerce, and it’s easy to enforce. (There might be people who argue that we might as well let prices resolve the matter, given that some people would rather bathe less than let their lawn wither, but I’m pretty sympathetic to the idea that water is some kind of human right and the losses in human well-being associated with impinging on the “rather water the grass than bathe” crowd aren’t all that severe. Call me the scourge of liberty, but that’s the kind of crank I am.)
On the other hand, I agree with the idea that if Comcast’s policy was to slow P2P when the network was overloaded (which it now is changing), they should tell their customers – any network manager should. All networks need management now and then – the idea that they should just sit back let the flow of bytes rip without somehow optimizing the system is absurd – it’s like saying we can have roads without traffic rules. The sooner consumers understand how these things work, the better.
The “neutrality” camp, predictably, has predicted that the world as we know it will now end. Derek Turner, Executive Director of the Open Internet Coalition said the decision put the FCC is “an existential crisis” and that the FCC now “has virtually no power to make policies to bring broadband to rural America” or other unserved areas. Markham Erickson, Executive Director, Open Internet Coalition said that “the FCC has no option but to…clarify its authority over broadband network providers under Title II” of its Act," which means that it would define the Internet as “a telecommunications device” and regulate it as it did the phone system. Parul P. Desai, Vice President of Media Access Project, said his organization “continues to maintain that the Commission must have the authority to protect all Internet users against harmful and anticompetitive conduct by Internet service providers.”
But these remarks miss the point. Let’s go back to Desai’s remark that, absent the FCC, nothing would protect us from harmful or anticompetitive conduct. Wait a minute! Competition generally does that. But when it fails, there’s anti-trust law! There’s a Federal Trade Commission with nothing to do all day but find bad actors and hammer them. We know what predatory and anti-competitive behavior is – there’s over a century of case law on this score. There’s a Justice Department full of lawyers with the express purpose of putting people in jail for that kind of stuff. If the FCC wants to push the Justice Department to prosecute somebody for monopolistic behavior, all it has to do is find some and walk across the street with a file. And we have a right to privacy in the Constitution -- or so some of us think -- as well as intellectual property law, and they all bear on what happens on the Internet.
And as for Turner’s view that now the FCC can’t subsidize creating broadband infrastructure in unserved areas, that’s just ridiculous. All the Congress needs to do is appropriate the money, give it to the FCC (or whomever else – as a former Commerce Undersecretary, I think they’d do a great job), and tell them to get the job done. What are you smoking?
But then we get down to the real deal – the advocates' view that the FCC has to “clarify its authority” under Title II of the Telecommunications Act of 1996, meaning that the FCC would go back to court and say, “Ancillary, hell! In fact, broadband is just another telecommunications device and we have the authority to regulate it as such.”
The amazing part of this, to me, is that the “neutrality” enthusiasts, who have argued the broadband Internet is so new and innovative, so transformative and unique, that we have to regulate it in a special way, are now reduced to urging the FCC to go in front of a judge and say, “Your Honor, the Internet is just another ol' telephone.” Is the paradox lost on them? There are all sorts of regulatory features that we applied to the technologies the Internet is displacing that we don’t apply to the Internet – the fairness doctrine, obscenity guidelines (which words would Carlin be unable to use on the Net today?), and the like. Arguing that we should treat the broadband Internet as we did telephones would be not only archaic (why not just refer to it as “a series of tubes”) but stupid – the phone regulatory system gave Ma Bell a guaranteed profit in exchange for running a stagnant service. We cut that deal with the phone companies because phones were a “natural monopoly” – it really only made sense to have one system in place given the scale and cost. But we already have more than one system in place to bring you broadband – cable, telcos, wireless all compete for your business, and as technology expands, we’ll have more competitors, not fewer. Should we get rid of that competition and regulate the providers instead – forcing them to open their systems to free-riding competitors, telling them how to manage their networks? Is that the Internet you want?
But there’s a downside to the “Title II” stratagem thees advocates want. If the courts entertain this argument – broadband is just another telecommunications device – and then reject it, then the FCC has more than an “existential crisis.” It’s lost a game of You Bet Your Life. It would never be able to compel broadband carriers to do much of anything, as its broad mandate to do so has now been rejected, and its specific mandate to regulate telecommunications would be found irrelevant.
I’ve argued before and often that there are plenty of places in the economy that don’t have enough regulation – greenhouse gas emissions and the behavior of financial institutions, for example. And every so often – Enron, Love Canal, or the tragic news today out of West Virginia – we’re reminded why those regulatory efforts are often sorely needed. But this isn’t one of those cases.
The FCC could have a very productive life as an honest broker of the broadband Internet, representing the government (and the public interest) on good ideas found in the National Broadband Plan – consumer information on speeds and prices, working with localities to get the best deal when trying to entice a provider to enter a rural or low-income neighborhood. But it would have to abandon the idea that it can shape the Internet in ways that the interaction of providers and their customers would not.
I’ve had existential crises in life, believe me. Just writing the sentence makes me wince. We all have them. And we emerge from them having learned something about who we are and what we need to do in life. I don’t want to reify a government agency, but there’s something unfortunate about the FCC clinging to an old role as opposed to forging into the future, having used the moment to rethink how it relates to a rapidly-changing medium.
Playing You Bet Your Life was a good play for Groucho. Not for broadband policy.
Sympathy For The Devil
Before I go to today’s topic – the rush to kick China around over its currency – a few distractions.
First, I’ve wondered about this for a while now, and invite any of you to share your views if you can, simply out of my own personal preoccupation with the question: when dogs bark in movies or on television, what are they saying?
What did you think, that dogs say bow wow wow and it’s completely bereft of meaning? Shades of Planet of the Apes! Our own dogs, Eddie (a cairn terrier, a distant relation of Toto and, on the dark-end-of-the-street, down-low, Fala) and Olive (a rescue dog named by my wife because she has a little pit in her), watch television with eager attention when a dog’s on screen, and are obviously getting the message. What are they hearing? “This is the twentieth time I’ve done this stupid trick!” Or, “The actor I’m barking at kicked me when no one was looking!” (After all, don’t dogs have the right to bitch?) For that matter, what was Flipper saying when he clicked and whirred to Ranger Rick, or whatever his name was?
Yeah, go find out what Brad DeLong and Paul Krugman think about that.
Next, the Ehrlich blogging dynasty continues, even if it flows up, not down -- cehck out what's going on inValencia, courtesy of ESPN, here.
A third and more important topic is today’s employment report, which came in at 162,000 jobs, the second positive monthly jobs report since January of 2008 (there was a small, positive blip last November), and the largest monthly jobs gain in three years.
About a third of the gain came because the census is now hiring people, and there’s also a bounceback from very bad winter weather in January and February, which artificially depressed reported employment.
But most importantly, the underlying trend favors jobs – in fact, I thought the number would be larger. The economy has gone through the most frightening period in our lifetimes. In the 2008 crisis, the economy was about to enter the equivalent of cardiac arrest – there was or was about to be no lending to be had in a variety of key markets, including those where businesses got working capital and people could park their liquid savings overnight.
Faced with this unprecedented situation, most firms had to be their own banker, and as I’ve argued elsewhere, a company can raise fast cash in only two ways – selling all the inventory they can and firing everybody they see. So business did both – in fact, they fired millions more people that you’d expect given how much output fell. If you don’t buy that explanation, you have to accept that our economy’s productivity is growing at a seven percent annual rate, meaning the amount of stuff the average worker makes is doubling every ten years. No way.
Look for more gains in the months ahead, and don’t buy the “jobless recovery” and “double-dip recession” arguments.
And now China. On April 15, the Obama Administration is obligated to report to the Congress as to whether China is a “currency manipulator,” and what it intends to do about it.
Currency manipulation means deliberately keeping your currency – here, the Chinese yuan – below its “real” value in order to make your exports cheaper and the imports you buy more expensive. Right now, foreigners want to buy yuan for two reasons; first, they want to buy cheap and plentiful Chinese goods, and Chinese producers have to be paid in yuan to pay their costs and make their nut. Second, many foreign companies want to build capacity in China, and that takes yuan, too, for the same reasons – the crane operator there isn’t going to take your zlotys or riyals to his grocery store.
So the Chinese accumulate big piles of other currencies – they run trade surpluses with 90 countries, so there’s all sorts of money coming in. Usually, in that situation, the yuan will go up in value compared to the dollar, because people want lots of yuan to buy Chinese goods and build factories in China than they do dollars. And when that happens, the situation self-corrects – people demand fewer yuan when its price rises, which leads to fewer Chinese exports, more imports into China, less foreign investment, and so on.
The economists in this debate seem to agree that the yuan, which has already been allowed to rise by 20 percent by the Chinese government since 2005, is still about 25 to 40 percent below where it “ought to be,” as judged by relative labor costs and other measures. And armed with this calculation, some of them have gone to town.
For example, one estimate has it that the artificially-depressed yuan has cost the U.S. 2.4 million jobs. More sober estimates still put the number at half of that. And in response, some very respectable guys – like Fred Bergsten and the aforementioned Paul Krugman -- have called for imposing a tariff on Chinese goods to make up the difference if they don’t stop screwing around with their currency – that is, put a 27.5 percent duty on everything we buy from them if they don’t clean up their act in six months. That’ll show ‘em.
It’s time to take a deep breath.
First, the 25 to 40 percent figure is true under the current set of conditions in China. By that, I mean this. If China were to allow its people to move money freely in and out of the country, there could be an outpouring of funds into higher-paying foreign investment opportunities, which would mean that suddenly people were demanding dollar and trying to get rid of their yuan, which would reverse the current situation. And while the liberties of Chinese savers are certainly circumscribed by these controls on the inflow and outflow of their money, you can see why China isn’t too enthusiastic about letting its currency move around like that – it invites the kinds of instability and speculation we’ve seen regularly in global capital markets. So while there’s a cost to these prohibitions, they’re part of China’s attempts to maintain some economic stability.
Second, I don’t buy the jobs numbers for an instant. There aren’t just two countries in the world, and products move from country to country in stages – stuff that “comes from” China could be made there, or assembled there out of Mayasian or Thai parts and components, or made by U.S. companies in their own facilities there. If that particular shipment of goods is slapped with a tariff, the assembly could move to Malaysia or Thailand, or the facility itself, or the U.S. firm might decide to set up its operation anywhere else around the world. And while China is now making higher-end goods, like electronics, as well as lower-end ones, like plastic sandals, it by-and-large doesn’t make stuff that we make.
The cause of our trade deficit is that we don’t save very much. If we, as an economy, spend more than we produce and earn, then we have to buy the difference from other countries and borrow their money to pay for it – that’s the only way you can buy more than you make. There’s just no way around that fundamental identity. That’s why we have a hellacious trade deficit. The reason we have a hellacious deficit with China is that China is a cheaper place to make all sorts of things, for both good reasons (cheap labor, hard work, making products that are easy to make) and bad ones (currency manipulation, slave labor). But acting on Chinese currency without acting on the fact that we spend more than we produce and earn (largely thanks to the budget deficit but also out of our low personal savings rate in general), is like arguing that we can deflate a balloon by squeezing it at one end.
There is then the problem of taking unilateral action against another country because you have “evidence” about bad stuff it’s doing – does this sound familiar? Letting the dogs of war slip in Iraq was a devastating blunder that seems to dwarf the possible repercussions of slapping import duties on China, but make no mistake – this is just as unilateral. And that’s particularly true because there are international institutions like the World Trade organization and the International Monetary Fund that have specified role to play in this kind of situation. Telling the IMF to take a walk and let us handle this is just as disruptive as telling the International Atomic Energy Agency.
The biggest problem with this kind of unilateralism, of course, is that invites a similar response. Is China going to let this kind of tariff pass without retaliation? Not in a New York minute. And China’s other advanced major trading partners will be happy to sell it the aircraft, infrastructure, energy services, and other stuff that advanced nations sell profitably to poorer ones.
Then there’s how China probably sees all of this. Their primary objective is not to put U.S. workers out of jobs, no matter what a few Senators think. For most of this decade, the U.S. was happy to let China fill in the gaps in our burgeoning national shopping list and then finance it by lending us the wherewithal to keep it going. Moreover, going back to the Asian financial crisis on 1997-98, China was the bedrock on which Asia was able to stand – it refused to devalue its currency would there was all sorts of pressure on it to do so, and absent its cooperation, the entire mess would have been catastrophic. So China’s allowed to feel that the signals are being changed on them.
Finally, China’s leaders probably have the hardest job in the world. They have 1.6 billion people, an archaic state-controlled economy, tens of millions of people on the edge of rootlessness, enterprises that ought to fail if they haven’t yet, a banking system that survives by not recognizing the worthlessness of many of their debts, and a budding property boom (that would be made worse by a rising yuan, as domestic home buyers would have higher real income). And they’ve been doing a very good job of keeping all of these balls in the air – compare their mastery at converting their broken down, communist mess when compared to Russia, which went for totalitarianism and poverty to despotism and being broke. (Reminiscent of the famous dictum – under capitalism, man exploits man, and under communism, it’s the other way around.)
It’s easy to rail against them, particularly if you wave around questionable job numbers , but it takes a more nuanced eye to see what China’s problems are and our stake in helping them make the transition to a market economy.
The good news is that China only recently announced that its President Hu will come to Washington in two weeks – right about when the report on their currency practices comes due. It’s tempting to read this as a sign that the Administration has come up with a way forward without resorting to starting a trade war or breaching the procedures nations are obliged to follow is their grievances with each other.
What’s really needed is the kind of bilateral policy coordination that we’ve so scrupulously avoided. The Bush Administration was happy have China pay for its tax cuts and write the rest off to its support of free trade. The Obama group, having inherited a bleeding mess, has less forgiving sensitivities. But if it can produce an agreement that balances gradual yuan appreciation with an American commitment to get its deficits – the real source of our trade imbalance – under control, it will have shown remarkable maturity, even if it requires some sympathy for the devil.
Brewster’s Gigabit
I had a college roommate named Joe Hartman who, to my great sadness, died last year, the first of our crowd to go. He was funny, sardonic, unkempt, direct, and had a sweeter disposition than he liked to let on. His Dad had a job reviewing plays in New York for 20th Century Fox, scouting them for prospective movies, which was a far cooler job than any of our Dads had -- my step-father, for example, sold plastic flowers wholesale, which makes clear the ample difference between surreal and cool. Owing to his Dad, Joe had a regular summer job for Fox as a “reader.” It was a job we all envied – reading books at $20 a pop and then writing a memo as to whether they would translate well to film. We all were doing that already for free.
The summer before his junior year, 1967, he was given a copy of Terry Southern’s novel The Magic Christian. In it, the world’s richest man adopts a young homeless guy and spends the rest of the book showing him how people will degrade themselves for money. This was no small assignment for Joe – Southern was a major guy, having restructured the unexceptional nuclear thriller Red Alert into the classic Dr. Strangelove for Kubrick and then having a writing hand in a series of hit movies. So the pressure was on Joe when he sent up a note suggesting that Fox pass, or so the story went. He was overruled and his overruler was then overruled, and so on back and forth up the chain until Darryl Zanuck himself flew to New York, locked himself in a hotel room, read the book, and then emerged to agree with Joe. Score another one for our suite on the third floor of B wing at Henry (now Hendrix) College (dorm) at Stony Brook. Someone else ended up making the movie, which starred Peter Sellars and Ringo Starr, and failed both critically and commercially, particularly given the high-wattage names. Joe was vindicated.
The Magic Christian’s climactic scene, which is not, as I recall, in Southern’s original novel, is about wealthy British toffs jumping into a swimming pool of excrement in order to get to the cash in the mess. And this all comes to mind because of a newspaper article I read the other day about a Magic Christian for the new millennium – Google’s promise to build a one gigabit fiber optic network in a mid-sized city, and the reaction it’s getting.
No, it’s not a swimming pool of excrement, but it has its moments. The mayor of Duluth took a plunge in a frozen lake to demonstrate his desire to be the chosen municipality. The mayor of Sarasota put himself in a shark tank to respond to his frozen counterpart’s public policy sensibilities. If you search “Google city gigabit” – on Google, say – you’ll get pages after pages of articles about what various cities across the country, from Philly to Hawaii, are doing to win this competition, although most of it not as sad as the two examples cited here. Hopefully the Google guys are disqualifying anyone who does something that stupid.
This spectacle is worth mentioning because it turns a very important question into a circus. The important question is how we’re going to get high-speed broadband to everyone who wants it in the U.S.
Let’s take a beat here on this “we’re behind and will lose the race” argument, which drives much of the discussion about broadband infrastructure. The U.S. is behind in some regards – other countries have more fiber strung and offer faster speeds – but ahead in others – our wireless is better, cheaper, and more extensively used. We have some disadvantages – we don’t have a national phone company with the explicit or implicit mission of getting this stuff done and if they lose money it’s not the end of the world (or a government that tells private firms the same), and we’re a less urbanized geography than most of these other countries, which makes the infrastructure more extensive and expensive. (And we’ve been our own worst enemy, giving a higher priority to arguing over old infrastructure than to building new.)
But we’ve got advantages as well – we’re really the only country where two separate sets of infrastructures – cable and telco – compete, which is what’s driving our catch-up, and our wireless providers are far more diverse and competitive than almost everybody else – only the U.S. and Great Britain have four wireless providers beating each other’s heads in to bring customers faster and cheaper service. And at the risk of appearing insufficiently enthusiastic, South Korea probably offers its consumers the fastest access anywhere, and while it’s cool, it hasn’t yet been transformative. Their standard of living still lags ours.
Google’s plan to build a 1 gigabit speed network in the lucky location is remarkable, to be sure, since that’s about 100 times what users with fast connections now have, and ten times what the FCC’s plan imagines for most Americans a decade from now. But when you get down to it, it’s part-circus, part-experiment, and its ultimate value is still unresolved.
Google’s caper won’t tell us, for example, anything about how to get a faster or more extensive network built. It won’t establish the economics of building one – that’s knowable right now. Google’s going to lose money doing this – or it’s going to con some municipality into sharing its losses through subsidies, which is probably part of the point of the circus.
And Google says it will operate the network “openly,” meaning that it will let other companies offering competing services on the same infrastructure. Some regulatory advocates want the entire net run this way; in essence, they want to commandeer the infrastructure that’s been built and require the companies that built it to let their competitors use it at a price the government determines. That’s how DSL happened, to some extent – companies like Covad and Earthlink rode this train at the government-subsidized fare and offered their service. Swell, but nobody is going to build new networks if they’re obliged to share them, much as airlines don’t let their competitors fly their planes and Ford can’t bang together a few cars at Chrysler’s assembly plants. Once fiber and cable started getting much faster than DSL, companies like Earthlink proved to be nothing more than free riders who disappeared once somebody else started innovating.
Besides, Google is in this to lose money – proving it can do so by sharing its investment with its competitors only proves it can lose it with elan. But it doesn’t change the fact that we’ll see somebody, somewhere, telling us that “if Google can build a 1G network, why can’t everyone?” Because not everyone has money to lose.
Besides, a gig is super-duper, but for many households, premature to say the least. Which is why the real value of this project, most would argue, is experimental – what will people do if they are given a 1G connection to their home? When technologists think about speeds this fast, they think of applications we could readily imagine now but can’t implement. Speeds that fast allow for real-time, high-quality video, so you could have real-time video of sports or entertainment events right to the home, with all of the perspective-shifting, information-sharing gimmickry you’d expect if you were watching a football game or a concert. Real-time, high quality video also makes telemedicine work, or remote learning and training. And although it’s usually thrown in as an after-thought, the first thing I think we’d see in a 1G world is real-time gaming – people playing astonishing blow-‘em-up games against their friends (or not friends).
But the reality is that we won’t see much of that in the designated Gigabit City, not now. First, many users will have to get new computers to make use of this stuff – imagine what it will take to buffer a stream that fast. Second, the development of these applications depends on having a mass market to which to sell them. Like Trotsky’s view of “the revolution” – that it can’t happen in just one place alone – applications need scale. I hope that the winner offers up a local hospital prepared to put resources into a telemedicine experiment, and if it does, we’ll learn something about how to offer such a service. But be prepared to lower your expectations.
Other companies have done similar experiments in telecommunications history. Time-Warner famously gave a community in Queens 150 channels twenty years ago – dig this write-up from the Reading Eagle from June, 1992 – the writer is so awestruck that he has to write “150 channels” in capitals, or as writers call it, screaming. It never occurred to him that what Levin would find out was that the wasteland is pretty damn vast.
But perhaps what we’ll learn after this experiment is over is less about the Internet and more about Google. There is a moment when some companies become so successful that, like Alexander weeping when there were no more worlds to conquer, they struggle to figure out their place. Exxon, in 1980, astride a booming oil market, invested in office systems, lost the predictable amount of money and, however paradoxically, was fortunate when the price of oil fell in the 1980s, so it could get back to trying to find it and sell it. Microsoft, once it had colonized the computer industry by the mid-1990’s, was at a similar crossroads before Gates had the presence of mind to realize that the Internet was for real – yes, for a while he wondered – and embraced it.
If Google’s really thinking about becoming a broadband infrastructure provider now that it dominates search, sell the stock. Google’s done many wonderful things, and the Android phone is an excellent first step towards Google embodying its value in things as opposed to services. Now and then Google feints towards being in the infrastructure business – for example, it once bid for spectrum at a government auction, but was probably trying to influence policy rather than win. That’s probably what it’s doing here, trying to get a better seat at the table for its views on Internet regulation while it horses around with a fun project. But providing infrastructure doesn’t have anything like the margins that Google gets, and is never going to.
In the final analysis, we’re about to learn more about the future of Google than the future of the Internet. And while the ice-plunging and shark-sitting mayors may seem like something from The Magic Christian, Google’s adventure may end up instead resembling Brewster’s Millions.
Accentuate The Positive
The Chairman of the Federal Communications Commission is scheduled today to release his long-awaited National Broadband Plan, but like any such release, parts of the work are already osmoting through the permeable boundary of the media. The Chairman himself published an overview of the report in Sunday’s Washington Post, and the Executive Summary found its way to the Internet yesterday.
Armed with that knowledge, and aware that the devil-containing details are yet to emerge (and in many instances will be determined later), here’s a summary in a nutshell:
Good.
I don’t think anybody across the spectrum of opinions on the future of the Internet disagrees about what the Promised Land looks like, at least when painted with a broad brush. We all want competitive markets to bring a very fast and very accessible (meaning both convenient and open) broadband Internet to everyone (save for those who outright refuse it) at a reasonable price.
And that’s more than a vapid statement. Embedded in it are the ideas that: private investment is the key to getting it done; it’s worth paying something to extend the high-speed Internet beyond where it would go if supply and demand found their own level; and we need to “draw” people into broadband, to improve broadband “literacy” among people who don’t now get it or understand it. You can’t subscribe to the vision of the Promised Land without accepting those implications.
With those ideas as a backdrop, let me tell you three things that are particularly good about what I’ve read so far.
The first is that Broadband is the Thing – meaning it’s more important than other stuff. If this sounds like truistic pap, you haven’t done enough time in government. Once something exists in Government World, it lives forever. When I was Undersecretaryin’ back in the day, I used to tell people that it was a good thing that the country wasn’t 10,000 years old, because there would be a Department of Hunting and Gathering that antedated the Department of Agriculture, and there’d be statistics collected on our vital national production of pelts and teeth. When I proposed in 1994 that my agencies stop producing the Index of Leading Economic Indicators – it cost us money and in a world with all sorts of economic forecasters we wouldn’t be missed – I had to go to the White House to explain myself to a group of Cabinet principals. (Lloyd Bentsen, much to his credit, asked why he was being bothered with this, although not in a particularly gentle way. I knew Lloyd Bentsen. Lloyd Bentsen was a friend of mine…)
So when the FCC comes out and says “broadband is more important,” it’s man-bites-dog and ought to be applauded. It does that by saying that Depression-era programs that subsidize rural telephone provision should be redirected to developing broadband access, and by saying that electromagnetic spectrum -- the range of radiation frequencies over which radio, television, and mobile phone signals move through the air – should be moved away from broadcast television and to mobile phones. That’s very positive. Change is not about addition – it’s about substitution.
A second thing that’s good about the Summary is that it recognizes that “wireline” and “wireless” broadband are competitors. To many people, it’s obvious – young people, for example, who have “cut the cord” and only keep a mobile phone. There are critics who argue that wireless Internet doesn’t compete with cable, fiber, or copper loop. But they’re obviously wrong, and it’s a good thing that the FCC agrees that all of these are part of the same “ecosystem.” (That’s the word the FCC uses in its report, and it’s a bit of a euphemism. I suspect they don’t want to say “market,” which would straight-out tell the critics they’re wrong, so “ecosystem” it is.)
In fact, the real danger isn’t that wireless broadband won’t compete with “wireline,” but that it will overwhelm it. Wireless is getting fast fast -- this year we’ll see the introduction of LTE, or Long-Term Evolution, the “next thing” after 3G phones. PCWorld recently reported that company tests of this technology showed speeds of 5 to 12 meg, comparable to what’s already in homes, and Verizon expects to have it in 100 million customers by the end of the year. Look at the adoption of mobile phones at the expense of wireline ones – people want mobility. Try it this way – which do you think will disappear 50 years from now – mobile phones or wired handsets?
So once you accept that wired and wireless broadband are in the same market, or “eco-system,” or fraternity, or phylum, or whatever, the broadband market becomes competitive as all get-out. You’ve got cable companies, telephone companies, the Big Four wireless providers, WiMax by Clearwire, satellite guys (on the periphery, to be sure), and the prospect of more entrants than quitters, because once you have a frequency, it’s a heck of a lot cheaper to offer mobile broadband than to run a hard connection to every home. And once you accept that broadband is a competitive environment, you have to wonder why we’re agonizing over how to regulate it. Instead, the focus ought to be where the FCC puts it – on freeing up more spectrum so the wire versus wireless competitive battle for broadband provision can be fought out.
And that leads to the third thing that I like in the FCC report, so far. In any report, you have to read between the lines, and once you do, the reading becomes subjective. But Chairman Genachowski, who spent many of the intervening months talking about principles to guide regulation, has now modified his tone. Instead of providing a framework for regulating broadband providers – mandates like “net neutrality” or “unbundling” requirements that force you to share your investments with your competitors -- he’s chosen to take a different tack.
The report talks about collecting and disseminating “detailed, market-by-market information on broadband pricing and competition.” It wants to develop “disclosure requirements for broadband service providers” that would be, one presumes, the equivalent of the energy labeling on a new hot water heater or toaster oven. Together with policies to make more spectrum available, to facilitate construction of new infrastructure (like rights-of-way and access to conduits and poles), and to create high-speed centers as schools, government sites, hospitals, and elsewhere, the report goes in a new direction, emphasizing building competition rather than regulating to, at best, imitate it. We’ll give consumers information, give them great and helpful stuff at schools and medical centers to connect to, and then let ‘em rip. But, then again, once you’ve accepted that the broadband market is an “ecosystem” in which wired and wireless competitors are rapidly innovating and changing the landscape, what else can you do?
Moreover, this approach is the quickest way to put new broadband infrastructure in place. No one is going to volunteer to be the Little Red Hen that makes the multi-billion dollar investments in fiber or cable – or satellites and towers – only to be told that your competitors can use those investments once they’re in place. By taking this new, pro-competitive route, the FCC is saying that investing to extend the broadband Internet to rural areas and inner-city neighborhoods is the number one priority. Again, change is about substitution and priorities.
So there’s a great first step. Make broadband the priority, recognize the full range of competing options involved (and don’t choose among them), and give consumers the information needed to drive the market. Or, in the words of the great Johnny Mercer, accentuate the positive, latch on to the affirmative, and eliminate the negative, with the goal of spreading joy to the maximum.
Do it, Mr. Chairman. Don’t mess with Mr. In-Between.
The New Radicalism (II)
Last week, I argued in this space that the Right-ists who believe dinosaurs were late for The Ark have taken on the stance that used to be held by the New Left of a generation ago – they share a fantasy about how the world ought to be, rather than respond to the realities of how the world is at the moment. And today’s progressives have replaced the Nixonian realpolitik – the new “radicalism” is climatology, biology, and earth science. And managing financial crises.
And as if to make my point, I read this week that the Texas State School Board is considering changes to its state-wide history textbooks that would drop Thomas Edison and Albert Einstein from the American history curriculum and replace them with Senator Joseph McCarthy and Phyllis Schlafly. Yes, I have that right. They were going to cut Christopher Columbus and Neil Armstrong, too, but spared them. For now.
As if anything could be more ignorant than the idea itself, consider this argument from a supporter of this substitution, a Mr. Terry Kemple of the Community Issues Council of Tampa who, according to the local Fox affiliate’s reporting, said that “both sides of this issue have an agenda.”
There you have it – science, empiricism, and rationality, and America’s greatest scientist and its most prolific inventor (regardless of whether he messed up the AC versus DC thing) – are not reality to these folks, but an agenda, equivalent to an ideological perspective or a personal belief. Light bulb – for or against? And this isn’t some backwater town somewhere – it’s the second largest state in the country.
This is beyond a political and social challenge for our country, a chilling reversion to fundamentalism. It goes to the very roots of our affluence.
200 years ago, David Ricardo, the British economist, nailed “the trade question.” Even the poorest and most backward countries export something. How do they end up doing so? And, if they're not particularly good at anything, what will they export?
Ricardo’s answer was the “law of comparative advantage,” which says that nations export what they can make “more better” than their trading partners.
Think about it this way. I know a guy who was a big-name cardiac surgeon, but he was also a first class carpenter and cabinet-maker -- he was both a better carpenter and a better surgeon than everybody else. But it’s harder to be a good surgeon than a good carpenter – you’d rather any old idiot (say, me) built you a birdhouse than screwed around with, say, a mole on your shoulder.
So the guy was “more better” at surgery than at carpentry – Ricardo’s law said he should be a surgeon and then pay other people to do his carpentry.
But Ricardo was concerned about trading English wool for Portguguese wine – simple products that were anchored in climate and geography. In today’s world, the “factors” that make goods and services are as mobile as the goods themselves. Capital travels around the world as digital bits. Partnerships, joint ventures, and the transnationalization of companies let almost all of the world’s technology go where it’s needed. The world abounds in smart people with incredible skills, learning, and ability. And today’s goods are obviously richer and more complex than wine and wool.
Economists from Raymond Vernon to Michael Porter have attempted to catch up with these changes, and to summarize, it goes like this; a country has a level of technological and “environmental” competence, where “environmental” refers to the broad array of factors that make a place a good place to get things done – literacy and numeracy, entrepreneurship and incentive, stable economic policy, competent (not absent!) regulation, and so on. This establishes a general level of competence or, as economists call it, productivity, and within that level of competence, the course of history provides a path leading to specific industries.
For example -- the U.S. was an leading auto producer for a long time because the Great Lakes provided a cheap and easy way to get iron ore and coal from one place to another, and then a few remarkable people – Henry Ford, for one – figured out how to integrate a variety of innovations that could be traced back to Alessandro Volta, who laid the basis for the spark plug a century before Ford. When the advantages and innovation came together, a great industry was born. And the auto industry wilted because the Great Lakes cost advantage became less important (and was squandered) and because the industry lost a lap in the innovation race.
All this Ricardian jive helps us understand what’s so chilling about deciding that stories of great innovators like Edison and Einstein aren’t worth passing down to kids. For one, some of the kids exposed to this bizarre curriculum are going to be slightly less numerate, less aware and worldly, less prone to being able to use empiricism, experimentation, and the scientific method to integrate innovations, resources, and a vision of how they add up to new economic activity. That’s tomorrow’s standard of living.
But there are all sorts of reasons why American kids lag the world in math and science — even though there are rays of hope that we’re catching up – and nutty ideas about Joe McCarthy is pretty far down the list. The real danger is that we risk becoming a theocratic culture that first ignores, then degrades, and perhaps one day demonizes the basic building blocks of our prosperity.
Where does this new fundamentalism head? What happens on college campuses when those who learn and teach the rudiments of science – the Big Bang, evolution, Earth science, all of the knowledge that contradicts a literal telling of the Bible’s mythic narrative – find themselves under attack or pressured to compromise their knowledge? If you were working at a Texas university – or Dell Computer in Austin – what would you be thinking right now?
Will the idea that science is “one perspective” or “one agenda” as opposed to a process and technique for learning about the world around us segregate scientists and innovators from the mainstream of society and turn innovation into the object of suspicion or derision?
Will cheerleading for “entrepreneurship” substitute for its irreplaceable complement – technological progress and innovation?
Will the political forces that feed this fire focus it on scientific practitioners? We see that now in areas such as animal experimentation and abortion, but regardless of what you think about those issues or how strongly you agree or disagree, at least it’s (often) driven by concepts of morality that come from the human heart. This new war on science, instead, comes from a shared rejection of reality, from an alternative world that exists in a cultural cocoon.
It’s not a joke. In the old Soviet Union, Stalin found it politically convenient to reject Mendel’s theories of genetic selection and instead decided that acquired characteristics could be inherited. He found a willing accomplice in the biologist Trofim Lysenko, who argued that Mendel was wrong and took Soviet science down a rat hole for a generation. At one point, disagreeing with him became a crime.
Which brings is back to the Texas School Board, which may make it illegal not to teach challenges to evolution, climate science, the origins of the universe, or any other scientific theory for cultural reasons that raise the ghost of Lysenko, and the prospect of the same consequences.
It’s troubling enough that some people find their theology endangered as mankind learns more about the world in which we live.
But it’s even more so when they seek to deny that knowledge and retard our economic progress as a result.
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