Tag: regulation

Eye of Neutrality, Toe of Frog

FCC Chairman Julius GenachowskiI won’t go on at too much length about FCC Chairman Julius Genachowski’s speech at Brookings announcing his intention to codify the principle of “net neutrality” in agency rules—not because I don’t have thoughts, but because I expect it would be hard to improve on my colleague Tim Lee’s definitive paper, and because there’s actually not a whole lot of novel substance in the speech.

The digest version is that the open Internet is awesome (true!) and so the FCC is going to impose a “nondiscrimination” obligation on telecom providers—though Genachowski makes sure to stress this won’t be an obstacle to letting the copyright cops sniff through your packets for potentially “unauthorized” music, or otherwise interfere with “reasonable” network management practices.

And what exactly does that mean?

Well, they’ll do their best to flesh out the definition of “reasonable,” but in general they’ll “evaluate alleged violations…on a case-by-case basis.” Insofar as any more rigid rule would probably be obsolete before the ink dried, I guess that’s somewhat reassuring, but it absolutely reeks of the sort of ad hoc “I know it when I see it” standard that leaves telecoms wondering whether some innovative practice will bring down the Wrath of Comms only after resources have been sunk into rolling it out. Apropos of which, this is the line from the talk that really jumped out at me:

This is not about protecting the Internet against imaginary dangers. We’re seeing the breaks and cracks emerge, and they threaten to change the Internet’s fundamental architecture of openness. [….] This is about preserving and maintaining something profoundly successful and ensuring that it’s not distorted or undermined. If we wait too long to preserve a free and open Internet, it will be too late.

To which I respond: Whaaaa? What we’ve actually seen are some scattered and mostly misguided  attempts by certain ISPs to choke off certain kinds of traffic, thus far largely nipped in the bud by a combination of consumer backlash and FCC brandishing of existing powers. To the extent that packet “discrimination” involves digging into the content of user communications, it may well run up against existing privacy regulations that require explicit, affirmative user consent for such monitoring. In any event, I’m prepared to believe the situation could worsen. But pace Genachowski, it’s really pretty mysterious to me why you couldn’t start talking about the wisdom—and precise character—of some further regulatory response if and when it began to look like a free and open Internet were in serious danger.

If anything, it seems to me that the reverse is true: If you foreclose in advance the possibility of cross-subsidies between content and network providers, you probably never get to see the innovations you’ve prevented, while discriminatory routing can generally be detected, and if necessary addressed, if and when it occurs.  And the worst possible time to start throwing up barriers to a range of business models, it seems to me, is exactly when we’re finally seeing the roll-out of the next-generation wireless networks that might undermine the broadband duopoly that underpins the rationale for net neutrality in the first place. In a really competitive broadband market, after all, we can expect deviations from neutrality that benefit consumers to be adopted while those that don’t are punished by the market. I’d much rather see the FCC looking at ways to increase competition than adopt regulations that amount to resigning themselves to a broadband duopoly.

Instead of giving wireline incumbents a new regulatory stick to whack new entrants with, the FCC could focus on facilitating exploitation of “white spaces” in the broadcast spectrum or experimenting with spectral commons to enable user-owned mesh networks. The most perverse consequence I can imagine here is that you end up pushing spectrum owners to cordon off bandwidth for application-specific private networks—think data and cable TV flowing over the same wires—instead of allocating capacity to the public Internet, where they can’t prioritize their own content streams.  It just seems crazy to be taking this up now rather than waiting to see how these burgeoning markets shake out.

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Why Chile Is More Economically Free Than the United States

42-16335429In the 2009 Economic Freedom of the World Report, Chile is now #5, one place ahead of the United States.

In 1975, of 72 countries, Chile was No 71. How did this happen? The explanation lies in what I call the “Chilean Revolution,” because it was as important and transformative to my country as the celebrated American Revolution that gave birth to the United States.

The exceptional political circumstances of this period have obscured the fact that from 1975 to 1989 a true revolution took place in Chile, involving a radical, comprehensive, and sustained move toward economic and political freedom (from a starting point where there was neither one nor the other). This revolution not only doubled Chile’s historic rate of economic growth (to an average of 7% a year, 84-98),  drastically reduced poverty (from 45% to 15%), and introduced several radical libertarian reforms that set the country on a path toward rapid development; but it also brought democracy, restored limited government, and established the rule of law.

In 1998, The Los Angeles Times described the importance of the Chilean Revolution to the world:

In a sense, it all began in Chile. In the early 1970s, Chile was one of the first economies in the developing world to test such concepts as deregulation of industries, privatization of state companies, freeing of prices from government control, and opening of the home market to imports. In 1981, Chile privatized its social-security system. Many of those ideas ultimately spread throughout Latin America and to the rest of the world. They are behind the reformation of Eastern Europe and the states of the former Soviet Union today… which demonstrates, once again, the awesome power of ideas.

The role and achievements of Chile’s team of classical liberal economists is well known. They were the ones who in 1975, once the quasi-civil war was over, decided to carry out a principled, “friendly takeover” of the military government that had arisen from the breakdown of democracy in 1973 (here is my essay, published in “Society”, on that drama). Much less well-known, however, is that they were also the foremost proponents of a gradual and constitutional return to a limited democracy.

In fact, on August 8, 1980, a new Constitution, containing both a bill of rights and a timeline for the restoration of full political freedom, was proposed and approved in a referendum. In the period 1981-1989, what Fareed Zakaria has called the “institutions of liberty” were created—an  independent Central Bank, a Constitutional Court, private television and universities, voting registration laws, etc—since they were crucial for having not only elections but a democracy at the service of freedom. Then on March 11, 1990, an extraordinary event happened: the governing military Junta surrendered its power to a democratically elected government in strict accordance to the 1980 Constitution (here is my note on the restoration of democracy in Chile).

Since 1990, Chile has had four moderate center-left governments and, despite minor setbacks on tax, labor and regulation policies, the essence of the free-market reforms are still intact. The 1980 Constitution is the law of the land, and has been amended by consensual agreements among all parties represented in Congress. Not only is Chile now at the top of rankings on free trade (number 3 in the world after Hong Kong and Singapore) and transparency (less corruption that in most western European countries), but it is expected to be a developed country by 2018, the first in Latin America.

Nobel Laureate Friedrich Hayek proved, again, to have been a visionary when he stated in 1981: “Chile is now a great success. The world shall come to regard the recovery of Chile as one of the great economic miracles of our time.”

Why Wall Street Loves Obama

wall streetWas it just me, or did there seem to be a whole lot of applause during Obama’s Wall Street speech?  Remember this was a room full of Wall Street executives.  The President even started by thanking the Wall Street execs for their “warm welcome.”

While of course, there was the obligatory slap on the wrist, that “we will not go back to the days of reckless behavior and unchecked excess,” but there was no mention that the bailouts were a thing of the past.  Indeed, there is nothing in Obama’s financial plan that would prevent future bailouts, which is why I believe there was such applause.  The message to the Goldman’s of the world, was, you better behave, but even if you don’t, you, and your debtholders will be bailed out.

The president also repeatedly called for “clear rules” and “transparency” - but where exactly in his plan is the clear line dividing who will or will not be bailed out?  That’s the part Wall Street loves the most; they can all say we’ve “learned the lesson of Lehman:  Wall Street firms cannot be allowed to fail.”  At least that’s the lesson that Obama, Geithner and Bernanke have taken away.  The truth is we’ve been down this road before with Fannie and Freddie.  Politicians always called for them to do their part, and that their misdeeds would not be tolerated.  Remember all the tough talk after the 2003 and 2004 accounting scandals at Freddie and Fannie?  But still they got bailed out, and what new regulations were imposed were weak and ineffective.

As if the applause wasn’t enough, as Charles Gaspario points out, financial stocks rallied after the president’s speech.  Clearly the markets don’t see his plan as bad for the financial industry.

It would seem the best investment Goldman has made in recent years was in its employees deciding to become the largest single corporate contributor to the Obama Presidential campaign.  That’s an investment that continues to yield massive dividends.

Public Information and Public Choice

MalamudOne of the high points of last week’s Gov 2.0 Summit was transparency champion Carl Malamud’s speech on the history of public access to government information – ending with a clarion call for  government documents, data, and deliberation to be made more freely available online. The argument is a clear slam-dunk on simple grounds of fairness and democratic accountability. If we’re going to be bound by the decisions made by regulatory agencies and courts, surely at a bare minimum we’re all entitled to know what those decisions are and how they were arrived at. But as many of the participants at the conference stressed, it’s not enough for the data to be available – it’s important that it be free, and in a machine readable form. Here’s one example of why, involving the PACER system for court records:

The fees for bulk legal data are a significant barrier to free enterprise, but an insurmountable barrier for the public interest. Scholars, nonprofit groups, journalists, students, and just plain citizens wishing to analyze the functioning of our courts are shut out. Organizations such as the ACLU and EFF and scholars at law schools have long complained that research across all court filings in the federal judiciary is impossible, because an eight cent per page charge applied to tens of millions of pages makes it prohibitive to identify systematic discrimination, privacy violations, or other structural deficiencies in our courts.

If you’re thinking in terms of individual cases – even those involving hundreds or thousands of pages of documents – eight cents per page might not sound like a very serious barrier. If you’re trying to do a meta-analysis that looks for patterns and trends across the body of cases as a whole, not only is the formal fee going to be prohibitive in the aggregate, but even free access won’t be much help unless the documents are in a format that can be easily read and processed by computers, given the much higher cost of human CPU cycles. That goes double if you want to be able to look for relationships across multiple different types of documents and data sets.

All familiar enough to transparency boosters. Is there a reason proponents of limited government ought to be especially concerned with this, beyond a general fondness for openness? Here’s one reason.  Public choice theorists often point to the problem of diffuse costs and concentrated benefits as a source of bad policy. In brief, a program that inefficiently transfers a million dollars from millions of taxpayers to a few beneficiaries will create a million dollar incentive for the beneficiaries to lobby on its behalf, while no individual taxpayer has much motivation to expend effort on recovering his tiny share of the benefit of axing the program. And political actors have similarly strong incentives to create identifiable constituencies who benefit from such programs and kick back those benefits in the form of either donations or public support. What Malamud and others point out is that one thing those concentrated beneficiaries end up doing is expending resources remaining fairly well informed about what government is doing – what regulations and expenditures are being contemplated – in order to be able to act for or against them in a timely fashion.

Now, as the costs of organizing dispersed people get lower thanks to new technologies, we’re seeing increasing opportunities to form ad hoc coalitions supporting and opposing policy changes with more dispersed costs and benefits – which is good, and works to erode the asymmetry that generates a lot of bad policy. But incumbent constituencies have the advantage of already being organized and able to invest resources in identifying policy changes that implicate their interests. If ten complex regulations are under consideration, and one creates a large benefit to an incumbent constituent while imposing smaller costs on a much larger group of people, it’s a great advantage if the incumbent is aware of the range of options in advance, and can push for their favored option, while the dispersed losers only become cognizant of it when the papers report on the passage of a specific rule and slowly begin teasing out its implications.

Put somewhat more briefly: Technology that lowers organizing costs can radically upset a truly pernicious public choice dynamic, but only if the information necessary to catalyze the formation of a blocking coalition is out there in a form that allows it to be sifted and analyzed by crowdsourced methods first. Transparency matters less when organizing costs are high, because the fight is ultimately going to be decided by a punch up between large, concentrated interest groups for whom the cost of hiring experts to learn about and analyze the implications of potential policy changes is relatively trivial. As transaction costs fall, and there’s potential for spontaneous, self-identifying coalitions to form, those information costs loom much larger. The timely availability – and aggregability – of information about the process of policy formation and its likely consequences then suddenly becomes a key determinant of the power of incumbent constituencies to control policy and extract rents.

Monday Links

  • Burnt rubber: Obama’s decision to slap a 35 percent tariff on Chinese tires whiffs of senseless protectionism.

Reform Needed, but Obama Plan Would Result in More Financial Crises, not Less

Today President Obama took his financial reform plan to the airwaves.  While there is no doubt our financial system is in need of financial reform, the President’s plan would make bailouts a permanent feature of the regulatory landscape.  Rather than ending “too big to fail” – the President wants us to believe that with additional discretion and power, the same Federal Reserve that missed the boat last time will save us next time.

The truth is that the President’s plan will result in a small number of companies being viewed by debtholders as “too big to fail”.  These companies would see their funding costs decline, allowing them to gain market-share at the expense of their rivals, making these firms even larger.  Greater concentration in our financial services industry is the last thing we need, yet the Obama plan all but guarantees it.

Obama also chooses myth’s over facts.  The President claims that de-regulation and competition among regulators caused the crisis.  The facts could not be more different.  Those institutions at the center of the crisis – Fannie Mae, Freddie Mac, Bear Stearns, Lehman –could not choose their regulator.

The President’s plan chooses convenient targets and protects entrenched interests, rather than address the true underlying causes of the crisis.  At no time have we heard the President discuss the expansionary monetary policies that helped fuel the bubble.  Nor has the President talked about the global imbalances – the global savings glut that poured surplus savings from the rest of the world into the US.  But then the President appears to hope that loose monetary policy and continued American consumption funded by China will get him out of his own political problems with the economy.  It is especially striking that the President makes little mention of the housing bubble, as if it was only the bust that was the problem.

The President continues to say he inherited this crisis.  While true, he did not inherit the same individuals – Tim Geithner and Ben Bernanke – who were at the center of creating the crisis.  All Obama needs to do is find a position for Hank Paulson and he will have completely re-assembled the Bush financial team.

Without real reform – fixing Fannie and Freddie, scaling back the massive subsidies for leverage in our tax code, loose monetary policy – it will only be a matter of time before the next crisis hits.  If we implement the President’s plan, we will, however, guarantee that the next crisis will be even larger and severe than the current one.

We’re Terribly Czarry

My former colleague Dave Weigel makes the excellent point that the supposed explosion of “Czars” under this administration is, in significant part, a function of journalists trying to make the same old “deputy undersecretary” sound sexier. Which is a shame, since it means that the pernicious and the benign get lumped together under the same sensationalist label – one whose public effect is to normalize the idea of unaccountable individuals within the executive branch given sweeping powers to solve specific problems, whether or not that picture is accurate.

I don’t know how much it can be attributed to the Czarmania, but I’m especially puzzled by the apparent emergence of legal scholar and prospective OIRA Adminstrator Cass Sunstein as the new hot bogeyman for conservatives. The Office of Information and Regulatory Affairs, which Sunstein’s been tapped to head, was created in 1980 and is precisely the sort of agency conservatives should love – tasked with catching inefficient and excessively burdensome regulations before they go into effect. It has, unsurprisingly, been most active under conservative presidents, and is one of the few offices where fans of limited government should want a vigorous, influential, and intellectually formidable director at the helm.

Now, Cass Sunstein is not somebody I agree with on a great number of things. On the day he’s tapped for a seat on the Supreme Court bench, I’ll break out in hives. But it’s awfully hard to imagine any realistic alternative – anyone Obama might actually have appointed – who would be better in the OIRA post from a limited government perspective. (I considered some of the specific concerns being raised about Sunstein back in the spring and found that they ranged from exaggerated to simply mendacious.) That’s one reason hardcore progressives have, in fact, been freaking out over his nomination. They must be pinching themselves  now that it seems Glenn Beck is out to do their work for them. Say what you will about the tenets of “libertarian paternalism,” but at least it’s an ethos that would demand a far lighter touch on markets than the unreconstructed technocracy of your average regulator.