Toward Open Wireless Networks

One of the hottest issues in tech policy this year is the regulation of wireless networks. The transition to digital television is almost complete, and the FCC is planning to conduct an auction next year to determine who will get to use the old analog television spectrum once the television stations are done using it. Some scholars have argued that the FCC should impose a variety of regulations on the winner of that auction to promote competition in the market for wireless services.

I’m skeptical of this argument, but I do think the critics are right about one thing: in the long run, open networks (like the Internet) do tend to be more innovative than closed ones (like AOL). This is true for much the same reason that free markets are superior to central planning; open networks facilitate decentralized decision-making and low barriers to entry for entrepreneurs. The people who founded Netscape, Google, eBay, Yahoo, and dozens of other successful Internet businesses didn’t have to ask anyone’s permission to do so.

Right now, the wireless networks are not as open as many people in the technology industry would like. Someone wanting to create a new cell phone or a new wireless application or service has to go through a long and cumbersome negotiation process with each wireless carrier. There are good reasons to think this is slowing down the pace of innovation in the wireless market. However, the big debate is over what to do about this. Some people think the FCC should step in and mandate open access to wireless networks. For reasons I laid out in TechKnowledge last month, I think that’s a bad idea. My view is that the wireless industry is still in its infancy, and that market forces will drive carriers to gradually open their networks over time.

Last week, we saw two examples of how this might happen. First, Ed Felten, a computer science professor at Princeton, had a great post pointing out one way the iPhone could shake up the wireless marketplace:

An open system would provide more benefit overall, but most of that benefit would accrue to consumers. The carriers would rather get a big share of a small pie, than a small share of a big pie. In most markets, competition keeps this kind of thing from happening, by forcing producers to account for consumer preferences. You would expect competition to have forced the mobile networks open by now, whether the carriers liked it or not. But this hasn’t happened yet. The carriers have managed to keep control by locking customers in to long contracts and erecting barriers to the entry of new devices and applications. The system seemed to be stuck in an unstable equilibrium. All we needed was some kind of shock, to get the ball rolling downhill.

Only a company with marketing muscle, design mojo, and a world-historic Reality Distortion Field could provide the needed bump. Apple decided to try, in the hope of selling zillions of the new, more capable devices. The real significance of the iPhone, whether it succeeds or fails in the market, is that it will trigger the transition to more open networks. Once people see that a pretty good phone can be a pretty good mobile computer, they won’t settle for less anymore; and mobile networks will be pried open.

One of the issues that critics of the wireless carriers often cite is the fact that American carriers have refused to support cell phones with built-in WiFi connections, which could save consumers money by allowing them to save money on their calling plans by making free calls over the Internet. Critics charge that carriers refuse to allow that because they want to force you to make every call over their network, allowing them to soak you with per-minute usage fees. Today David Pogue has an article in the New York Times describing a new offering from T-Mobile that allows consumers to do just that: when the phone detects an Internet connection nearby, it will automatically route calls via the WiFi network, and the customer isn’t charged for the call. As Pogue points out, this is a direct result of T-Mobile’s desire to get a leg up on the competition:

Have T-Mobile’s accountants gone quietly mad? Why would they give away the farm like this?

Because T-Mobile benefits, too. Let’s face it: T-Mobile’s cellular network is not on par with, say, Verizon’s. But improving its network means spending millions of dollars on new cell towers. It’s far less expensive just to hand out free home routers.

Furthermore, every call you make via Wi-Fi is one less call clogging T-Mobile’s cellular network, further reducing the company’s need to spend on network upgrades.

T-Mobile has the smallest market share of the four national wireless carriers, so they have the least to lose and the most to gain from a shake-up of the market. As a result, they’ve proven most willing to take risks in order to gain market share. If this service proves to be a hit, as I suspect it will, it will force the larger carriers to follow suit or risk losing market share.

That’s how competition works–it steadily forces companies to offer more consumer-friendly products and services whether they like to or not. It’s frustratingly slow for people who are used to the rough-and-tumble of the promiscuously open Internet. But it’s moving in the right direction, and given the FCC’s poor track record when it comes to protecting consumers, I think it would be a mistake for Congress or federal regulators to try to “fix” it.

Does Cost-Sharing for Rx Reduce Health?

Unknown, say Dana Goldman, Geoffrey Joyce, and Yuhui Zheng of the RAND Corporation. 

In this week’s Journal of the American Medical Association, the team presents a meta-analysis of “132 articles examining the associations between prescription drug plan cost-containment measures, including co-payments, tiering, or coinsurance[;] pharmacy benefit caps or monthly prescription limits[;] formulary restrictions[;] and reference pricing[;] and salient outcomes, including pharmacy utilization and spending, medical care utilization and spending, and health outcomes.”

Here are their principal findings and conclusions, from the abstract:

Increased cost sharing is associated with lower rates of drug treatment, worse adherence among existing users, and more frequent discontinuation of therapy. For each 10% increase in cost sharing, prescription drug spending decreases by 2% to 6%, depending on class of drug and condition of the patient. The reduction in use associated with a benefit cap, which limits either the coverage amount or the number of covered prescriptions, is consistent with other cost-sharing features. For some chronic conditions, higher cost sharing is associated with increased use of medical services, at least for patients with congestive heart failure, lipid disorders, diabetes, and schizophrenia. While low-income groups may be more sensitive to increased cost sharing, there is little evidence to support this contention.

That last sentence was certainly interesting. But here comes the kicker.

While increased cost sharing is highly correlated with reductions in pharmacy use, the long-term consequences of benefit changes on health are still uncertain.

That echoes points I’ve made previously in this blog:

  • The mere fact that cost-sharing causes people to reduce their consumption of prescription drugs (or other medical care) does not mean that their health suffers. 
  • Even if cost-sharing does cause some people’s health to suffer, that does not mean that the overall health effects of cost-sharing are harmful. 

Indeed, as Goldman et al. conclude that these studies leave open the question of long-term health effects, the best evidence on this point remains the RAND Health Insurance Experiment, which showed that the overall health effects of cost-sharing are nil.

But as Tom Firey has argued in this blog, even if it could be shown that cost-sharing does reduce overall health outcomes, that is not a public policy problem.  It means that people prefer to spend their money on things other than medical care.  That is their right.  We might try to persuade them to spend their money differently.  But we are not justified in taking their money away from them to spend it according to our preferences – or more likely, those of the health care industry – rather than their preferences.  Whose life is it, anyway?

Unequal Justice?

There it was, emblazoned across the front page of the Washington Post, a headline made especially disturbing by its publication on July 4:

Justice Is Unequal for Parents Who Host Teen Drinking Parties

What did it mean, I wondered. Poor parents go to jail, rich parents walk? The law is enforced in black neighborhoods, winked at in white suburbs?

Not exactly. In fact, the Post reported,

In Virginia and the District, parents who host such parties can be charged with contributing to the delinquency of a minor, a misdemeanor that can carry jail time. In Maryland, hosting an underage drinking party is punished with a civil penalty, payable with a fine, even for multiple offenses.

So it’s not a story about unequal justice, just about different jurisdictions with different laws. But the Post sees it differently:

The stark contrast in punishments is just one inconsistency in a patchwork of conflicting legal practices and public attitudes about underage drinking parties.

“Inconsistency.” “Patchwork.” “Conflicting legal practices.” This is ridiculous. Move along, folks, nothing to see here. On the Fourth of July, let’s pause to remember: The United States is a federal republic, not a unitary centralized state. Different states and even different cities and counties have different laws.

One of the benefits of a decentralized republic is that laws can reflect people’s different values and attitudes. Decentralism also allows states and counties to be “laboratories of democracy.” If voters in Maryland and the District of Columbia read about how Virginia sentences parents to 27 months in jail for serving alcohol to teenagers after taking away their car keys — and they think that sounds like a good idea — then they can change their own laws. Or if Virginia voters notice that Maryland has a slightly lower highway fatality rate, then they might decide to change their laws.

States in our federal republic have different laws about lots of things, certainly including alcohol since the repeal of national Prohibition. I grew up in a dry county in Kentucky — no legal sales of alcohol of any kind — but neighboring counties were wet. The old joke was that Bourbon County was dry while Christian County was wet, but that seems not to be true any more. First cousins can marry in some states but not in others. The rules used to vary on interracial marriage until the Supreme Court stepped in and banned laws against it. In the past couple of years we have begun to experience different state laws on same-sex marriage.

Some people seem to want all laws to be uniform across this vast nation, from California to the New York Island, from the redwood forest to the Gulf stream waters, from sea to shining sea. They use their power in Congress to impose national speed limits, national environmental rules, national school testing laws, national marijuana bans, and so on. But the beauty of America is that we have resisted many of those pressures, and there are still real differences in the laws of San Francisco and San Antonio; Manhattan, New York, and Manhattan, Kansas; Wyoming and Wyomissing, Pennsylvania.

The laws are even different in Virginia and nearby Maryland. That does not mean that justice is unequal.

The Germans Attack Tax Competition…Again

Germany’s finance minister Peer Steinbrueck wants to curtail tax competition by prohibiting countries from having corporate tax rates of less than 30 percent. Since German politicians have been whining about competition from low-tax nations in Eastern Europe for quite some time, this is hardly news.

But this new round of sour grapes is particularly amusing because Herr Steinbrueck is trying to close the barn door when the horses are galloping in the fields. The average corporate tax rate in the European Union already has fallen to about 24 percent and more corporate tax cuts are about to take effect — including a tax rate reduction in Germany.

Bloomberg reports:

The European Union needs a “level playing field” in areas including tax competition…if there is to be greater integration among member states, German Finance Minister Peer Steinbrueck said. A “race to the bottom” regarding…taxes, social and environmental standards risks discrediting the idea of a more united Europe among the continent’s citizens, Steinbrueck said in a speech prepared for delivery today in Frankfurt an der Oder, on the eastern German border with Poland.

…The average corporate tax rate in Europe shouldn’t fall below the threshold of just under 30 percent, which will go into effect in Germany next year, Steinbrueck said. Eastern European governments…can’t finance the infrastructure demanded by their citizens if taxes are lowered too much, he said.

Another Flat Tax Nation?

Moldova, a former Soviet Republic, is a poor and backwards nation with too much government. Seeking a brighter future, a part of Moldova has declared independence and is calling itself Pridnestrovie. Though this new country has not yet been recognized by the world, Pridnestrovie has wisely decided to implement free market reforms — including a flat tax that has been reduced from 15 percent to 10 percent according to a story from last year in the Tiraspol Times:

Parliament in Pridnestrovskaia Moldavskaia Respublica approved new lower tax rates for the emerging but unrecognized country. Previously, the nation taxed incomes for physical persons at 15%, but starting next month the rate will be just 10% flat.

…Since its declaration of independence on 2 September 1990, Pridnestrovie has gradually transformed itself from a post-Soviet system to a free, Western-style market based economy. In the process, it has found that a flat tax provides the best incentives for citizens and investors alike.

Hoover Institution political scientist Alvin Rabushka points to a number of different countries in the former Soviet bloc that have adopted some form of flat tax in recent years. In addition to Russia, Pridnestrovie and Slovakia, they are Romania, Georgia, Estonia, Latvia, Serbia and Ukraine.

Not surprisingly, the flat tax is having a positive impact. The Tiraspol Times now reports that tax revenues have more than tripled and lawmakers understand that lower tax rates can lead to more revenue — just as the Laffer Curve illustrates:

Thanks to reform in the tax code, and a lowering of rates, income from taxes has gone up three and a half times in Pridnestrovie, says the parliamentary press service. …Tax revenues went from 63.4 million dollars in 2001 to a whopping 221.6 million dollars in 2006, the last full year for which the numbers are available.

…Key to the reform package were measures which makes filing simpler, as well as a comprehensive program of tax relief. Five taxes which existed before 2001 have now been abolished and instead replaced with a single, simple tax.

…With both personal and corporate tax rates well below those of Ireland, the growth in Pridnestrovie’s tax income is even more impressive. As taxes have been simplified and rates have been lowered, revenues have gone up three and a half times.

Addendum: The good news about Pridnestrovie may not be so good after all. My Cato colleague Justin Logan rained on my flat tax parade by telling me that Pridnestrovie, AKA Tansnistria (I guess even the name of the place is in dispute), is not exactly the Hong Kong of Eastern Europe. The breakaway province has a very poor reputation for corruption. It also is not exactly a role model of democracy, since the boss of the country recently won 103 percent of the vote in one region (eat your heart out, Castro). Alas.

Hillary’s Chutzpah

Sen. Hillary Rodham Clinton denounces the Libby commutation as “disregard for the rule of law” and a “clear signal that in this administration, cronyism and ideology trump competence and justice.”

She has a point. But hello?! Wasn’t she part of the Clinton administration? Speaking of disregarding the rule of law.

And abusing the pardon power? The Clinton administration was notoriously stingy in pardoning real victims of unjust sentences. When it did use the pardon power, it seemed to have an unerring instinct for scandalous and undeserving beneficiaries. In 1999, as Hillary Clinton began her Senate campaign, President Clinton pardoned 16 members of the Puerto Rican terrorist organization FALN, raising questions about whether the pardons were intended to curry favor with New York’s Puerto Rican electorate. And then there was the infamous last day in office, when Clinton managed to pardon or commute the sentences of

  • Marc Rich, a fugitive tax evader whose ex-wife was a major contributor to the Clintons;
  • Susan McDougal, who loyally refused to testify in the Whitewater scandal;
  • Child-molesting Democratic congressman Mel Reynolds;
  • Post Office-molesting Democratic congressman Dan Rostenkowski;
  • Cocaine kingpin Carlos Vignali, whose father was a major Democratic contributor;
  • Four Hasidic shysters alleged to have promised and delivered Hasidic votes to Hillary Clinton’s first campaign;
  • Clinton’s half-brother Roger;
  • and various crooks who paid fees to Hillary Clinton’s brothers Hugh and Tony Rodham to lobby the First Family.

With so many people in jail who deserve a pardon, as Gene Healy and I have discussed in earlier Cato@Liberty posts, it’s appalling that both President Clinton and President Bush have used their pardon powers in such ways. And if anyone lacks credibility to criticize the Libby pardon, it would be President Clinton and Senator Clinton.

Why People Hate the IRS

My wife and I received a notice from the IRS yesterday regarding our 2006 income tax return. At first glance, I thought it said we underpaid by $107, which would be no big deal and I’d go ahead and pay.

Then I looked closer at the calculations the notice showed:

Total Tax On Return: $xx,242.00

Total Payments and Credits: $xx,241.63

Underpaid Tax: $0.37

Penalty: $106.65

Interest: $0.01

Total Amount You Owe: $107.03

You’ve got to be kidding–we underpaid our taxes by 37 cents and the IRS is dinging us with a $107 penalty?!

Page 22 of the 1040 instruction book clearly says that rounding to the nearest whole dollar is OK.  I think this needs more investigation.