We employ an wide variety of techniques and social conventions to control who we communicate with in the offline world. We might share details about our love life with friends at a bar that we wouldn't share over Thanksgiving dinner. Conversely, we might tell our families about medical or financial decisions we wouldn't discuss at a bar. And we lower our voices when we want to make sure the people at the next table don't overhear us.

The early Internet was very different. Users faced a stark choice between posting information on a public Web site or sending it in a private email, with little in between. The new generation of social media tools is helping to bridge the gap. Twitter lets me make my tweets public or limit access to people I've specifically approved. Facebook allows me to decide whether my profile will be visible to others with a princeton.edu email address, whether friends-of-friends will be able to see my photos, and even whether my profile will show up at all when someone searches for my name.

Of course, there's still a lot of room for improvement. Many users find these tools inconvenient or hard to use, and some are careless about posting information that could become embarrassing in the future. But we shouldn't be too impatient; the offline world has a centuries-long head start in developing privacy-preserving tools and social conventions.

In recent years, self-styled "network neutrality" activists have pushed for legislation to prevent network owners from undermining the end-to end principle. Although the concern is understandable, such legislation would be premature. Physical ownership of internet infrastructure does not translate into a practical ability to control its use. Regulations are unnecessary because even in the absence of robust broadband competition, network owners are likely to find deviations from the end-to-end principle unprofitable.

New regulations inevitably come with unintended consequences. Indeed, today's network neutrality debate is strikingly similar to the debate that produced the first modern regulatory agency, the Interstate Commerce Commission. Unfortunately, rather than protecting consumers from the railroads, the ICC protected the railroads from competition by erecting new barriers to entry in the surface transportation marketplace. Other 20th-century regulatory agencies also limited competition in the industries they regulated. Like these older regulatory regimes, network neutrality regulations are likely not to achieve their intended aims. Given the need for more competition in the broadband marketplace, policymakers should be especially wary of enacting regulations that could become a barrier to entry for new broadband firms.

Someone in Microsoft's marketing department must have a dark sense of humor, because just four years ago the company started calling its digital music format, its proprietary method for downloading, storing, and playing digital music, "PlaysForSure." The name was intended to highlight the fact that, in contrast to the iTunes-iPod combo, PlaysForSure was supported by dozens of music stores and device manufacturers. Songs purchased from Rhapsody, Yahoo! Music, or the MSN Music Store could be enjoyed on players manufactured by Samsung, Dell, Sony, or Creative.

In spite of this, Apple's iPod continued to outsell all the PlaysForSure players put together. So Microsoft reshuffled its strategy in 2006, releasing a new music player called the Zune. Convinced that the tight integration between iTunes and the iPod was the secret to Apple's success, Microsoft abandoned the PlaysForSure approach, shuttered the MSN Music Store, and built the Zune around yet another proprietary format.

As a result, music in the PlaysForSure format will not play — for sure or otherwise — on a Zune music player. Up to here this is just an ordinary business story of technological obsolescence, certainly nothing to be outraged about. Companies drop old product lines all the time, and sometimes that means customers are stuck with compatibility headaches. In ordinary circumstances, you would expect entrepreneurs or volunteers to pick up Microsoft's slack and offer software to convert those old recordings to another format.

But the Digital Millennium Copyright Act transforms what would normally be a promising business opportunity into a federal felony. Not only will PlaysForSure music not play on a Zune, but the DMCA makes it illegal, punishable by up to five years in jail on the first offence, for third parties to offer utilities to bridge that gap. The PlaysForSure format includes copy protection technology that was supposed to deter piracy. Under the DMCA, no one may "circumvent" a copy protection scheme without the permission of the platform's owner. Moreover, it is illegal to "traffic" in software that performs this function.

That means that customers with PlaysForSure-formatted music have only three options. They can content themselves with the dwindling number of PlaysForSure-compatible music players still left on the market, such as the Sony Walkman or Creative Zen. They can burn all their music to CDs, then re-rip them to an open format — not just a time-consuming process but one that will reduce the quality of the recordings. Or they can break the law and download illegal software to convert their music to an open, widely supported format such as MP3, allowing their music to be played on any music player, including iPods and Zunes.

As if all that weren't enough, this fall Microsoft will switch off the license servers that allow customers to "authorize" new computers and operating systems to play music bought from the MSN Store. Customers who replace their computers will find themselves with no legal way to play their music.

It's a rich irony that users who choose to break the law and download music from peer-to-peer file sharing sites don't face these inconveniences. The DMCA ostensibly was aimed at stopping illicit file sharing, which continues unabated. There is no evidence that the law has kept music off peer-to-peer networks. There is no evidence that PlaysForSure has kept music off peer-to-peer networks either. And music on peer-to-peer sites is typically available in an open format such as MP3, which can be played on almost any device. Thus the DMCA's only substantial impact on the music marketplace has been to inconvenience those who made the mistake of purchasing music from a legal online service.

There is growing recognition of the absurdity of this state of affairs. Copy protection has become so unpopular that after years of insisting that all music downloads come in copy-protected formats, last year the major labels began allowing some online retailers, including Apple, Amazon, and Wal-Mart, to sell music downloads in the open MP3 format. But as the PlaysForSure debacle demonstrates, there is still a great need to reform copyright law. The DMCA needlessly restricts consumers' freedom to listen to their legally purchased music on the devices of their choice. In the name of fighting illegal downloads, it has created a big incentive to download music illegally.

Update: Between the time this story went to press and this posting, Microsoft has announced plans to support PlaysForSure customers through 2011. For more information, go here.

Tencent, China's largest telecom provider, purveyor of the popular QQ instant messaging service, offers a virtual currency that allows Internet users to buy ringtones for cell phones, weapons for online games and the like. The currency, called QQ coins, can be easily exchanged on QQ, and Internet users can buy a single QQ coin for a single yuan.

Until earlier this year, Chinese Internet users could use QQ coins to buy goods and services from third-party vendors, which were rapidly springing up to meet the demand, but the PRC government cracked down on the practice. Like their counterparts in other countries, Chinese netizens sometimes used the currency in ways authorities didn't approve of: to gamble, to buy pornography, and perhaps later, some feared, to evade taxes, launder money, or finance terrorist operations.

"Virtual currency has been a hotbed for gambling and illicit trade under the guise of e-commerce," Zhou Hongyu, a National People's Congress deputy from Hubei said in March, shortly before the stricter regulations went into effect.

These fears are overblown. In regulating QQ coins and other virtual currencies like them, the PRC may be smothering a new wealth-creating enterprise in its cradle.

With additional measures to prevent fraud and abuse, the QQ coin or something like it has the potential to allow China's 137 million Internet users to supplant slower channels of exchange for paying bills, buying goods in online auctions, and the like.

Analysys, a Beijing market research firm, estimated in May that 60% of China's Internet population had made an online payment of some sort, and 8% make at least one such payment per month. The value of these payments, the South China Morning Post reports, totaled 50 billion yuan last year, and is expected to add up to 150 billion yuan in 2009.

In the U.S., Internet users can make purchases in online auctions on eBay, and transfer payment with intermediary services like PayPal, but the practice requires various forms of identification. In the age of identity theft, customers who would otherwise shop in these auctions balk when they see systems that require them to enter their automobile driver's licenses and bank account numbers.

Virtual currencies could make that simpler. Chinese Internet users already use online payment systems like Alipay, a product of the Huangzhou-based company Alibaba, in huge numbers. The system is said to have more than 33 million registered users -- almost a quarter of China's entire Internet user base -- but it charges 1.5% to third-party users for transferring money through it.

That'd probably be lower if there were more competition. If the Chinese government were to regulate virtual currencies only as much as was necessary to prevent egregious misuses, and go after gambling sites, pornography peddlers and the like separately, it would witness the rise of a whole new economy. Third-party vendors of all sorts would sell their goods in exchange for virtual currency so long as they could redeem it for RMB.

Insofar as Tencent gives initial QQ coin deposits to users on a promotional basis, it has an incentive to prevent misuse of its accounts. And insofar as customers pay for the rest of their QQ hoards in real RMB, the customers themselves will take steps to keep their accounts secure.

The growth implications are huge, and the monetary ones, trivial. "These limited use currencies are pretty contained. They don't spill over into other transactions," says George Selgin, an economist at the University of Georgia, and a specialist in e-money. "If they're denominated in the Chinese yuan, then their supply is strictly governed by the supply of [currency] the Bank of China issues."

And if people were using virtual currencies solely as a means of concealing their transactions, they could just as easily use cash. If the government were really committed to cracking down on all undesirable behaviors, Selgin remarks, taking the example to the extreme, it could just do away with paper money.

Of course, "In any such action, you're going to suppress legitimate trade along with some underground stuff," Selgin adds. "You might accomplish your goal, to some extent, but you're doing it at a heavy cost in legitimate activity."

With millions of Chinese clamoring for easy access to credit, that's something for PRC planners to keep in mind.

But since that column, it has come to light that online auction giant eBay has thrown its support behind Goodlatte's efforts. Why would an Internet company open its arms to congressional regulation of the Internet?

Some speculate that eBay is attempting to win favor with Goodlatte, who also happens to sit on the Congressional Internet Caucus. There's probably some truth to that. But there's another, more likely explanation for eBay selling out the e-commerce world: Good, old-fashioned protectionism.

First, a brief history lesson is in order.

eBay owns PayPal, the popular, online payment system favored by millions of auction sites, membership-based, sites, and bloggers. This wasn't always the case. PayPal was actually founded in the late 1990s by Peter Thiel and Max Levchin, two libertarian-minded Silicon Valley entrepreneurs with a revolutionary vision. Thiel and Levchin saw the potential for PayPal to grow into a kind of private currency.

In his book The PayPal Wars, early PayPal marketing guru Eric M. Jackson recounts a stirring speech Thiel gave to the company's early staff.

"PayPal will give citizens worldwide more direct control over their currencies than they ever had before," Thiel said. "It will be nearly impossible for corrupt governments to steal wealth from their people through their old means because if they try the people will switch to dollars or pounds or yen, in effect dumping the worthless local currency for something more secure."

Unfortunately, that vision never panned out. PayPal thrived when it came to innovating and adapting to stay a step ahead of its early competitors. But the company proved less adept at slaying its more formidable antagonists: Lawyers and politicians.

Class-action suits spurred by trial lawyers attacked the company from one side, while frivolous patent-infringement claims pummeled from the other. State governments piled on next, arguing that the company should be subject to expensive banking regulations.

New York Attorney General Elliott Spitzer then struck at the very heart of Thiel and Levchin's vision: Spitzer subpoenaed documents related to PayPal's use in online gaming sites, arguing that the company's refusal to snoop in on what its customers were doing with their own money on their own time was in violation of New York's anti-gambling laws.

A U.S. attorney later followed Spitzer's lead, and invoked the PATRIOT Act to investigate PayPal for suborning illegal activity with respect to Internet gambling.

The young start-up stammered. And fell. In the end, complying with the regulators, appeasing the politicians and fighting off the civil and criminal litigation was too much to bear. Thiel and Levchin abandoned their vision, and sold PayPal to eBay, a company with an established Internet presence, an experienced legal team on staff, and -- to the detriment of PayPal's loyal customers -- a conciliatory corporate culture.

One of the first things eBay did after acquiring PayPal was to reconcile with Spitzer and the Justice Department. eBay paid a $10 million fine and promised to bar PayPal's customers from using the service for online gaming. The company later announced an even more restrictive policy, forbidding customers from using PayPal for adult-oriented products and services, as well as "non-adult services whose Web site marketing can be reasonably misconstrued as allowing adult material or services to be purchased using PayPal," a move that coincided with the Bush administration's war on Internet pornography.

PayPal even suspended the accounts of bloggers who posted content on their sites that the company deemed offensive.

Today, Thiel and Levchin's vision for PayPal is long dead. But it lives on in similar, offshore companies like Neteller and FirePay. These companies are safe and reliable (FirePay is traded on the London Stock Exchange), but aren't subject to U.S. law, and so can be used for all sorts of goods and services the U.S. government has determined Americans aren't grown-up enough to purchase. The most notable of these is Internet gambling.

Once your money leaves your bank account for a Neteller or FirePay "online wallet," there's no way to know how you then spend that money. Your bank doesn't know you've set up an online poker account, or bought a plane ticket or a bottle of wine.

Enter Rep. Goodlatte. Goodlatte's bill bans the use of financial services to facilitate Internet gambling sites. It's already illegal to operate a gaming site on U.S. soil. But most experts agree it's still legal to "place" a bet. Goodlatte wants to put up a wall between the domestic "bet placing" and the offshore "bet taking," which FirePay and Neteller make possible.

If banks and other financial institutions are going to be responsible for policing what their customers do online, as will happen should Goodlatte's bill become law, it's safe to assume that they'll comply by simply banning all transactions with offshore payment services.

Which means that Goodlatte's bill's main effect will be to shield PayPal, a domestic company, from foreign competitors (foreign competitors that, ironically, are doing exactly what PayPal's founders envisioned).

What's more, the letter eBay government relations director Brian Bieron sent to Goodlatte announcing the company's support of his bill actually goes above and beyond what any gambling foes in Congress have called for. Bieron in fact calls for the actual prosecution of Internet gamblers themselves, a policy which could only be enforced by allowing law enforcement officials to essentially begin monitoring everyone's online activity, including tracing visited websites back to IP addresses.

A law similar to what Bieron is advocating hit the books in Washington State this month. It makes online gambling a Class C felony, on par with child pornography.

The funny thing is, even as eBay has joined Rep. Goodlatte's moral crusade against gambling, the company's overseas operations are moving into the gaming business. According to the gaming industry publication igamingnews.com, PayPal Europe has recently entered into agreements with two online gambling services to allow PayPal to be used by Europeans who want to gamble online.

Industry insiders estimate that as much as 4 percent of the U.S. population participates in online gambling. That's about 12 million people. It's likely that a good percentage of those 12 million active, online users also patronize eBay. I wonder what they'd think if they knew that eBay has called for them to be arrested and prosecuted?

Founders Larry Page and Sergey Brin and many other wealthy officers of the company got rich the only way you can in a free market: by producing something other people want. A lot of brilliant people worked long hours producing computer software that hundreds of millions of people chose to use, in the midst of a highly competitive market that offered lots of other options.

But in our modern politicized economy - which National Journal columnist Jonathan Rauch called the "parasite economy" - no good deed goes unpunished for long. Some people want to declare Google a public utility that must be regulated in the public interest, perhaps by a federal Office of Search Engines. The Bush administration wants Google to turn over a million random Web addresses and records of all Google searches from a one-week period. Congress is investigating how the company deals with the Chinese government's demands for censorship of search results by Chinese users.

So, like Microsoft and other companies before it, Google has decided it will have to start playing the Washington game. It has opened a Washington office and hired well-connected lobbyists. One of the country's top executive search firms is looking for a political director for the company.

What should concern us here is how the government lured Google into the political sector of the economy. For most of a decade the company went about its business, developing software, creating a search engine better than any of us could have dreamed, and innocently making money. Then, as its size and wealth drew the attention of competitors, anti-business activists, and politicians, it was forced to start spending some of its money and brainpower fending off political attacks. It's the same process Microsoft went through a few years earlier, when it faced the same sorts of attacks. Now Microsoft is part of the Washington establishment, with more than $9 million in lobbying expenditures last year.

By Washington standards, Google is still a bit player, with lobbying costs of less than $1 million per year.

Seasoned Washington players have been patronizing about Google's political innocence. Technology lobbyist Rhett Dawson says that the company "is quickly going through a maturation phase. ... It pays to pay attention to Washington." Lauren Maddox, a former Newt Gingrich aide recently hired by Google, says that the company's lobbyists are explaining to them that the "policy process is an extension of the market battlefield."

Microsoft went through the same hazing, though with more of an edge. A congressional aide said, "They don't want to play the D.C. game, that's clear, and they've gotten away with it so far. The problem is, in the long run they won't be able to."

Sorta like, "Hey, Bill, nice little company ya got there. Shame if anything happened to it."

And companies get the message: If you want to produce something in America, you'd better play the game. Contribute to politicians' campaigns, hire their friends, go hat in hand to a congressional hearing and apologize for your success.

The tragedy is that the most important factor in America's economic future - in raising everyone's standard of living - is not land, or money, or computers; it's human talent. And some part of the human talent at another of America's most dynamic companies is now being diverted from productive activity to protecting the company from political predation. The parasite economy has sucked in another productive enterprise.

The slowdown of the American economy over the past few decades can be blamed in large measure on just this process - the expansion of the parasite economy into the productive economy. The number of corporations with Washington offices has shot up, along with the number of CEOs who visit Washington regularly. And if you thought the growth of the parasite economy would slow down under Republican government, you'd be wrong. The number of companies with registered lobbyists is up 58 percent in six years, and official spending on lobbying has risen from $1.5 billion to $2.1 billion in that time.

In 1998, Bill Gates wrote, "It's been a year since the last time I was in D.C. I think I'm going to be making the trip a lot more frequently from now on."

And that's what the parasite economy is costing America. The founders of Microsoft and Google and other innovative companies are going to waste their brains on protecting their companies rather than thinking up new products and new ways to deliver them.

Google's new presence in Washington is entirely understandable, but it is a tragic symbol of the diversion of America's productive resources into the unproductive world of political predation and the struggle to resist it.

It is commonly said that copyright matters because it encourages the production of socially beneficial, culturally significant expressive content. Excessive focus on copyright law and policy, however, can obscure other information practices that also produce beneficial and useful expression. The functions that make up the creative cycle— creation, selection, production, dissemination, promotion, sale, and use of expressive content— have historically been carried out and controlled by centralized commercial actors. However, all of those functions are undergoing revolutionary decentralization and disintermediation.

Different aspects of information technology, notably the digitization of information, widespread computer ownership, the rise of the Internet, and the development of social networking software, threaten both the viability and the desirability of centralized control over the steps in the creative cycle. Those functions are being performed increasingly by individuals and disorganized, distributed groups.

This raises questions about copyright as the main regulatory force in creative information practices. Copyright law assumes a central control structure that applies less well to the creative content cycle with each passing year. Copyright law should be adjusted to recognize and embrace a distributed, decentralized creative cycle and the expanded marketplace of ideas it promises.

The courts have a proven track record of fashioning balanced remedies for the copyright challenges created by new technologies. But when Congress passed the Digital Millennium Copyright Act in 1998, it cut the courts out of this role and instead banned any devices that "circumvent" digital rights management (DRM) technologies, which control access to copyrighted content.

The result has been a legal regime that reduces options and competition in how consumers enjoy media and entertainment. Today, the copyright industry is exerting increasing control over playback devices, cable media offerings, and even Internet streaming. Some firms have used the DMCA to thwart competition by preventing research and reverse engineering. Others have brought the weight of criminal sanctions to bear against critics, competitors, and researchers.

The DMCA is anti-competitive. It gives copyright holders—and the technology companies that distribute their content—the legal power to create closed technology platforms and exclude competitors from interoperating with them. Worst of all, DRM technologies are clumsy and ineffective; they inconvenience legitimate users but do little to stop pirates.

Fortunately, repeal of the DMCA would not lead to intellectual property anarchy. Prior to the DMCA's enactment, the courts had already been developing a body of law that strikes a sensible balance between innovation and the protection of intellectual property. That body of law protected competition, consumer choice, and the important principle of fair use without sacrificing the rights of copyright holders. And because it focused on the actions of people rather than on the design of technologies, it gave the courts the flexibility they needed to adapt to rapid technological change.

Let's say a contractor had the tools and materials to build the sturdiest modern structure, but the local building code required less-than-perfect construction. Would putting up a structure as required by local code be "evil"? Nothing of the sort.

By their logic, though, critics of Google's engagement with China would rather see people freeze in the cold than take shelter in substandard housing.

The Chinese government does not like how uncensored search results would affect the structure of the society and government in that country. Sooner or later, freely flowing information will topple, enfeeble, or flatten the current regime. So for now, local code requires substandard information products, and Google has agreed to conform with the restrictions of Chinese authorities.

Google abandoning China would be no help to the Chinese people. A competing local search engine, Baidu, stands ready to provide government-friendly information products. Indeed, Baidu may use its relationship with the Chinese government to hamstring Google as a competitor.

Google says it discloses to users when it returns censored results, which signals to Chinese users that they do not live in a free country. That's a useful byproduct of Google's unfortunate cooperation with the Chinese. Just as importantly, the search engine will expose the Chinese people to a world of information and ideas, including the value and strength of freedom.

Criticism of Google for making this difficult compromise is misplaced. It takes attention away from the responsible party: the government of China, which unforgivably retains a deadly Communist ideology.

Google may not be the tool the Chinese people will use to bring the Communist regime to an end, but it will be the soil in which their awareness and desire for freedom will continue to grow. Engaging with China is not evil. It is good.

To his credit, the U.S. State Department's David Gross bristled back: "We will not agree to the U.N. taking over management of the Internet." That stands to reason. The Internet was developed in the U.S. (as are upgrades like Internet 2) and is not a collective "global resource." It is an evolving technology, largely privately owned and operated, and it should stay that way.

Nevertheless the "U.N. for the Internet" crowd say they want to "resolve" who should have authority over Internet traffic and domain-name management; how to close the global "digital divide"; and how to "harness the potential of information" for the world's impoverished. Also on the table: how much protection free speech and expression should receive online.

While WSIS conferees have agreed to retain language enshrining free speech (despite the disapproval of countries that clearly oppose it) this is not a battle we've comfortably won. Some of the countries clamoring for regulation under the auspices of the U.N.--such as China and Iran--are among the most egregious violators of human rights.

Meanwhile, regulators across the globe have long lobbied for greater control over Internet commerce and content. A French court has attempted to force Yahoo! to block the sale of offensive Nazi materials to French citizens. An Australian court has ruled that the online edition of Barron's (published by Dow Jones, parent company of The Wall Street Journal and this Web site), could be subjected to Aussie libel laws--which, following the British example, is much more intolerant of free speech than our own law. Chinese officials--with examples too numerous for this space--continue to seek to censor Internet search engines.

The implications for online commerce are profound. The moment one puts up a Web site, one has "gone global"--perhaps even automatically subjected oneself to the laws of every country on the planet. A global Internet regulatory state could mean that We Are the World--on speech and libel laws, sales taxes, privacy policies, antitrust statutes and intellectual property. How then would a Web site operator or even a blogger know how to act or do business? Compliance with some 190 legal codes would be confusing, costly and technically impossible for all but the most well-heeled firms. The safest option would be to conform online speech or commercial activities to the most restrictive laws to ensure global compliance. If you like the idea of Robert Mugabe setting legal standards for everyone, then WSIS is for you.

The very confusion of laws makes some favor a "U.N. for the Internet" model. Others propose international treaties, or adjudication by the World Trade Organization, to stop retaliation and trade wars from erupting over privacy, gambling and pornography. Still others assert that the best answer is to do nothing, because the current unregulated Web environment has helped expand free speech and commerce globally for citizens, consumers and companies.

We favor the nonregulatory approach. But where laissez-faire is not an option, the second-best solution is that the legal standards governing Web content should be those of the "country of origin." Ideally, governments should assert authority only over citizens physically within its geographic borders. This would protect sovereignty and the principle of "consent of the governed" online. It would also give companies and consumers a "release valve" or escape mechanism to avoid jurisdictions that stifle online commerce or expression.

The Internet helps overcome artificial restrictions on trade and communications formerly imposed by oppressive or meddlesome governments. Allowing these governments to reassert control through a U.N. backdoor would be a disaster.]]> Sun, 09 Oct 2005 00:00:00 EDT http://www.cato.org/pub_display.php?pub_id=5125 http://www.cato.org/pub_display.php?pub_id=4013

ChoicePoint is a consumer data company, part of a growing industry that collects and analyzes information about people's lifestyles, wealth, and habits. This data is used in marketing, transaction verification, and credit scoring. Some of the data that the company collects is compiled into dossiers to help law enforcement circumvent the federal Privacy act of 1974.

As we all know from the headlines, criminals recently defrauded ChoicePoint into revealing information about thousands of consumers.

Despite its Information Age trappings, the incident appears to be a classic case of corporate negligence. The crooks set up bogus companies to appear like legitimate clients and siphoned off the personal information of more than a hundred thousand Americans. They used this information to commit an as-yet-untold number of identity frauds.

Some politicians have used this massive identity fraud as an opportunity to argue for legislative action; maintaining that the government should plug "loopholes" or sew up the "patchwork of laws" that supposedly allowed this to happen.

In a Los Angeles courtroom this month, a 41-year-old Nigerian man named Olatunji Oluwatosin pled no contest to unlawful use of personal identification in a Los Angeles courtroom. He was sentenced to 16 months in state prison for his role in the ChoicePoint affair.

More importantly, a victim has filed suit in Los Angeles Superior Court, alleging that ChoicePoint was negligent. If she was harmed, she has a good case. The company probably violated a duty to protect her.

A California law requiring consumer notice of data breaches has been given too much credit in this case. It was ChoicePoint's compliance with this law that broke the story, but it's more a case of the law mandating what makes sense to do.

In August 2003, another data company called Acxiom suffered a data breach that was far less severe than the ChoicePoint theft. The company announced the breach publicly because it knew it should do so, not because of the California disclosure law which was just a month old at the time and not yet applicable to the company.

Politicians are using consumer concerns to vilify the data collection industry in an attempt to bring it under further political control. But what the ChoicePoint incident really calls for is clear recognition that data holders are liable when they allow sensitive information to fall into the wrong hands.]]> Tue, 15 Mar 2005 00:00:00 EST http://www.cato.org/pub_display.php?pub_id=4013 http://www.cato.org/pub_display.php?pub_id=2653 Finally, a victory for the taxpayer. At least a partial one. Last week the Senate approved compromise legislation crafted by Sen. John McCain, Arizona Republican (yes, Mr. McCain was on the side of the angels), to extend the ban on Internet taxes four years through 2008. President Bush and Sen. George Allen, Virginia Republican, who rates four stars for unwavering support for keeping cyberspace free of taxes, favored a permanent ban, but a four-year extension keeps Internet users at arm's length from the Internal Revenue Service and local tax collectors for least the foreseeable future.

The fight for a tax-free zone on the Internet was tougher than it should have been, because a handful of Republican senators wanted to empower states and cities to tax access to the Internet at their discretion. Freshman Sen. Lamar Alexander of Tennessee and a former governor, led the crusade for states, localities and brigades of special interest groups who receive the largess of local governments who all desperately wanted to tap this new cash cow of the Internet. Mr. Alexander was unfortunately joined by four other Republicans who wanted to allow local governments to impose a tollbooth on the Internet: Mike Enzi of Wyoming, George Voinovich of Ohio, Kay Bailey Hutchinson of Texas and Thad Cochran of Mississippi.

Lamar Alexander's Internet access tax proposal would have done real damage to the U.S. economy at the very time it is getting its feet back under itself from the tech implosion in 2000-01. In this nascent recovery, growth is again being propelled by technology and knowledge-based industries. Free market advocates argued the Internet should be treated as a tax- and regulation-free form of commerce rather than an ATM machine for government officials to fund favored programs.

Back in 1998, Congress wisely declared the Internet a Tax Free Zone by establishing a moratorium on such Internet access charges. An "access charge" is just the government's polite way of adopting a new tax. The idea was to prevent the government from causing infant crib death of this new consumer technology. After all, as Justice John Marshall once observed, "The power to tax is the power to destroy." By all accounts, the Internet tax moratorium has been a resounding success. In 1985, about 1 in 6 American families and businesses had access to the Web, now 3 in 4 do.

E-commerce is the new frontier of business enterprise. International Data Corp. recently estimated the Internet economy in 2003 reached $2.8 trillion. In the U.S. alone e-commerce accounted for $500 billion in business activity and employed 2.3 million Americans. The Internet sector of the economy is growing 12 percent per year compounded.

E-commerce, in short, is to the early 21st century what the steam engine was to early 20th century economic development. Meanwhile, the telecommunications sector of the economy now stands ready to invest billions to upgrade the nation's communications networks and make high-speed (or broadband) Internet access available to all American homes and small businesses, as it is for large corporations today. The tax ban extension will facilitate that infrastructure investment.

Opponents of the Internet tax ban always had it wrong. They argued this policy unfairly deprives state and local governments who need the money to fund vital public services. Mr. Alexander has labeled the federal ban on the Internet access taxes an "unfunded mandate on states."

But an unfunded mandate is a federal requirement that states and localities spend money. This policy doesn't even deny states and cities a traditional revenue source.

Most importantly, the growth of the Internet and the information economy has been an enormous net positive fiscal development for the states. In the 1990s, as the Internet economy soared, state and local revenues grew 3 times the pace of inflation. By the end of the 1990s, states and local government coffers were overflowing; it wasn't until the tech bubble burst that government revenues sank.

Republicans and many pro-growth Democrats have done a service to taxpayers by extending the no-tax zone on the Internet, and the GOP really dodged a political bullet here. It would have made little sense for Republicans to run for re-election as the party that initiated the nation's first-ever tax on the 74 percent of American households who use the Internet. That's particularly true because these taxes already contemplated by some states and city hall could have cost families up to $150 a year.

But the victory for the Internet and for taxpayers last week only further postpones the bigger fight over whether Internet access and purchases should ever be taxed. Here is why the self-evident answer to that question is no. The expansion of the e-commerce world offers a one-time opportunity to erect a massive, global free trade zone, in which government regulations, fees and levies are banned.

What could be more liberating? Government power will shrink, as the information superhighway is further democratized over the next 20 years to reach every business and household in the world. This is precisely why so many advocates of big government want to tap into the power of the information age economy, before it renders them irrelevant.

So kudos to John McCain, George Allen and the White House for clearing away roadblocks to cyberspace future. It is also worth applauding Democrats such as Ron Wyden of Oregon who fought valiantly to keep politicians' paws off the Internet. As Mr. Wyden said during the Senate debate: "Under [Mr. Alexander's] proposal, the consumers would be taxed every time they send an e-mail, every time they read their local newspaper or check a bank statement online." How sad that many Republicans in the Senate need to be lectured by Ron Wyden on the destructive impact of new taxes.

The House earlier this year passed a permanent ban on Internet taxes. When the Senate takes up the issue of making the Bush tax cuts permanent, it should add the Internet tax moratorium to the mix. An Internet tax won't make any more sense five or 10 years from now than it does today.

But Google isn't without detractors. Some fear Google's supposed market dominance. Still others object to the particular mechanics of Google's search technology, which ranks a given web page based on popularity based on the number of other pages linking to it. Some even think Google tinkers inappropriately with search results. But Google was vindicated after being sued by rival Search King, which alleged manipulation of search results to lower its ranking. According to the judge, "PageRanks are opinion," and protected by the First Amendment.

The latest debate has arisen over the potential privacy hazards of Google's new email service, "Gmail". Other search engines, like Yahoo, have long offered free email. Latecomer Google plans to offer a full gigabyte of email storage, many times that available today from the popular Yahoo and Hotmail free services; their few megabytes are consumed by a song file or a few attached documents.

But nothing is free: The Gmail tradeoff is that emails a user receives will be scanned by machine, and advertisements, based on trigger words, will appear within one's browser. The method is rather like the tailored ads that appear whenever one searches the Web, except that it responds to key words or phrases typed in the body of a message. If your correspondence mentions NASCAR or The Dixie Chicks, for instance, you might see ads for motor oil or a concert tour. Google promises that Gmail messages will remain private. Yet over two dozen unconvinced groups have demanded that Google abandon the approach. But as the Progressive Policy Institute has pointed out, any email provider that wants to scan emails can already do so; mail scanning is already common in spam filters. So Gmail is not exactly an invasion of privacy. Nonetheless, it can be risky to store so much of one's personal or business correspondence online, as Gmail's ample storage would encourage-but that is a cybersecurity issue existing entirely apart from Gmail. Security problems abound on the Internet at large.

Another controversial Gmail feature is that emails may remain on Google's servers even after the user deletes them from view. That could make an attractive target for hackers, and might be something Google changes simply because of user objection. Of course, just about anything posted online elsewhere lives forever. The Wayback Machine stores outdated and vanished Web pages for posterity; and, years ago, it was apparent that one's newsgroup postings were immortal in cyberspace. Users must weigh the tradeoffs. Indeed, if you're a Gmail user, your friends might recoil at sending a message to your Gmail address until more assurances are forthcoming.

The competitive marketplace can resolve these tricky matters. However some lawmakers are needlessly butting in already. Despite the tech downturn, California, unfortunately, can be counted on to not outsource bad legislation: State Sen. Liz Figueroa, who thinks Gmail is "an absolute invasion of privacy," is drafting legislation to ban the service.

The idea of government, which routinely and invades individual privacy, acting as a defender of email privacy, is preposterous. The Patriot Act gave the government enhanced "trap and trace" capabilities of our private email. Granted, the inability to delete Gmail messages is worrisome, and Google may rethink this subpoena-friendly tilt toward Patriot Act-style invasiveness. But we need not ban Google's offering; we can simply use another email service-or ask Google to improve it.

Government ought not to ban novel services that awkwardly express inherent capabilities of the Internet; we can hammer out norms, and improve our lot without misguided legislation. Consumer acceptance or rejection of Gmail is not a public policy matter, but a private one. Indeed, Gmail promises more services to those least able to otherwise afford them.

It wouldn't be surprising to find Google competitors (there are dozens of search engines available worldwide, according to the Search Engine Collossus) applauding the outrage over Gmail. But the Internet is about experimentation. Let's see what folks are comfortable with; nobody can make us use Gmail.

Why the fuss over a free email service? In developing GMail, Google leveraged its expertise from the search engine business in two ways. First, Google will encourage users to leave all their email on its servers indefinitely and provide powerful search features to help users quickly find old messages. Second, like the Google search engine itself, GMail will feature targeted text advertising. The system will use the content of users' emails as a guide to choosing ads to display alongside each message. If you exchange emails with a friend about an upcoming trip to the Bahamas, GMail might display ads for airlines and hotels that offer service there. Not only does this increase ad revenue for Google, but it can improve the user experience, too. Advertisements are more likely to be for products the user is actually interested in.

Understandably, this idea gives some privacy activists the creeps. Chris Hoofnagle of the Electronic Privacy Information Center compares it to allowing your phone company to listen to your conversations or the postal service to read your mail. California state senator Liz Figueroa has threatened to write legislation banning Google's service unless changes are made.

Their complaints sound logical until you consider how the system works. The selection of advertisements is done entirely by computer programs; no Google employees will be snooping through users' email. Moreover, advertisers won't be told which keywords might have led to their ad being shown to a particular user, so the contents of a user's email stays private. Indeed, as Google has pointed out, most free web-mail services offer spam filters that must scan users' email messages to determine which messages are spam. Scanning emails to choose advertising is no different.

Critics retort that there's no guarantee that Google won't change its policies in the future. For example, Google could cross-reference information in emails with other Google services, such as its search engine, to create a comprehensive user profile that it would then sell to advertisers. But it's hard to see how this is different from other free email services. Competitor Yahoo! not only offers a search engine, but online dating and financial services as well. Surely, those offerings are more prone to privacy invasions than a search engine.

Regardless of the merits of Google's approach, legislation would be counterproductive. Without strong revenues from its targeted ads, it's unlikely that Google could afford to offer each user a gigabyte of storage space, one of GMail's main selling points. They would be forced to trim the service back, and perhaps abandon the idea altogether. Sen. Figueroa might claim the mantle of consumer protection, but consumers don't benefit from having choices taken away from them.

Google has been candid about its business model, and users should be allowed to choose for themselves whether they're comfortable with Google's terms of service. If consumers think a free gigabyte of storage space is worth the risk to their privacy, they should be free to make that choice, no matter what politicians in Sacramento or Washington think about it.

So is there an answer to the spam problem? Yes: Require spammers to pay recipients, through postage, to receive their spam. It's that simple, and it doesn't require massive government regulation.

Look at Britain. There, e-commerce privacy is regulated by a government agency. Yet a recent study that I conducted with co-authors Karim Jamal and Michael Maier indicates that spam and Internet privacy violations are as troublesome in the UK as they are in the largely unregulated United States.

Last year, we visited 56 high-traffic UK sites and 100 high-traffic U.S. sites to determine if they posted privacy policies, if they used cookies, and if our visits led to our receipt of spam. We found that the UK sites were less likely than their U.S. counterparts to post privacy policies, even though UK law requires the display of that information. The UK sites were also less likely to disclose the use of cookies, or that third parties use the gathered data. Finally, we found that, regardless of whether we opted in or opted out of receiving commercial e-mail from the sites, visits to UK sites generated slightly more spam than the U.S. sites on average.

Why would Internet privacy in the heavily regulated UK be protected no better than in the laissez faire United States? Regulation is not effective when it is difficult and costly to detect violations, identify the violators and impose sanctions. When people find it in their own best interests to follow society's norms, such norms can be more effective than regulation backed by legal enforcement.

In the United States, many high-traffic sites are eager to show that they respect consumers' demand for privacy, in order to keep consumers coming back. Those sites frequently contract with firms like TRUSTe and BBB Online to establish rules for privacy protection and to test whether the Web sites follow the rules. If compliance is proven, the Web sites receive seals of approval that they can display to Web surfers. Hence, the U.S. sites consider protection of visitors' privacy as a lure to attract customers, while the UK government mandate on Internet privacy seems to have become a target for minimal compliance, and even circumvention.

But if the U.S. approach to Internet privacy is somewhat better than the UK's, is there some way to reduce the annoying amount of spam? Robert Kraut, James Morris and I recently proposed one approach: Have spammers pay recipients to receive their e-mails. Just as postage on a letter provides a useful disincentive for junk mailers and signals recipients as to the material's importance, so the adoption of a voluntary "postage" scheme for e-mail -- with the recipient receiving the postage -- would help the recipients screen out spam.

Senders would affix any postage they wish to their messages. The amount of postage would be displayed on the receiver's screen, and would be transferred between the escrow accounts maintained by the e-mail or Internet service provider. Recipients can configure their browsers to prioritize incoming messages by the amount of postage, and be free to automatically delete messages without postage they consider sufficient to draw their attention. They can also allow messages from friends and colleagues to receive higher priority irrespective of postage. This voluntary e-mail postage is a market-based solution for efficiently serving the legitimate interests of both the sender and the recipient.

E-mail postage will help discipline spammers. Low or no postage on the messages they send will reduce the chances that their messages will be read or even opened. Increasing the chance of getting recipient attention will cost real money. As with other markets, a market will develop to induce efficient allocation of our precious attention without government regulation.

Having been accustomed to free e-mail, the postage idea may, at first, sound unacceptable to many. When first proposed in the 1980s, the idea of trading pollution rights to reduce atmospheric emissions was greeted with skepticism. Today, it has become an effective solution to an important socio-economic problem based on laws of economics. Following Adam Smith, we can design our social systems so pursuit of self-interest by individuals leads to efficient social outcomes. Contrary to popular beliefs, cyberspace is not exempt from these laws.

Moreover, a prohibition policy has perverse effects and encourages the behavior it seeks to curtail. This is illustrated by a close examination of one of the most popular forms of gambling: sports betting. There is a large demand for sports betting, and a large illegal sector has arisen to provide this activity despite a long-standing policy of prohibition. A similar ban on all Internet-based sports betting also is likely to fail. A legalized regime is a better way to mitigate the potential dangers of Internet betting.

To begin, let's take a closer look at betting on major sports, which is currently illegal in all states besides Nevada, regardless of whether it involves the Internet. While these bans are primarily enforced by states, the federal government does get involved if wagers cross state lines or there is an alleged involvement of organized crime. So how successful has this regime of prohibition been at eliminating sports betting? By almost any measure it is a failure. A recently completed report from the National Gambling Impact Study Commission estimates that individuals wager between $80 and $380 billion dollars with illegal bookmakers. This is nearly 100 times the amount bet on professional sports with legal bookmakers in Nevada.

The sheer size of the illegal sports betting markets only tells part of the story. I recently completed an analysis of illegal bookmakers in New York City using actual records seized in a series of arrests by the Kings County (Brooklyn) District Attorney office. I found that illegal bookmakers utilize policies that exacerbate the potential harm of gambling. First, they offer short-term credit, and allow bettors to wager for a week or longer without fronting any money. Most of the bettors in my records would be considered compulsive gamblers, wagering almost every day and laying hundreds of dollars at a time.

Second, illegal bookmakers take advantage of people's mistakes. They know that many bettors are fans of certain teams. In the case of the bookmakers I have records for, about a quarter of the bettors appear to be New York Yankees fans who wager consistently on their team. The bookmakers understand this tendency and "price discriminate" against such bettors: They charge them a higher price for their Yankees bets. While price discrimination does have an important role to play in free markets, it is likely that consistent use of it would be precluded if sports betting was legalized and above-board.

Right now, Internet gambling is proliferating. Internet operations catering to U.S. citizens operate from bases in countries as diverse as Antigua, Costa Rica and Australia.

Presuming the current attempts at prohibiting Internet sports betting persist, what might we expect to see? First, there will be a growing alliance between Internet bookmakers and the more traditional illegal bookmaker. The on-street bookmakers have experience in providing and servicing financial credit, which would be difficult for the Internet books to provide given the difficulty of enforcing a debt contract from afar. There is already evidence that Internet operations have started to pay their illegal on-shore cousins to run their credit business. Such interaction will help reinforce the influence of the illegal sector and will exacerbate the perceived problems of sports betting, such as facilitating money laundering.

Second, prohibition will drive the Internet operators further from the U.S. An important feature of the Internet is that it makes physical distance largely irrelevant, and from a bettor's perspective it is just as convenient to wager on-line with an Antigua bookmaker as with one down the street. As bookmakers move further from U.S. soil to escape its influence, it will become harder and harder to legalize Internet gaming in the future as the bookmakers get ensconced in their offshore locations.

A far more sensible policy would be to legalize Internet bookmakers. This would allow policies to be put in place that could limit the potential excesses of gambling and minimize the role of the criminal element. As side benefits, a legalized regime would likely displace the widespread illegal operations. It is perhaps understandable that such an option is rarely considered. Gambling is a subject that many feel passionately about. But the argument for legalization and regulation should have appeal for opponents and supporters of gambling alike.

While such policies might spring from a moral viewpoint, they are unlikely to succeed in limiting online betting. Because Internet gaming operations are often located outside of the U.S., there is little Washington can do to restrict their actions.

Moreover, a prohibition policy has perverse effects and encourages the behavior it seeks to curtail. This is illustrated by a close examination of one of the most popular forms of gambling: sports betting. There is a large demand for sports betting, and a large illegal sector has arisen to provide this activity despite a long-standing policy of prohibition. A similar ban on all Internet-based sports betting also is likely to fail. A legalized regime is a better way to mitigate the potential dangers of Internet betting.

To begin, let's take a closer look at betting on major sports, which is currently illegal in all states besides Nevada, regardless of whether it involves the Internet. While these bans are primarily enforced by states, the federal government does get involved if wagers cross state lines or there is an alleged involvement of organized crime. So how successful has this regime of prohibition been at eliminating sports betting'.. By almost any measure it is a failure. A recently completed report from the National Gambling Impact Study Commission estimates that individuals wager between $80 and $380 billion dollars with illegal bookmakers. This is nearly 100 times the amount bet on professional sports with legal bookmakers in Nevada.

The sheer size of the illegal sports betting markets only tells part of the story. I recently completed an analysis of illegal bookmakers in New York City using actual records seized in a series of arrests by the Kings County (Brooklyn) District Attorney office. I found that illegal bookmakers utilize policies that exacerbate the potential harm of gambling. First, they offer short-term credit, and allow bettors to wager for a week or longer without fronting any money. Most of the bettors in my records would be considered compulsive gamblers, wagering almost every day and laying hundreds of dollars at a time.

Second, illegal bookmakers take advantage of people's mistakes. They know that many bettors are fans of certain teams. In the case of the bookmakers I have records for, about a quarter of the bettors appear to be New York Yankees fans who wager consistently on their team. The bookmakers understand this tendency and "price discriminate" against such bettors: They charge them a higher price for their Yankees bets. While price discrimination does have an important role to play in free markets, it is likely that consistent use of it would be precluded if sports betting was legalized and above-board.

Right now, Internet gambling is proliferating. Internet operations catering to U.S. citizens operate from bases in countries as diverse as Antigua, Costa Rica and Australia.

Presuming the current attempts at prohibiting Internet sports betting persist, what might we expect to see... First, there will be a growing alliance between Internet bookmakers and the more traditional illegal bookmaker. The on-street bookmakers have experience in providing and servicing financial credit, which would be difficult for the Internet books to provide given the difficulty of enforcing a debt contract from afar. There is already evidence that Internet operations have started to pay their illegal on-shore cousins to run their credit business. Such interaction will help reinforce the influence of the illegal sector and will exacerbate the perceived problems of sports betting, such as facilitating money laundering.

Second, prohibition will drive the Internet operators further from the U.S. An important feature of the Internet is that it makes physical distance largely irrelevant, and from a bettor's perspective it is just as convenient to wager on-line with an Antigua bookmaker as with one down the street. As bookmakers move further from U.S. soil to escape its influence, it will become harder and harder to legalize Internet gaming in the future as the bookmakers get ensconced in their offshore locations.

A far more sensible policy would be to legalize Internet bookmakers. This would allow policies to be put in place that could limit the potential excesses of gambling and minimize the role of the criminal element. As side benefits, a legalized regime would likely displace the widespread illegal operations. It is perhaps understandable that such an option is rarely considered. Gambling is a subject that many feel passionately about. But the argument for legalization and regulation should have appeal for opponents and supporters of gambling alike.

A heated dispute erupted in late 2002 between corporate giants in the high-tech sector over how the networks owned by cable and telecom companies will be governed in the future. Several major software and e-commerce firms have formed the Coalition of Broadband Users and Innovators to petition the Federal Communications Commission to adopt rules ensuring that cable and telephone industry broadband operators will not use their control of high-speed networks to disrupt consumer access to websites or other users. In the name of preserving "network neutrality" and Internet "openness," CBUI members argue that the FCC must adopt preemptive "nondiscrimination safeguards" to ensure Net users open and unfettered access to online content and services in the future. CBUI claims such preemptive, prophylactic regulation is necessary because the current market is characterized by a cable-telco "broadband duopoly" that threatens Internet users.

Such rhetoric and calls for preemptive regulation are unjustified. There is no evidence that broadband operators are unfairly blocking access to websites or online services today, and there is no reason to expect them to do so in the future. No firm or industry has any sort of "bottleneck control" over or market power in the broadband marketplace; it is very much a competitive free-for-all, and no one has any idea what the future market will look like with so many new technologies and operators entering the picture. In the absence of clear harm, government typically doesn't regulate in a preemptive, prophylactic fashion as CBUI members are requesting.

Moreover, far from being something regulators should forbid, vertical integration of new features and services by broadband network operators is an essential part of the innovation strategy companies will need to use to compete and offer customers the services they demand. Network operators also have property rights in their systems that need to be acknowledged and honored. Net neutrality mandates would flout those property rights and reject freedom of contract in this marketplace.

The regulatory regime envisioned by Net neutrality mandates would also open the door to a great deal of potential "gaming" of the regulatory system and allow firms to use the regulatory system to hobble competitors. Worse yet, it would encourage more FCC regulation of the Internet and broadband markets in general.

The real issue, however, is whether a "U.N. for the Internet" is on the way. Last week's summit and another in 2005 will discuss whether Internet decisionmaking should be shifted from largely private management to the United Nations.

In one sense, none of this is surprising. Regulators across the globe have long been clamoring for greater control over content and commerce on the Internet. Ironically, in the guise of protecting the world's citizens, Statists around the world want to get their hands on one of the world's most liberating communications technologies.

While the U.N. conferees have "generously" agreed to retain language that enshrines free speech, despite the disapproval of countries such as China and Iran, these matters are far from settled. There've been a few notable international cyber-spats already, such as a French court's attempt to force Yahoo! to block the sale of offensive Nazi materials to French citizens, and an Australian court's ruling that the online version of Dow Jones publication Barron's could be subjected to that country's libel laws. And Chinese officials have attempted to censor the search engines Google, AltaVista and Yahoo!

Apart from speech and libel laws, sales taxes, privacy policies, antitrust statutes, intellectual property laws, and that fearsome "digital divide" are other hot button issues that will undoubtedly find their way onto the U.N. agenda. What gives foreign bureaucrats the right to wrap their tentacles around the World Wide Web? How can a Web site operator know how to act or do business in this confusing legal environment? And who really should have jurisdiction over Internet activities anyway?

We examine these complicated questions in a new Cato Institute book, Who Rules the Net? The threat a patchwork of international laws poses for online vendors and the growth of e-commerce arises from the fact that compliance with 190 different legal codes would be confusing, costly, and technically impossible for all but the most well-heeled firms. A Web site operator's only option would be to conform its online speech or commercial activities to the most restrictive laws on the planet to ensure global compliance. If you like the idea of Zimbabwe's dictator du jour setting libel standards for everyone on Earth, this sort of lowest common denominator regulation is the legal regime for you.

If enough countries start playing these games, the threat of retaliation and potential trade wars increases as cross-border legal spats intensify over privacy, gambling, pornography, intellectual property, and tax policy. All these interventions provide footholds for poorer nations to effect wealth transfers from wealthier nations to address digital divides and poverty largely of their own making -- problems rooted in fundamentally inept or despotic governance rather than Internet governance.

The implications for online commerce are profound. The moment one puts a Web site online, one has "gone global." Should that mean you have automatically and willingly subjected yourself to the laws of every country on the planet? Shouldn't the origin of content matter?

This is one reason some favor the "U.N. for the Net" model. But others have suggested that international treaties or adjudication by the World Trade Organization might offer the better approach. Still others assert that the best answer is to do nothing because the current unregulated Web environment has helped expand free speech and commerce globally for companies, consumers and citizens alike.

We favor the latter. But to the extent pure laissez-faire is not an option, "country of origin" standards may provide the best default solution. That is, government should only exert authority over those actors who physically reside within the confines of their traditional geographic borders. In this sense, an origin-based jurisdictional methodology protects sovereignty while simultaneously giving meaning to the notion of "consent of the governed" in an online setting. Healthy jurisdictional regulatory and tax competition via origin-based rules would allow companies and consumers to have a "release valve" or escape mechanism to avoid oppressive jurisdictions that seek to stifle online commerce or expression.

Software-enabled geographic targeting may increasingly play a role, too. Particularly as U.N. power-grabbing grows more extensive, businesses may choose to avoid interaction by using geo-location technologies to selectively target their services instead of making materials available to the entire planet. Such targeting may be the better approach from a marketing perspective anyway. But to have it forced by U.N. shenanigans would be unfortunate.

The great advantage of the Net is precisely the ability to reach as many people as possible and overcome artificial restrictions on trade or communications at traditional geographic boundaries. The Web, whatever problems it has raised, has provided far more opportunity and freedom to mankind. The U.N. appears eager to assume greater control over the Net, not because of it's failures, but because it undermines members' authority. That sounds like the best reason ever to make sure a U.N. for the Internet never becomes a reality.

However, the dilemma isn't merely that legislation likely won't rid us of spam, given the Net's global pool of scofflaws; rather, legislation like "ADV" mandates or "do-not-spam" lists doesn't address the root of the spam problem: (1) the lack of authentication of senders, and (2) the ability of spammers to shift the costs of bulk e-mail to recipients.

Granted, such misdeeds as peddling shoddy goods, forging the name of a sender, and phony "unsubscribe" promises should be punished. Abuses like "dictionary attacks" and spoofing often commandeer unwitting computers and resemble hacking more than commerce. But to a great extent, these are already illegal and alternative market-driven solutions via technology, pricing and industry consortia are going to become more urgent.

Maybe that's a blessing in disguise, because spam is not a single dilemma: Kids seeing porn in the inbox is a different problem than ISPs overwhelmed with ricocheting Viagra ads.

Moreover, the industry must coalesce to address cybersecurity and hacking concerns that need remedying perhaps more urgently even than spam. Actually solving such problems is a different proposition from passing a law.

Pending legislation, for example, would impose subject-line labeling, like "ADV," for commercial e-mail; mandate "unsubscribe" mechanisms; ban "harvesting" software; set up fines or even bounties; and contemplates an expensive (and likely hackable) Do-Not-Spam list.

But if legislation merely sends the worst spammers offshore, we've only created regulatory hassles for small businesses trying to make a go of legitimate e-commerce, and mainstream companies that already follow "best practices" like honoring "unsubscribe" requests. Proposed legislative penalties can easily keep many small businesses out of Internet marketing altogether, for fear of a costly misstep. Is that really our goal?

Commercial e-mail, even if unsolicited, may not always be unwelcome. Yet how might the definition of "spam" expand? Is it just "bulk unsolicited commercial" mail, or is it "anything you didn't ask for?" Many e-mails aren't commercial but are still unwanted: press releases, resume blasts, charitable solicitations. Even the signature lines we all put in our e-mails are a subtle solicitation. If we need "ADV" for advertisements, then what about "REL" for religious appeals? Notably, politicians are exempt from anti-spam legislation.

We shouldn't discount the creativity of lawyers looking to sue the easy marks, such as the small businesses that will inevitably slip up when implementing "unsubscribe" requests, or newsletters that fail to put "ADV" in the subject line. Navigating e-mail commerce will be easier for large firms.

Much of the Internet industry's new-found support of spam legislation seems defensive and aimed at protecting the ability to send legitimate commercial e-mail. But post-legislation, marketers will surely feel they have met federal requirements, like ADV and a street address, and therefore ISPs have no right to block their messages. (One cynic said the "CAN SPAM" bill meant that you "can spam.") But blacklists are one of the key means of dealing with spam today. Contracts, and the right of ISPs and consumers to end unwanted relationships -- not federal guidelines -- should rule.

There's some good news. If the desire is to stop spam in personal inboxes, one can do it already using "handshake" or "challenge-and-response" e-mail accounts, which typically thwart all spam. Meanwhile, the entire industry needs to get busy on standards, such as for digital signatures or "seals" for trusted e-mail as a means of helping tomorrow's ISPs block spam. It could require unprecedented industry coordination.

At bottom, the flat fees and free e-mail of today aren't a fact of nature or a natural right. Ultimately, e-mail "postage" or protocols that allow users or ISPs and users to charge fractions of a cent for unsolicited mail would allow users to impose their own conceptions of "spam." Emerging bonded sender programs anticipate such a sea-change.

It may be that today's system, in which originators of messages remain anonymous, is altogether inappropriate for the commercial information society of tomorrow. While the government must not outlaw anonymous e-mailing, maybe it needs to be impossible, not merely illegal, to send a commercial e-mail if the network owner can't discern who you are or charge you. If so, those are jobs for the industry that can't be replicated by passing a law.

A heated debate is once again under way in Congress over the tax treatment of electronic commerce and the Internet Tax Freedom Act of 1997. The ITFA imposed a moratorium on state and local taxes on Internet access and banned "multiple or discriminatory" taxes on electronic commerce. That moratorium was intended to last only three years but was extended by Congress in 2001 for another two years. It will lapse on November 1, 2003.

The ITFA has been a remarkably misunderstood or misinterpreted statute and has very little to do with what really lies at the heart of this debate--the effort by state and local governments to collect sales and use taxes on remote vendors in interstate commerce (mail order, catalog, and e-commerce companies). Contrary to press reports and statements made by some members of Congress, the ITFA moratorium does not directly affect the ability of states and localities to impose sales and use taxes on purchases made over the Internet.

What state and local officials are really at war with is not the ITFA but 30 years of Supreme Court jurisprudence that has not come down in their favor. Their ultimate goal is to overturn those precedents, which held that states could require only firms with a physical presence--or "nexus"--in their jurisdictions to collect taxes on their behalf. State and local tax officials have worked to eliminate or water down these restrictions on their tax reach but thus far have not been able to get around them or convince Congress to authorize the imposition of collection obligations on interstate vendors.

Although extending the existing ITFA moratorium and continuing to uphold the Supreme Court's nexus jurisprudence makes good sense, Congress must also take an affirmative stand against efforts by state and local governments to create a collusive multistate tax compact to tax interstate sales. Other options exist that state and local governments can pursue before looking to impose unconstitutional tax burdens on interstate commerce. Of course, getting runaway state spending under control would go a long way toward solving many of their supposed problems. Merely extending sales tax collection responsibilities to electronic commerce--which constitutes less than 2 percent of all retail activity in the United States--will not solve the fiscal crisis that state and local governments have created through their profligate spending habits.