Category: regulation

Covid-19: What should Uncle Sam do?

On February 29 the first person in the United States died from Covid-19, the disease caused by SARS-CoV-2, the so-called novel coronavirus first observed in Wuhan, China.  On March 12, three more people succumbed from this disease bringing the total to 41. Ten days later on March 22, 117 died bringing the total to 419 as the exponential growth of Covid-19 deaths continues. Globally 15,420 had died by midday March 23 and deaths are rising fast.

How and where will this end?  Shutting the economy down and keeping everyone isolated in place until the virus “dies” for lack of new victims would ultimately kill everyone from starvation (if not boredom).  This pandemic will only end (stabilize with the status of the flu, which currently kills about 34,000 per year in the U.S.) when an effective vaccine is developed and administered to almost everyone. This will take one year to eighteen months if it is discovered today, and that is if we are lucky that the safety and effectiveness trials go according to plan. Without a vaccine, the pandemic will “end” when most of us have acquired immunity to it as a result of having and surviving (as almost everyone will) covid-19 –acquiring so called herd immunity.  This assumes that having and surviving the disease will immunize us. This is generally the case with viruses but has not yet been established for SARS-CoV-2.

Our hospitals and medical services could not handle the patient load if every one contracted this disease over too short a period, so it is important to slow down the pace of infection–so called flattening the curve (which could spike quickly as you see from the opening paragraph). The ideal strategy is to allow the infection of those with low risk of serious illness or death to speed up herd immunity with minimum demand on our limited health facilities, while protecting and treating the most vulnerable. The young and healthy are least vulnerable and the old and health-impaired are the most vulnerable.  We should reopen schools and restaurants after Easter and gradually restart our cultural entertainment lives adhering to higher standards of hygiene and public interaction. This would be ideal both with regard to speeding up herd immunity and with regard to minimizing that damage to the economy.

What should government do?

I am from the government and I am here to help (it is risky to attempt humor in these times, but what the hell). “Treasury Secretary Steven Mnuchin warned GOP senators that the unemployment rate could spike to nearly 20 percent if they fail to act dramatically…. The United States is expected to lose 4.6 million travel-related jobs this year as the coronavirus outbreak levies an $809 billion blow to the economy, according to a projection released yesterday by the U.S. Travel Association…. Research from Imperial College London, endorsed by the U.K. government, suggests that 2.2 million would die in the United States and 510,000 would die in Britain if nothing is done by governments and individuals to stop the pandemic.” “six-chilling-estimates-underscore-danger-of-coronavirus-to-public-health-and-the-economy”

“Infectious disease experts do not yet know exactly how contagious or deadly the novel coronavirus is. But compared to SARS and MERS, SARS-CoV-2 [as the novel coronavirus is now labeled] has spread strikingly fast: While the MERS outbreak took about two and a half years to infect 1,000 people, and SARS took roughly four months, the novel coronavirus reached that figure in just 48 days.”  “Mapping the Novel Coronavirus Outbreak”

The U.S. does not have the medical equipment or hospital beds that will be needed for those anticipated to need ICU facilities.  And as poorly equipped medical staff fall ill from their exposure to the Coronavirus, we will run out of enough doctors and nurses to care for them forcing us to default to the unpleasant realities of medical triage where doctors begin to assess and choose those that have a higher probability of survival and to leave the weakest to fend for themselves. This has already started in Italy.

So, what should the government do? Its response might be considered under three categories:  a) Stop or slow the spread of covid-19; b) Help state and local health service providers care for those needing it; and c) minimize the damage to the economy (i.e. to those whose income is affected by the disease or the measures taken to slow the spread of the disease).

As with all good policies, as the government determines its immediate approaches to the crisis, it should keep one eye on the longer run implications of the policies adopted. It should balance the most effective immediate actions with the minimization of what economists call moral hazard in the future.  The simplest and best-known example of moral hazard results from the now hopefully banished practice of governments bailing out banks when they fail as a way of protecting depositors. This one way bet for the banks–they profit when they win their bets and the government bails them out when they lose them–encouraged banks to take on excessive risks. In the U.S. we have replace bank bail outs with deposit insurance and efficient bank resolution (bankruptcy) procedures. “Key Issues in Failed Bank Resolution”

If economists do nothing else, we pay very close attention to incentives, particularly those created by government rules and regulations (including taxes and subsidies).  Government financial assistance must also be carefully designed to be temporary, recognizing the danger that expansions of government into the economy in emergencies have the bad habit of becoming permanent.

From these general considerations our response should be guided by these principles: Measures should be effective with the least cost. They should be narrowly targeted. They should be temporary. The cost of financial assistance should be shared by all involved–no bailouts.

Flatten the curve 

The government’s first priorities must be to slow the spread of covid-19 while supporting the medical needs of those contracting it.  Limiting the number of infected will limit the resulting deaths (guesstimated to be around 1% of those infected by this virus). Slowing the rate at which people are infected–flattening the curve–will reduce the peak demand for hospital beds and related services until a vaccine is found (once one or several candidates are discovered today, it will take 12 to 18 months of tests to establish its safety and effectiveness and manufacture enough to start administering it).

Despite clear warnings that the novel coronavirus posed serious threats to the U.S. for which we were not prepared, President Trump failed to act until very recently, calling the scare a Democratic plot as recently as February 28. “Trump-says-the-coronavirus-is-the-democrats-new-hoax”  “U.S. intelligence agencies were issuing ominous, classified warnings in January and February about the global danger posed by the coronavirus while President Trump and lawmakers played down the threat and failed to take action that might have slowed the spread of the pathogen, according to U.S. officials familiar with spy agency reporting.” “US-intelligence-reports-from-january-and-february-warned-about-a-likely-pandemic”

Countries that acted quickly to identify and isolate those infected by the virus have generally succeeding in slowing its spread without shutting their economies down.  South Korea, Singapore, and Taiwan have tested widely and quarantined those testing positive, many of whom were asymptomatic. Their economies have not been shut down. Restaurants and bars remain open as do schools in Singapore and Taiwan.  New cases in S Korea have fallen to very low levels two weeks ago and active cases have been declining since March 11 as more people recover than acquire the disease. On March 22 only two people died from the disease.  Cases and deaths have remained low in Japan, Singapore and Taiwan. The following describes the lesson’s from Singapore’s success: plan ahead, respond quickly, test a lot, quarantine the sick, communicate honestly with the public, live normally:  “Why-Singapore’s-coronavirus-response-worked–and-what-we-can-all-learn”

As a result of the U.S. failing to act earlier, the potential for this approach has been reduced in the U.S.  Nonetheless, the government should urgently remove its barriers to testing, increase the supply of tests, and pay most of the cost of testing. In order to discourage frivolous testing those being tested should pay a small amount of the cost (e.g. ten dollars per test).  Even today (March 21) very few Americans are tested despite frantic catch up efforts by the U.S. government.  “A-government-monopoly-led-to-botched-covid-19-test-kits-but-private-labs-are-now-saving-the-day” Positive test results (“cases”) in the U.S. are rising rapidly (983 new cases on March 16 jumped to 9,339 on March 22, for a total of 33,546). However, as so little testing has been possible, there is no way we can know whether this dramatic increase reflects increases in infection or only the increase in the identification of existing infections. “Peggy Noonan gets tested–finally”

As a result, the government has urged people to stay home, and most entertainment centers (theaters, cinemas, restaurants, gyms, and bars) have closed, and a few state governors are mandating it.  Many international flights have been cancelled.  Aside from grocery stores and pharmacies, most shops and malls have closed. A controversy is raging over whether closing schools does more harm than good. Among the arguments against it is that because serious illness and death among the young is rare but they can spread the disease (to their families at home and others), attempting to block their infection interferes with herd immunization (protection from infection as the result of a large proportion of the population becoming immune as the result of recovery from infection).

The economic impact of those drastic measures will be explored below, but the government must now urgently prepare for the surge of covid-19 patients promising to overwhelm our brave medical health care workers, medical supplies and hospital beds even with these draconian measures. Priorities must be given to properly equipping medical service providers and training their replacements as they fall ill. Hospital beds and respirators and other equipment needed for the more seriously ill must be urgently produced, in part by turning out and away, less seriously ill patients and those with non-emergency, elective treatments. We can delay the investigation into why these steps where not taken two months ago when the need was identified.

Care for the sick

The government should support the market’s natural incentives to develop better treatments and ultimately a vaccine (i.e. profit). This raises challenging policy issues. Protecting the patent rights of firms developing treatments protects the profit incentive for them to do so. However, the sharing of research findings, thus threatening such patents, can greatly accelerate the discovery of helpful medicines or procedures. Hopefully rights can be established and protected that both encourage drug development and cooperative information sharing.

The failure of the U.S. government to provide for or allow significant testing for covid-19 is a scandal. The government should get out of the way. “Coronavirus-and-big-government” Its claim last week and the week before that testing was opening up is sadly not true.  By March 19th the U.S. with a population of 327 million had only tested 103,945 people (0.03%).  S. Korea with a population of 51.5 mil. had tested 316,664 by March 20th (0.6%) and Germany with a population of 82.9 mil. had tested 167,000 by March 15th (0.2%)  “Covid-19-why-arent-we-prepared”

President Trump’s trade war has damaged world’s ability to fight covid-19 in general but more specifically his tariffs on medical supplies are contributing to their shortage in the U.S.  “The US-China trade war has forced US buyers to reduce purchases of medical supplies from China and seek alternative sources. US imports of Chinese medical products covered by the Trump administration’s 25 percent tariffs dropped by 16 percent in 2019 compared with two years earlier.”  “Tariffs-disrupted-medical-supplies-critical-us-coronavirus-fight”

Save the economy

Having missed the opportunity to flatten the curve via testing and targeted quarantines, the U.S. has taken much more drastic steps to restrict public interactions, shutting down the entertainment, educational, and transportation sectors of the economy. These should result in temporary interruptions of the supply of these services that will bounce back when the restrictions are lifted. Some output will be lost forever (lost classroom time, and restaurant meals) but others can be recouped or at least restored to original levels (rates). Clothing and other retail items not purchased during the shut down can be purchased later.

What the economy will look like afterward (hopefully only a few months) will depend on several factors. The first is the extent to which our public behavior is altered permanently. Home movies might permanently replace some part of our usual attendance to the cinema. Teleconferencing might permanently reduce meeting travel or accelerate the existing trend in that direction, etc.

The policies being debated in congress at this moment for protecting individuals and firms from the financial cost of the temporary shutdown can profoundly affect the future composition and condition of the economy. Every big firm out there is working on how they can tap some of the taxpayer’s money that government will be giving out. Those pushing government interventions into new areas on a permanent basis will exploit the occasion to slip in their favorite policies. Unfortunately, once the government moves into an area– it rarely withdraws. Almost 19 years later, the horrible Patriot Act, adopted when a scared public was willing to trade off liberty for security, is still largely with us.

Our public interest would be served by incentives that lead those who might be sick with covid-19 to stay home rather than risk infecting others, and by policies that enable viable firms that lost customers and individuals who stayed home to bridge their financial gap until returning to normal. Affected firms and individuals will continue to have expenses (food, rent, mortgages, etc.) but no incomes. They should be provided with the funds to meet these expenses in order to return to life/work when the lights go back on. The sharing of the cost of those funds must be considered politically fair and must incentivize the desired behavior. Everyone must have some skin in the game (a share of the cost). Adopting measure that fill those criteria will not be easy.

The government (taxpayers) should cover much of the cost of the covid-19 related medical services and hospital costs, including very widespread testing. Medical service providers should be tested daily (e.g., several doctors have died from covid-19 in Italy). Anyone staying at home and testing positive should receive sick leave paid for by the government.

Assistance to companies and the self-employed should be as targeted as possible on those forced to reduce or stop operations as a result of covid-19. Where possible, assistance should take the form of loans to companies that continue to pay wages to their employees even if not working. Restrictions should be placed on how such loans are used (no stock buy backs, or salary increases during the life of the loans). Bank and lending regulators should allow and in fact encourage temporary loan forbearance by the lenders on temporary arrears from otherwise viable firms. “Bailout-stimulus-rescue-check” One small businessman convincingly argued that wage subsidies that keep working on the payroll are better than generous unemployment insurance, which makes it easier for firms to lay off their workers. “Dear-congress-i’m-a-small-business-owner-heres-what-my-business-needs-to-survive”

What about the big companies, such as Boeing, the airlines, the Hotel Chains, and Cruise ship operators? Yes, they should be included in the loan forbearance and incentive loan programs, but they should receive no special consideration beyond that. If government (partially) guaranteed loans through banks to pay wages and other fixed expenses for a few months are not enough to finance a firm’s expenses without income for a few months it is probably not viable in the long run anyway and should be resolved through bankruptcy as were GM and Chrysler in earlier financial crises. This would wipe out the stakes of owners while preserving the ability of the firm to return to profitable operation with new owners. “Bailing-out-well-if-bail-out-we-must”

Monetary policy

The American economy (and elsewhere) is suffering in the first instance a supply shock (sick people unable to work and produce). This fall in income from supply disruptions also reduces demand. Cutting the Fed’s already low interest rate target to almost zero is a mistake. No one will undertake new or expanded investments because of it, and its impact on reducing the return on pensions and other savings will, if anything, reduce spending. The last decade of very low interest rate policy targets has already contributed to excessive corporate debt and inflated stock prices (recently deflated back to normal).

Injecting liquidity via new lending facilities and international swap lines, as the Fed is now undertaking, is the correct response. If lenders allow their borrowers to delay repayments for a few months, they need to replace that missing income somehow (rather than calling in nonperforming loans and bankrupting the borrower). The Federal reserve should substitute for that income by lending to banks freely against the good collateral of government debt or government guaranteed debt.

“The vital need of everyone in the economy, from the corner drugstore to the local transit authority to the mightiest multinational, is liquidity: credit to meet payroll and other key obligations so as to remain solvent until the end of what we all must hope is a finite crisis.”  “Here’s-an-economic-aid-plan-better-than-mitch-McConnell’s”

Macroeconomic policy

As noted above, the government’s help should be narrowly targeted to the direct victims of covid-19.  A general fiscal or monetary stimulus is not needed or desirable.  Nonetheless, it will add to the federal debt that is already bloated by years of annual deficits at the peak of a business cycle when a surprise is customary and appropriate.

“The United States is not confronted with a financial crisis and a follow-on crisis of demand, as in 2008 or 1929. Rather, previously robust consumption and production are being deliberately halted to save lives. Thus, traditional tools of monetary and fiscal stimulus, such as zero interest rates and direct cash aid to households, are unlikely to prove decisive. You can’t shop, or invest in new construction, while on lockdown.”  “Here’s-an-economic-aid-plan-better-than-mitch-McConnell’s”

This is a dangerous period both for our personal health and for the health of the economy. Affected firms should be helped in order for them to continue paying their employees and to remain solvent until they can return to production. But the United States has failed to prepare properly and is handling the fight against covid-19 poorly. We need to reopen our schools and restaurants and return to normal at a reasonable pace while allowing herd immunity to develop at a faster pace while supporting the most rapid development of a vaccine possible. Don’t fight this wildfire with our eyes shut while enhancing the dangers of future fires from ill-advised measures undertaken in this emergency environment.

Stay strong everyone. We will all get through this.

Socialism as seen by Millennials

“Seventy percent of millennials in a new poll say that they are somewhat or extremely likely to vote for a socialist candidate.” “70-percent-of-millennials-say-theyd-vote-for-a-socialist”  That, and the current lead of Bernie Sanders, a self-proclaimed Socialist, for the Presidential nomination of the Democratic Party, means that those of us who believe that capitalism is the foundation of our freedom and prosperity have a job to do to convince millennials that they are wrong about Socialism.  If Sanders wins the Democratic Party’s nomination, which I doubt, his long history of support for Soviet communism will be marched out by the Republicans. “Bernie Sanders support of communism is a moral failing”  As recently as a few days ago, Sanders was praising Fidel Castro. “Bernie-sanders-didnt-mention-the-dark-side-of-education-in-castros-cuba”  Sanders is not even a registered Democrat. But my concern is that so many millennials (born between 1981 and 1996) and Gen Z’s (born between 1995 and 2015) are attracted to Socialism. We need to convince them that it will not deliver the better society that they think it will.

We need to start with the recognition that these new generations, like all of their predecessors, want to do the “right thing.” “The-search-of-purpose”  They are searching for how best to address the deficiencies of life in America today. While dire poverty has been reduced from over 90% to less than 10% by capitalism, there is still that 10%.  Adult literacy has been at 99% for a few decades but the quality of public school education has been declining.  Only half of elementary school students in California are proficient in English (i.e., performed at grade level). “California-school-test-scores-2019”  And so on. The question is how to address these problems? What should we do to further improve our lives economically and culturally? Should we increase the role of government in directing resources and making our decisions or reduce it or adjust it? Do we need more Socialism or more Capitalism?

In 1919 the “Old Bolsheviks,” Nikolai Bukharin and Evgeny Preobrazhensky, wrote in the widely read The ABC of Communism, that the communist society is “an organized society,” based on a detailed, precisely calculated plan, which includes the “assignment” of labor to the various branches of production.  As for distribution, according to these eminent Bolshevik economists, all products will be delivered to communal warehouses, and the members of society will draw them out in accordance with their self-defined needs.  I urge my young friends to read the fuller account in Ralph Raico’s  “Marxist-dreams-and-soviet-realities”

The theoretical and historical/empirical cases against Socialism are overwhelming, at least to those of us who lived through the cold war and the decline and fall of the Soviet Union in the early 1990’s and the Israeli kibbutzim more gradually in the 1960s through 1980s.  Cuba, North Korea and Venezuela provide contemporary examples.  Sanders and many millennials reject these examples (sort of) as reflecting the bad luck of state capture by bad guys (I am not aware of any bad girl examples). But the centralization of the power to direct businesses and people that is the essence of Socialism, is a natural and powerful magnet for bad guys.  No socialist regime has escaped the opportunities and temptations to favor its friends and relatives with government contracts or protections from the horrors of competition. “Crony capitalism”  Venezuela is a particularly shocking example of the rapid deterioration of one of South America’s wealthiest countries.

Sanders often points to the Scandinavian countries as examples of the softer democratic Socialism he now says he has in mind.  But he is fifty years out of date. The experiment with “democratic socialism” by, for example, Sweden in the 1960s and 70s was a failure and abandoned in recent decades. “Bernie Sanders’s Scandinavian fantasy”

Socialism has failed historically because it lacks incentives (financial rewards) for hard work and the development of better mouse traps, provides incentives for corruption, and is really hard to “get right.”  National Socialism (Nazism) and other versions of socialism involved top down control over many aspects of society.  But the central allocation of resources and decisions about what we may and may not do–central planning–suffers from serious informational challenges even when made by smart and totally honest people. Friedrich Hayek had much to say about the importance of prices in a market economy for providing critical, decentralized information on people’s preferences and thus on the optimal allocation of resources. “The Road to Serfdom”

But we are not likely win over the younger generations to capitalism just on the bases that it has given us standards of material well-being and individual freedom unimaginable several hundred years ago.  We also need, I think, to defend its moral superiority while offering promising remedies to its remaining deficiencies.

The morality of capitalism rests, in my view, in its capacity to give us, and to protect, our ownership of the fruits of our own labor. This means also the freedom to decide how to live.  It is a system in which we bear the primary responsibility for our own decisions and actions and their consequences.  It is a system that flourishes in a culture of trust and mutual caring and thus encourages such values. It is a system that rewards and thus encourages virtuous behavior. The top down, central planning, central control of socialism tends to have the opposite effect.  A common saying in the Soviet Union (USSR), while it still existed, was that “They pretend to pay us, and we pretend to work.”

America was unique in its time (exceptional) in establishing a constitution and government in which the people gave up limited authority to their government to protect their property and liberty, rather than, as with the Magna Carta, the sovereign giving up some of its authority to the people.  See American Exceptionalism.  In the personal freedom this provided and the accompanying responsibilities it imposed, Americans flourished in every sense of the word more than most. Those who fall behind or floundered were not ignored.  It was a country of free and virtuous people and as Thomas Jefferson said at the end of his presidency in 1809: “the sole depository of the sacred fire of freedom and self-government.”[1]  Seymour Martin Lipset in the middle of the 1990s used the concept of this exceptionalism to explain “why the United States is the only industrialized country which does not have a significant socialist movement or Labor party.…”  I would hate to see that change.

Countries differ in the balance of personal freedom and security (safety net, police, army) they seek. But in the most successful ones the provision by the government of security is limited and well targeted to minimize its infringements on personal freedom.  Here are my earlier thoughts on improving the government’s role in and contribution to an orderly free market, capitalist system: “My-political-platform-for-the-nation-2017”

Let me end with a quote from Winston Churchill to drive my point home: “The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.”  Indeed, Capitalism has its flaws, but Socialism has no success stories that we should strive to emulate. The way to move forward is to repair the flaws in a Capitalistic free market society.

[1] Quoted in Tucker and Hendrickson, Empire of Liberty p 7; see John P. Foley, ed. The Jeffersonian cyclopedia (1900).

Crony Capitalism

The standard of living of the median income family in the United States has risen to heights that could not have been imagined just a hundred years ago ($73,891 in 2017). All other industrial countries have had similar experiences.  “As measured in 2011 U.S. dollars, the global income per person per day in the first year of the Common Era stood at $2. That’s also where it stood when William the Conqueror set sail in 1066 to claim the crown of England…. In 1800, the average income was $2.80. In the 18 centuries that separated the emperorship of Caesar Augustus and the presidency of Thomas Jefferson, per capita income rose by less than 40 percent….

“Then industrialization changed everything. Between 1800 and 1900, GDP per person per day doubled. In other words, income grew over twice as much in one century as it had over the preceding 18 combined. By 2016, the number…in the United States… stood at $145…. In other words, global and American standards of living rose twelve-fold and 24-fold respectively over the course of the last two centuries….  These and other fascinating data are presented by Marian Tupy in: https://humanprogress.org/article.php?p=1906

How was this miracle possible? It resulted from each worker on average becoming dramatically more productive and being able to trade his or her products for the other goods and services he or she wanted. But what was the source of such an amazing increase in productivity?  Workers developed and or were provided with tools and equipment (capital) that made it possible.  These machines, cooperative production structures and worker skills (so called “human capital”) were developed because “capitalists” creating and investing in them had protected property rights in them and shared in the profits from their use. In short, it was because people had an incentive to invent and learn that was lacking in feudal or earlier social structures.  Bill Gates, for example, became a billionaire from selling us the computer products and services that Microsoft invented and produced. We happily paid Microsoft these billions for its tools that greatly enhanced our own productivity in both production, household management, and play. In the win-win world of private property and trade, we gained from Microsoft as much or more than Bill Gates did.

Interestingly, there is more to this story. As industrialization took hold, and the incomes of the lower and middle classes rose, income inequality declined. The monopolies of feudal Lords were eroded.  More recently “global inequality is declining as developing countries catch up with the developed world. Between 1990 and 2017, argues Branko Milanovic from City University of New York, the global Gini coefficient, which measures income inequality among all of the world’s inhabitants, decreased from 0.7 to 0.63” i.e., became more equal (zero equals perfect equality). [Tupy]

In the U.S. after years of gradual decline, the Gini coefficient rose from 0.35 in 1979 to 0.49 in 2018, slightly less than China’s (0.47). What is going on? Though still more equal than the world on average, why is income distribution widening modestly over the last forty years in the U.S.?

A widely held explanation is that industries have become more concentrated and have exploited their quasi monopolistic market power to extract noncompetitive, i.e. monopoly, rents. Two hundred forty-four years ago, Adam Smith wrote that, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” [Wealth of Nations Book I, Chapter X.] What prevents such conspiracies from succeeding is the competition from other firms seeking to exploit these attractive prices. When faced with competition, a person or firm can only profit by satisfying customers better than the competition.

But why have American firms, and those of many other industrial countries, become more concentrated and protected from competition?  Largely via state capture. As he reluctantly increased U.S. military spending as the “Cold War” heated up, President Dwight D. Eisenhower worried that it would be hard to avoid a mutually self-serving relationship between the government paying the bills and the defense industry supplying the goods. In his famous Farewell Address on January 16, 1961, Eisenhower warned that: “In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist. We must never let the weight of this combination endanger our liberties or democratic processes.”

When government becomes involved or increases its involvement with private firms, the door (and the revolving door) is opened for firms to exploit the relationship to their advantage. It is not just the military-industrial complex (or the military-industrial-congressional complex as Eisenhower stated it in the first draft of his Farewell Address) that enjoys government favor and protection. President Trump’s tariffs on imported steel and aluminum are not for the benefit of American’s generally but are protectionist favors to America’s uncompetitive steel and aluminum firms. Protectionism is just another word for corruption.

Some products and industries need to be regulated to protect consumers and insure honesty and transparency. But larger firms increasingly accept, if not welcome, overly burdensome regulations because they are better able to devote resources to complying with them and thus absorbing their cost than are smaller firms. Such regulations protect them from competition from new, smaller firms. Professional licensing has increasingly been used to protect professionals from hairdressers to real estate agents to lawyers from competitors thus enjoying higher fees than would result in a more competitive market for their services.

The quasi monopoly rents firms are able to extract as the result of government protection against competition grow with the size of government involvement with the economy. The increase in income inequality (a reflection of shrinking competition) of recent decades (the increase in America’s Gini coefficient) have followed the large increases in the size of government, whether measured by expenditures, employment, or regulations.  https://wcoats.blog/2008/09/06/how-to-measure-the-size-of-government/

“• In 1900 the federal government consumed less than 5 percent of total output.

  • In 1950 the federal government consumed roughly 15 percent of total output.
  • In 1992 the federal government consumed almost 25 percent of total output.”

https://fee.org/articles/the-growth-of-government-in-america/

Bernie Sanders, a self-proclaimed Socialist, and Elizabeth Warren, a self-proclaimed defender of capitalism (I am not joking), argue that to fix industrial concentration, to prevent or unwind monopolies, the government needs to be bigger and more active in the economy. This is backward in terms of logic and experience. I don’t question that overwhelmingly most public servants work for the government out of the desire to serve the public. However, the interface between government and the private sector creates opportunities and incentives (resisted by most I am sure) for corruption. By corruption I mean the exploitation of government regulations and contracts to reduce market competition for (i.e. to protect) established firms.

Political lobbying by firms and trade organizations can provide useful industry input to congressional legislation or executive rule making but it is generally the prospective of established firms rather than of potential competitors or the general public. “Since the 1970s, there has been explosive growth in the lobbying industry, particularly in Washington DC.  By 2011, one estimate of overall lobbying spending nationally was $30+ billion dollars. An estimate of lobbying expenses in the federal arena was $3.5 billion in 2010, while it had been only $1.4 billion in 1998.” “Lobbying_in_the_United_States – A_growing_billion_dollar_business”

In 2010 the Supreme Court ruled in a 5-4 decision in Citizens United v. Federal Election Commission, “that the free speech clause of the First Amendment prohibits the government from restricting independent expenditures for political communications by corporations, including nonprofit corporations, unions and other associations.” “Citizens_United_v._FEC – Super_PACs”  This opened the door to direct corporate and union “donations” to political candidates and parties, providing a powerful tool in achieving government cooperation with what these groups consider their special interest.

The competitiveness, and whatever the lack of it contributes to income inequality, of American businesses will not be served by expanding the government’s role in the economy, quite the opposite. Competition is rarely stifled by natural market phenomena. Rather it is much more often blocked or restrained by government regulations that favor the established, dominant firms, who are able to gain the government’s favor. The political forces of expanding government regulation and interference in the economy promote every increasing state capture by dominant firms.  Crony capitalism will be the death of the real thing if it is not continuously resisted. As we should all well know, the price of liberty is eternal vigilance.

New tools require new rules?

A hammer can hit a nail on the head, or it can hit you (or your enemy) on the head. Most, if not all, tools have multiple uses, some good and some bad.  Societies adopt rules to promote the beneficial uses of technologies and discourage harmful uses. New tools/technologies necessitate a discussion of what the rules for their proper uses should be. We are now having that discussion for the uses of social media to promote and propagate ideas and information (some true and some false).

Free speech is revered in America for good reason. Like many other aspects of our preference for self-reliance (personal freedom), it requires that we take responsibility for sorting out what is true from what is false rather than giving over that task to government (and whoever leads it at the time). This can be a challenging task.  We must sort out who we trust to help us. Those of you my age will appreciate that we no longer have Walter Cronkite, and Huntley and Brinkley to help us filter real from fake news.

Our commitment to free speech is so fundamental to the character of America that I have written about it a number of times. https://wcoats.blog/2012/09/14/american-values-and-foreign-policy/    https://wcoats.blog/2012/09/15/further-thoughts-on-free-speech/ https://wcoats.blog/2012/09/29/freedom-of-speech-final-thoughts-for-a-while-at-least/

Various social media platforms present us with another new tool and the need to sort out how best to use it. The answer(s) will take the form of social conventions and government regulations. It is important to get the balance right.

Facebook, Twitter, Google, YouTube, Instagram, Tiktok and other platforms do not generate or provide content. They provided a very convenient and powerful means for you and me to share the content we produce. What responsibility should Mark Zuckerberg, Jack Dorsey, Larry Page, Sergey Brin, etc. have for regulating the content we post to their own platforms, which are after all private. As you saw in my earlier blogs on this subject, publishing and broadcasting our words are limited when they endanger or slander others. But these limits do not and should not limit our advocacies for policies and political beliefs as I am doing now.

The big issue today is fake news (out right lies). If you create or repeat lies, you must be responsible for what you do (but we don’t generally punish lying unless under oath). You are allowed, for example, to state on Twitter or Facebook that you believe Obama was born in Kenya despite thorough documentation that he was born in Hawaii. Perhaps you are gullible enough to actually believe it though it is false. But should Facebook and other platforms have a responsibility to block clearly fake news? What if their own biases lead them to block more Democratic Party “fake news”, or vice versa?

As a private company Facebook can more or less do what it wants but it has a strong business/financial incentive to build a reputation of fairness and to provide a platform that attracts as many users as possible. Here are their rules from their website:

“To see the full list and learn more about our policies, please review the Facebook Community Standards.  Here are a few of the things that aren’t allowed on Facebook:

  • Nudity or other sexually suggestive content.
  • Hate speech, credible threats or direct attacks on an individual or group.
  • Content that contains self-harm or excessive violence.
  • Fake or impostor profiles.
  • Spam.”

The debate at the moment is focused on political ads. Facebook has said that it will not fact check political ads and Tweeter has said that it will not run them at all.  A Washington Post editorial stated the issue this way: “Politicians should, for the most part, be able to lie on Facebook, just as anyone else is, and the public should be able to hold leaders to account. But that’s a different question from whether politicians should be able to pay to have their lies spread, based on unprecedentedly precise behavioral data, to the voters who are most likely to believe their lies.”  “Google’s reply has been more nuanced. The company will limit the criteria campaigns can use to “microtarget” ads to narrow audiences based on party affiliation or voter record. The aim is to increase accountability by letting more people see ads….”  “Tech-firms-under-fire-on-political-ads”

No one, thank heavens, wants the government to vet ads for truthfulness. Some facts are obvious and some are less so. The potential danger to free speech is illustrated by Singapore’s “fake news” law.  Singapore claimed that a post by fringe news site States Times Review (STR) contained ‘scurrilous accusations’.  Giving in to the law, Facebook attached a note to the STR post that said it “is legally required to tell you that the Singapore government says this post has false information”.  “Facebook’s addition was embedded at the bottom of the original post, which was not altered. It was only visible to social media users in Singapore.” https://www.bbc.com/news/world-asia-50613341

However, the government should provide the broad framework of a platforms responsibilities.  For example, the U.S. government requires transparency of who pays for ads in print and TV ads. The same requirement should be imposed on Internet political ads. To qualify for Facebook’s say whatever you want in a political ad policy, the candidate being supported should be required to attach his/her name as approving the ad. Limiting the use of micro targeted ads broadens the exposure and thus discipline on truth telling.  According to The Economist: “To the extent that these moves make it harder for politicians to say contradictory things to different groups of voters without anybody noticing, they are welcome. “Big-tech-changes-the-rules-for-political-adverts”

Knowing what sources of news to trust is no trivial matter. Knowing the source is helpful. Rather than fact checking the content of posts, Facebook attaches an easily viewed statement of the source.  Establishing standards for and establishing boundaries between categories of posts sound easier than they really are, but insuring transparency of who has posted something should play an important role. Flagging questionable sources, without changing the content of a post, as Facebook does, is also helpful. I hope that the discussion of the best balance (and not every platform needs to adopt the same approach) will be constructive.

Attorney General Barr’s News Conference

I, and everyone I know, want to know the facts of any collusion between Trump and his associates and Russia. I am confident that the Mueller investigation provides them as well as we could expect. Attorney General Barr’s news conference this morning summarizing that report was clear and transparent. He did an exemplary and impressive job. The complaints from some Democrats on the Hill that Barr should not have held this press conference until after they had read Mueller’s report were unfounded and frankly embarrassing. Please let’s move on.

My assessment of Trump’s administration today, which is what we should be debating, is very mixed. Adjusting and lightening the regulatory burdens that have been holding our economy back is largely good in my view (though each must be judged individually) as are the tax reforms making the system simpler and fairer. While the tax reforms did not go far enough, they were a big improvement over the existing tax law.

Trump’s attitude toward trade and the protection of inefficient American firms is ill informed and damaging to American’s economy as a whole (as opposed to coal and steel producers). His bullying and unilateral approach is clumsy, amateurish, and counterproductive. The EU, Canada, Japan and others would be happy to join us in confronting China’s bad trade behavior, if Trump were willing to work together and not busy attacking them as well.

I supported Trump’s campaign promises of restraint in deploying American troops around the world, but he has not delivered. His message to the Senate accompanying his veto of the bill passed by both houses of Congress (54-46 in the Senate and 247-175 in the House) a few weeks ago invoking the War Powers Resolution to end U.S. support of Saudi Arabia’s war in Yemen reflects a truly shocking affront to our Constitution: “This resolution is an unnecessary, dangerous attempt to weaken my constitutional authorities, endangering the lives of American citizens and brave service members, both today and in the future.”  The truth is just the opposite. The constitution gives the power to declare war to Congress and the almost blank check congress gave Presidents following 9/11 cannot meaningfully be stretched to include what we are doing in Yemen.

Trump continues to undercut and weaken American leadership in the international organizations and agreements that have contributed so much to post WWII peace and prosperity. This will be increasingly harmful to our and the world’s legitimate interests.

In his spare time, the President thoughtfully advised the French on fighting the fire in Notre Dame. What an embarrassment and fire experts say that his advice was wrong.

Please, let’s fight the real battles and stop wasting time on the phony ones.

The College Admissions Scandals

A few weeks ago, Ito and I went to “Admissions,” the very well performed and thought provoking play by Joshua Harmon about affirmative action, at Studio Theater. Several friends had independently attended the play and suggested that we get together for one of Ito’s superb dinners and discuss it.  So we enjoyed an evening discussing the pros and cons of “affirmative action,” the “temporary” suspension of nondiscrimination legislation meant to repair and make up for discrimination against blacks that made them less prepared for college. It is a complex issue without obvious solutions. The play did an excellent job of fairly presenting all perspectives on this issue.

My opinion is that suspending, even temporarily, equal treatment (merit-based college admissions) of applicants to universities and colleges, as is done with affirmative action, is not the best approach to achieving equal treatment of all. It attempts to treat the symptoms of racial discrimination rather than the disease. First of all, private universities (unlike state schools using tax payers’ money) should be free to establish whatever admission policy they want.  Any school I would want to attend will want to include an element of diversity in its student body as an important element of the education they offer and will build that into its admission policy in whatever way it considered sensible.

And now we are confronted with the revelation that some of the rich and famous paid bribes to get their underperforming children into top schools. As stated in the Washington Post: “the scope and sheer shamelessness of an elaborate scheme in which some of the country’s richest people allegedly paid bribes to get their children into top U.S. universities is truly mind-boggling.” https://www.washingtonpost.com/opinions/the-college-admissions-scandal-should-prompt-broader-soul-searching/2019/03/13/f67aa986-45b5-11e9-aaf8-4512a6fe3439_story.html

This is shocking and unacceptable for the same reason I oppose affirmative action. It violates the principle and standard of merit in hiring people or admitting them to college. Our country is one of the wealthiest and most respected in the world because firms and organizations allocate jobs, positions, and resources in general on their merits (i.e. qualifications for the job, etc.). In short, people and other resources are put to their most productive use.  Obviously, this is not always the case. But firms that fall short of this standard suffer lower profits than if they had adhered to it. In short, in the private sector there is an economic incentive to employ the resources (including people) that best fit the needs being filled. Companies that employ their under-qualified relatives suffer lower profits as a result. Hiring or admitting people on the basis of merit is also our standard of fairness that is widely admired throughout the world.

Affirmative action is a deliberate departure from this standard as are the recently revealed bribes and test score cheating for college admission. In the first case it is an effort to overcome the damage of earlier discrimination against a once enslaved people. In the second case it is an effort to overcome the deficiencies of intelligence or character in our own children. A world in which we acquiesce to standards other than merit will always favor the already well off. We will never fully achieve the high standards of merit based appointments we have set, but we should never stop trying. A powerful strength of the private sector in a competitive free market economy is that the economic incentives are in the right direction.

American universities may never achieve a perfect admissions system completely based on merit and devoid of personal bias, but we should encourage them aim for it. The world outside of the academic environment is unfair enough when it comes to race, gender, sexual orientation and religion to name a few. Let us try to instill in the younger generation the understanding that hard work and smarts are what gets you ahead– not money, influence and certainly not the color one’s skin. And let’s promote attitudes and policies that encourage and reward such a reality.

Net Neutrality

The issue of net neutrality is almost as complicated as the Internet (the network of networks) itself. As with so many topics, the debate over how best to maximize the development of and benefits from the Internet (email, World Wide Web, and all of the rest) broadly divides between those who support prescriptive rules to guide and govern its operations and those who support a more permissive role for the government stepping in only to correct actual problems. To overstate it a bit, it divides the statists from the free marketers.

The history of what we now call the Internet is quite amazing. History of the Internet. Though governments provided the seed money that got it going (in the U.S. it was the Department of Defense’s ARPANET and later the National Science Foundation’s CSNET and in the U.K. it was the National Physical Laboratory), the U.S. gradually stepped back and allowed the unregulated development of commercial and private uses of the connectivity that was developing and allowed private Internet Service Providers (ISPs) to develop the gateways (access) for almost all users (both content providers and consumers) to the Internet. This policy was imbedded in the Telecommunications Act of 1996 signed by President Clinton. That legislation, affirmed that the policy of the United States was: “to preserve the vibrant and competitive free market that presently exists for the Internet . . . unfettered by Federal or State regulation.”

From the beginning of its break away from its narrow military and scientific uses, all involved in the Internet’s development were committed to it being free and open. The Federal Communications Commission (FCC) promulgated guidelines to preserve this principle in November 2011. “The FCC’s rules focus on four primary issues:

  • Transparency. Fixed and mobile broadband providers must disclose the network management practices, performance characteristics, and terms and conditions of their broadband services;
  • No blocking. Fixed broadband providers may not block lawful content, applications, services, or non-harmful devices; mobile broadband providers may not block lawful Web sites, or block applications that compete with their voice or video telephony services; and
  • No unreasonable discrimination. Fixed broadband providers may not unreasonably discriminate in transmitting lawful network traffic.
  • Reasonable network management. ISPs may engage in reasonable network management to maintain a high quality of service for broadband Internet access.” FCC Openness Principles

In this permissive environment the Internet flourished, developing in directions and ways no one could have imagined only a few decades earlier. “But two years ago, the federal government’s approach suddenly changed. The FCC, on a party- line vote, decided to impose a set of heavy-handed regulations upon the Internet. It decided to slap an old regulatory framework called “Title II”—originally designed in the 1930s for the Ma Bell telephone monopoly—upon thousands of Internet service providers, big and small. It decided to put the federal government at the center of the Internet.” Ajit Pai’s Newseum Internet Freedom Speech

What happened? Were the principles of an open Internet with fair access to all suddenly being violated or under threat in 2015? Is the proposed return to the status quo before 2015 really a threat to the principles of net neutrality?

Like all other economic activities, every aspect of the Internet costs money that someone has to pay. Those who built and maintain the Internet Backbone (NTT, Cogent, GTT, etc.), the facilities and networks of the ISPs (Verizon, AT&T, Comcast, etc.), and the content providers (Netflix, Facebook, Snapchat, HBO, etc.) did so to make money (or at the very least to cover their costs). We all know about content and service providers who thought first about how to attract users and only later how to get them to pay (e.g., Facebook and Amazon). They gradually developed their business models over time and some worked and others didn’t. What worked best (most cost efficient use of Internet resources, etc.) was not and could not have been foreseen in the beginning of the Internet’s development. Had the regulations imposed in 2015 been imposed two decades earlier, it is very unlikely we would be enjoying the Web we have today. Freezing or constraining the business models of the key players with very prescriptive regulations is neither necessary nor wise. As Mike Montgomery put it in The Hill: “The digital world moves at the speed of light. To slow that growth to the speed of bureaucracy would have serious negative effects on the burgeoning tech industry which is creating jobs faster than almost any other industry out there.” (see the link below)

Markets function best when profits are maximized by providing the best service at the lowest cost. In such cases, which is the general case, incentives are aligned, i.e. what best serves the supplier/producer also best serves the general public/consumers. Two forces operate to insure that the Internet is open to all. The first was a broad public consensus that the Internet should be open to all on fair terms (no discrimination against—filtering out or blocking—any one or any idea or point of view). The second is that discriminating in any way blocks some customers and thus reduced profits. The incentives for ISPs to provide fair access to all aligned with the public’s expectations of and desires to have fair access.

Ideology enters the discussion when people disagree over the meaning of fairness. Some people think that some classes of users (the poor, IT startups, etc.) should have the cost of their use of the Internet paid by someone else (tax payers, cross subsidies from larger, established users/suppliers, etc.). ISPs, the gateways to the Internet, have no profit incentive to provide such subsidies. Fairness for most economists is when each user pays the marginal cost of their use (plus a small profit margin).

The primary legitimate concern with respect to the net neutrality I want to see is that industry consolidation has reduced the number of ISPs to the point that over half of the country has only one (i.e. no) choice. The only competition in some areas comes from your cell phone plan. Thus there is a legitimate concern with the possibility that an ISP might charge different prices for fundamentally the same service and that those ISPs that are beginning to produce their own content might favor it over competitors’ content with faster lanes or worse.

There were indeed a few problems during the long era of light touch regulation prior to 2015. Verizon’s dispute with Netflix over download speeds and AT&T’s blocking Facetime video but not Skype on iPhones (not even an Internet issue), for example. This occurred before and were resolved before the 2015 FCC regulations on the basis of existing legislation. Excessive concentration and abuses of market power can be and have been dealt with via existing anti trust laws and state and individual civil suits.

The United States has generally allowed markets to develop fairly freely, only applying regulations to deal with real problems when they occur. I represented the IMF as an observer at a G10 Deputies Working Group on E-money meeting at the BIS in Basel Switzerland in December of 1996. The G10 Deputies are the Finance Ministers and Central Bank Governors of the ten largest economies in the world. The meeting was chaired by a young Tim Geithner, then the Deputy Assistant Secretary for International Monetary and Fiscal Policy in the U.S. Treasury Department. The meeting was to determine the regulatory approach to the prospective emergence of Electronic Money, now referred to as Cyber money. We considered reports on developments to date and took the wise decision to stand back and watch how things developed before formulating regulatory advice.

More recently the Federal Reserve’s Faster Payments Task Force project and the Federal Reserve’s cautious approach to bitcoin and other digital currencies reflects a similar attitude. That attitude, to repeat, is that no one knows for sure the direction that the development of new technologies will take in the search for maximizing their benefits thus profits. Government can at best play a supportive role of providing a flexible legal and regulatory framework within which new products and services can be explored. If problems arise, the government can review with consumers and producers how best to deal with them. The approach to regulating bitcoin and other digital currencies is still evolving.

A counter example to the above enlightened approach is the U.S. approach to Anti Money Laundering and Combating the Financing of Terrorism (AML/CFT), which has imposed enormous regulatory costs on payments of all sorts with no discernable benefits.

Those who believe that private sector behavior and the development and use of technology can be carefully and successfully regulated by government suffer what I have called hubris in other contexts. See, for example: https://works.bepress.com/warren_coats/38/. Nonetheless, in the case of so called net neutrality greater certainty about the legal and regulatory environment in which the Internet must operate would help further its development and evolution, especially if the light touch regulation under which it has developed is restored. Congress should write net neutrality into law.

An excellent discussion of these issues can be heard in this podcast on the Future of Internet regulation with FCC chairman Ajit Pai