Net Neutrality: Pushing on Another Side of the Balloon

80934315-5276900Yesterday I blogged on President Obama’s ill-conceived and statist call for the Federal Communications Commission (FCC) to regulate the Internet so as to prevent Internet Service Providers (ISPs), companies like Comcast, Time Warner, and AT&T, from charging differentially higher fees to Netflix, Amazon Prime, and other broadband “hogs” for subscribers’ access to online content. Here are some additional thoughts.

Because Google and other content providers will likely undermine the monopoly powers of today’s cable-based “gatekeepers” in the near future, it seems odd that “net neutrality” lately has become a clarion call of Barack Obama’s failed presidency. Moreover, the issue is hardly new.

The source of today’s online bottleneck can be traced back to local and regional government authorities, who quickly recognized the benefits (to them personally) of creating and granting exclusive franchises to one ISP that would, for the term of the contract, be a monopolist. (Government officials can extract more rents if they negotiate with only a handful of contestants.) Given that only one ISP would “win” the right to provide online content to local customers, the local monopolists also recognized a benefit of exclusive franchises: They would have the freedom to discriminate against some content suppliers by adding extra fees for privileged access.

So, a simple solution to the absence of net neutrality is readily available: Foster competition between ISPs.

Some people might raise the objection that, in this realm, robust competition for consumer dollars is unlikely because the suppliers of connections to the Internet are “natural monopolists”. In fact, ISPs are not “natural monopolists” as some commentators would have us believe. They are local government-granted monopolies. (Even Frederic Scherer, the author of the influential textbook Industrial Market Structure and Economic Performance, wrote that such claims of “natural monopoly” are “trumped up.”) Competition between ISPs nowadays is a contest for the favors of mayors and city councils who ultimately will determine who will win the exclusive franchise; it is not competition for the business of paying customers.

If public policy were to encourage competition between ISPs at the local level, the debate about net neutrality would die in short order because each of the rivals would have incentives to provide content at the lowest possible price.

“Net Neutrality” Is an Oxymoron When Government Logs On

SnailSpeedPresident Obama released a video on Monday, November 10, asking the Federal Communications Commission to adopt rules that would keep the Internet what it always has been—“free and open.” The buzzword is “neutrality,” meaning that no telecom company or internet service provider (ISP) would be allowed to discriminate against some content providers by charging differently higher fees for delivering text or video recordings to consumers.

In other words, the “pipes” forming the Internet’s backbone would be treated like a “common carrier” and, like any other older economy service delivery platform (public utilities supplying your electricity and natural gas, railroads, and motor carriers), they would be required to provide access to all users on substantially equal terms. Neutrality in cyberspace means that broadband “hogs” (think Netflix or Amazon Prime’s video streaming service) would pay essentially the same fees to reach subscribers that other content providers pay.

Because this issue is still in the FCC’s hands, no one can know for sure what rules the agency will adopt. One important question, though, is: will neutrality apply to wireless services or only to cable-based ISPs, such as Comcast, Time Warner, and AT&T? In addition, will failure to preserve the status quo slow down the speed at which Internet connections and broadband capacity expand (because ISPs won’t be able to shift more of the expansion costs onto the “hogs”)? And what exactly is wrong with ISPs wanting to charge content providers higher prices for more bandwidth and faster, more reliable downloads?

More certain, however, is that regulations requiring “net neutrality” will end up benefiting the large, established ISPs. Incumbent firms have gained from “common carrier” regulation throughout U.S. history. As a matter of fact, the FCC predictably will be captured (if it has not already been) by the very companies President Obama wants to regulate “in the public interest.”

The president’s call to action sounds eerily similar to demands for federal railroad regulation that ultimately led to the creation of the Interstate Commerce Commission in 1887. Until it was put out of business in the early 1980s by President Jimmy Carter, the ICC allowed the railroads and, later, motor carriers and pipelines to charge prices exceeding competitive levels, thereby trying its best to protect the carriers’ profits at consumers’ expense.

The FCC’s chairman, Tom Wheeler, says he prefers a nuanced approach to net neutrality. “What you want,” he told representatives (i.e., lobbyists or rent seekers) from Comcast and other major industry players, “is what everyone wants: an open Internet that doesn’t affect your business.... What I’ve got to figure out is how to split the baby.”

Expect news soon that the baby is on life support or on the way to its funeral. When a politician or regulator claims to have consumers’ best interests in mind, hold on to your wallet.

The Case for Victim Justice

enterprise_of_law_180x270For elected officials eager to find a real problem to fix, here’s a big one that’s seldom mentioned during campaign season: American courts and prisons are plagued with injustices and inefficiencies. One of the main culprits, according to Independent Institute Senior Fellow Bruce L. Benson, is their guiding principle: an emphasis on offenses against the state, instead of infringements against an individual’s right to be secure in his or her person and property. Americans would therefore enjoy more justice at less cost if victims’ rights to restitution were moved for the forefront.

Benson puts forth this bold thesis in his recent article in The Independent Review, “Let’s Focus on Victim Justice, Not Criminal Justice”, and he defends this claim with the same rigor and erudition that made his books The Enterprise of Law and To Serve and Protect landmark contributions to the literature on private law enforcement and dispute resolution.

Focusing on “victim justice” would be easier to achieve, Benson also argues, if society were to embrace the full-scale privatization (not government “contracting out”) of security services, investigations, pursuit, prosecution, adjudication, and sentencing. “The result would be relatively efficient compared to punishment by imprisonment, which imposes huge costs on taxpayers and wastes large amounts of resources in the form of idle prisoners’ time,” Benson writes.

Moreover, privatizing each step—from crime prevention to restitution collection—would likely reduce crime. First, victims would have stronger incentives to report offenses, knowing that their chances of collecting full restitution were greatly improved. Second, recidivism would likely decline because some offenders needing to work off their debts would learn job skills that are in greater demand than those promoted in today’s prisons.


Audio: Bruce Benson on Crime in the U.S. (The Katherine Albrech Show, 10/23/14)

Prison Break: A New Approach to Public Cost and Safety, by Erwin A. Blackstone and Simon Hakim (Independent Policy Report, 6/30/14)

[A version of this post first appeared in the November 11, 2014, issue of The Lighthouse. For a free subscription to this weekly newsletter of analysis and announcements from the Independent Institute, enter your email address here.]

Tap and Track: Not Just for the NSA

The National Security Agency has come under intense scrutiny over the past several years for its warrantless wiretapping and other surveillance tactics. Members of the public have been the subjects of surveillance, as well as a over 120 world leaders, including close U.S. allies like German Chancellor Angela Merkel. Knowing this, the backlash against the NSA may not seem so shocking.

It may be a surprise, however, to learn that the tools and techniques used by the NSA are also being used by state and local law enforcement. In the most recent issue of The Independent Review, my coauthor Chris Coyne and I discussed the origins of domestic surveillance in the United States in “Perfecting Tyranny: Foreign Intervention as Experimentation in State Control.” In particular, we discuss how one can tie the early incarnations of the NSA to U.S. interventions abroad. We argue that once new social control techniques are developed, they permeate throughout the larger system through changes in technology, the skills of workers, and alterations in the broader structure of private and public industry.

One example of how new social control techniques spread domestically is illustrated by the development and use of a device called a “Stingray” or a “cell site simulator.” The Stingray, about the size of a large toaster oven, simulates a cell phone tower, tricking the software in cell phones into transmitting information like the phone’s location and other identifying information. A cadre of federal agencies use these devices in the name of combatting terrorism. In addition to the NSA, the FBI, Secret Service, ICE, ATF, branches of the military, and U.S. Special Operations Command are all known to use Stingrays. The devices allow users to track the movements of a suspect, learn who an individual is contacting, and where they are going.

But the Stingrays have not just been used by federal authorities to “track terrorists” as originally intended. Instead, these devices have seen extended use by state and local law enforcement to track common criminals.

We can debate the merits of tracking everyday criminal suspects with this technology. But consider that these devices don’t impact only the intended target. They also obtain information from other phones in the surrounding area. According to one report by the ACLU,

 “Even when police are tracking a specific suspect, stingrays sweep up information about large numbers of bystanders who happen to be nearby; if stingrays yell out “Marco,” the mobile phones in the area reply, “Polo.” The result is that police gather the electronic serial numbers and other information about phones, as well as the direction and strength of each phone’s signal, allowing precise location tracking. Stingrays can also gather information about people’s communications, such as which phone numbers they call. Because we carry our cellphones with us virtually everywhere we go, stingrays can paint a precise picture of where we are and who we spend time with, including our location in a lover’s house, in a psychologist’s office or at a political protest.”

The most recent reports discuss the use of Stingray technology in Washington, D.C., but it is clear the devices are used throughout the country (you can click the map below for the interactive version).

Screen Shot 2014-10-20 at 5.28.17 PM

What’s more disturbing is that the use of the Stingrays is shrouded in mystery. Local agencies are required to sign non-disclosure agreements with federal authorities before buying a Stingray. As a result, very little information is known about how local police actually use this powerful tracking equipment. Attempts to compel the release of said information have been subverted by the aforementioned non-disclosure agreement.

State and local authorities often cite “combatting terrorism” in the homeland as justification for obtaining more powerful equipment and increasing their stock of materials. This idea of combatting terrorism is often accepted by the general public. It’s important for us, then, to examine whether or not these methods are actually effective. In most cases, they are “effective” only in that they grossly erode personal privacy.

In response to this, people often say, “I don’t care if they track me. I’ve got nothing to hide. If they catch one bad guy it’s worth it.” But what they fail to realize is that, as these types of activities spread, the “bad guys” become the general public. This attitude erodes the critical checks and balances placed on all levels of the government. As the case of the Stingray illustrates, we may be giving up our right to privacy, without the ability to know who, when, and how our rights are being violated.

Saudi Arabia Pressures Russia

Low-prices-of-OilOne remarkable aspect in the recent fall in global oil prices is that Saudi Arabia has not cut production to prop them up. Much of the speculation about why the Saudis have sat by passively and allowed the oil price decline has been that they are trying to undermine higher-cost producers in the US and Canada. A decline in oil prices will make some of that production uneconomical.

While American producers will see their profits fall as oil prices decline, American consumers benefit from lower gas prices. Meanwhile, the oil price decline will hit Russia much harder than the US.

After the Russian intervention in Ukraine, both the US and EU announced economic sanctions against Russia. Those sanctions have had a minimal effect on the Russian economy, whereas the decline in oil prices poses a much larger threat. The Russian economy has been slow to advance in the decades since the Cold War, and has become increasingly dependent on natural resource exports for financial support. The decline in oil prices will hurt.

Among various economic threats thrown back and forth as a result of Russia’s intervention in Ukraine, Russia has threatened to cut off energy exports to Ukraine and the EU, and the economic impact of lower oil prices makes Russia more dependent on that revenue, and so less likely to actually follow through and cut off its exports.

I’d be hard-pressed to claim that pressuring Russia is the reason the Saudis have stood by and allowed global oil prices to fall. They may well have in mind undercutting high-cost American producers, as news analysts have suggested, and lower oil prices also puts pressure on Iran, which may help stabilize the Middle East.

Whatever their motives (and they may be many), it is easy to see that the decline in global oil prices, facilitated by the passive Saudi response, hurts Russia far more than the economic sanctions imposed by the US and EU.

Lesson from the Election: People Want Less Government

6353268_SThe lesson I draw from the Republican victories in the 2014 election is that people want less government. Since 2009 the number of Democratic Senators fell from 58 to 45, the number of democratic House members fell from 256 to 192, and the number of Democratic governors fell from 28 to 18. I’m not the first to observe that these big Democratic losses are directly related to the unpopularity of President Obama’s big government agenda.

But wait... didn’t he come in with a mandate? Both the House and Senate went Democratic in 2006, prior to Obama’s election, and he ran as a big government candidate, more or less. Actually, I’d say less. He ran on a platform of “hope and change,” an anti-Bush campaign. He was running against what he called “the eight failed Bush-McCain years,” rather than running on his own platform. Yes, he talked about health care reform, but mostly, he campaigned against Bush (who. at that point, wasn’t running for anything).

It appears that Bush’s waning popularity in his second term was also a sign of opposition to big government. Bush initiated two wars and a major Medicare expansion, turned a budget surplus when he took office into a substantial deficit when he left, and completely eroded any notion of fiscal conservatism. In 2000 he appeared to be a principled supporter of limited government. By 2006, when the Congress turned Democratic, he appeared to be a big-spending foreign interventionist.

Remember a few limited government promises Obama did make on the campaign trail: end the wars in Iraq and Afghanistan, and close the prison in Guantanamo. Those promises sounded good to American voters, but six years later, they haven’t materialized.

There is more here than just the idea that presidents grow unpopular after six years in office. Both Bush and Obama generated voter backlash because of their big government policies. The problem is that for both Republicans and Democrats, the people who run for office are people who believe the government can solve our problems. If people really do want to curb the power and influence of government, the best thing they can do is vote for divided government and hope for gridlock. That’s what voters did.

The Power of Ideas

11316360-standardToday marks the twenty-fifth anniversary of the most thrilling event of my lifetime: when oppressed individuals came together and laid claim to their birthright of liberty.

Also known as “The fall of the Berlin Wall.”

It wasn’t supposed to have happened this way. “Everyone” knew the Soviet Union was the strongman. The intellectuals dismissed historian Robert Conquest’s portrayal of a corrupt and tyrannous system, and Paul Craig Robert’s prescient exposure of the myth of central planning. Communism was the darling of the western cultural elites.

And yet the change came from no political “messiah,” no elections, no liberating army.

It was simply the full flowering on an idea: individuals latching onto the idea “We are free,” and rejecting the message “You are slaves.” They withheld their consent to be ruled. Their rulers blinked, and utterly collapsed—morally bankrupt.

While those brave souls celebrating at the Berlin Wall may not have appreciated fully the idea that each of us is born with inalienable rights to life, liberty, and property, they embraced the idea enough to peacefully topple the modern era’s most powerful tyrant.

Ought not we as heirs of the Declaration of Independence find it so much easier to claim our birthright and turn back incursions on our liberties?

The State and its claims are just ideas. Liberty is the better one.

Spread the good news, be a shining example of how one lives in community with free and equal people, seize every opportunity of standing and speaking against claims against our liberty. Let’s live purposefully, topple every “Berlin Wall” erected against freedom, and unleash the full flowering of human potential in peaceful, prosperous, and free societies everywhere.

Gordon Tullock and the Transitional Gains Trap

41LaBkV7NCL._SY344_BO1,204,203,200_Gordon Tullock, who died on Monday at the age of 92, was along with his longtime colleague James Buchanan, the founder of the modern field of public choice, which during the past fifty years has become a well-established subfield of economics and of political science and has also had an influence on other disciplines. Tullock himself is most closely associated with the idea of rent seeking, which would have caused less confusion and been more precise if it had been called privilege seeking.

One of his most important contributions, which he expounded in a 1975 article in the Bell Journal of Economics, pertained to what he called the transitional gains trap. This idea helps us to understand, among other things, why government privileges have such durability long after the original rationale for their creation has become irrelevant.

Consider, for example, an agricultural subsidy such as the production controls authorized for lemon producers during the 1930s. This privilege allows the lemon producers to operate, without fear of the antitrust laws, a marketing cartel for their product. This cartel, called a marketing board, restrains the quantity of lemons placed on the market each year and thereby ensures that the product’s price will be higher than it otherwise would be. When this privilege was created, it had the effect of making the land operated by existing lemon producers (i.e., members of the cartel) more valuable. This increase in land value reflects what economists call the capitalization of rents: because the future stream of income expected from growing lemons on the land has been raised, farmers are willing to pay more to acquire the land. Indeed, they will pay so much more that anyone who acquires the land after the cartel has been created will gain no special benefit—no extraordinary rate of profit—from its ownership. Future owners must, so to speak, pay fully for the cartel profits associated with ownership of the land and its employment in growing lemons. All of the true profit from cartel’s creation is captured by those who owned the land at the time the cartel was created.

Now, the Great Depression, which had an especially harmful effect on most farmers, ended long ago, yet many such agricultural subsidies remain in legal effect. Why? Because elimination of the privileges at this point would be harmful to all the existing land owners by causing them substantial capital losses on the value of their land. Any farmer who acquired possession of the land after the privilege had gone into effect gained no profit from lemon production, yet all such farmers would sustain large losses from its elimination. Hence, existing producers are willing to carry out whatever political actions are necessary to bribe legislators to keep the program going (thereby illustrating another of Tullock’s ideas, the deadweight loss associated with rent seeking).

The transitional gains trap is a powerful and (by the general public) little understood idea. For its formal introduction and development in the economics profession, we are indebted to Gordon Tullock.

I got to know Gordon about thirty years ago. I spent time with him on many occasions over the years and worked with him in various editorial and professional capacities. He was an extraordinary person in many ways, and he made contributions of great and lasting value to our understanding of economic and political life. May he rest in peace.

Third Parties Control 83 Percent of Prescription Drug Spending, Up from 52 Percent in 1993

Adam J. Fein of Drug Channels has written a short article describing the evolution of payment for prescription drugs. In just twenty years, patients’ share of payments dropped from almost half of the spending to just 17 percent. Even worse, Fein forecasts, the share will drop to 12 percent by 2023.

Of course, if you look at the first graphic in his article, you see that most of the third-party-payer growth is from government spending, while private insurance shrinks as a share. By 2023, 45 percent of prescription drug spending will be controlled by government.


Does anyone really think that the government will continue to hold back from fixing prices as its share of spending becomes increasingly dominant? This is a time bomb for the pharmaceutical industry.

Even worse, most people who use prescription drugs are capable of paying for them directly: We live in an era of paying $4 for a month’s supply of commonly used medicines. And yet, the truly sick — cancer patients and the like — are stuck with out-of-pocket bills for many thousands of dollars.

This is pretty much the opposite of what health insurance should look like.

Gordon Tullock, R.I.P.

10444565_10153334911167796_5877500791548779174_nMy friend and former colleague Gordon Tullock passed away on Election Day eve at the age of 92.

Gordon was one of the great polymaths of the past more than half-century. Known best as the co-author (with Nobel laureate James M. Buchanan) of The Calculus of Consent: Logical Foundations of Constitutional Democracy (1962), Gordon invented the concept of what became known as “rent seeking” in a paper published in 1967 (the term actually was coined by Anne Krueger in 1974), contributed extensively to the literature of the law (owing to the high error rates of judges and juries in common law regimes, he favored continental civil law processes), and wrote much about the economic behavior of non-human societies (e.g., “The Coal Tit is a Careful Shopper” is one of my favorites). In The Social Dilemma, Gordon explored the benefits and costs of revolutions and coups d’état; he also brought his fertile mind to bear on autocratic regimes, which he observed correctly are much more prevalent in human history than democracies.

Many of us thought that Gordon should have shared Buchanan’s Nobel Prize and, until very recently, held out faint hope that a Nobel would be awarded to him for launching a vast literature extending his rent seeking logic, perhaps jointly with Anne Krueger. Alas, that was not to be.

In addition to co-authoring The Calculus, to which Gordon contributed some of the first applications of game theory to problems of collective decision making, he single-handedly launched the academic journal now known as Public Choice, was present at the creation of the Public Choice Society, and as journal editor fostered the careers of many young scholars by publishing their work. (It is for that reason that the journal’s publisher, Springer, funds the honorarium paid to the winner of the annual Gordon Tullock Prize for the selection by the journal’s current editorial team of the best paper published by a younger scholar in Public Choice.)

Gordon was famous for insulting his friends good-naturedly and not interacting much with people he didn’t particularly like. I count myself as one of Gordon’s friends because not long after I succeeded the late William C. Mitchell as book review editor of Public Choice, he remarked that I hadn’t been doing as bad of a job in that post as he had expected me to do.

Gordon was proud to say that he took only one undergraduate course in economics (taught by Hebert Simon) and that because he had not fulfilled all of his degree requirements prior to being accepted into (and later graduating from) law school, he didn’t even have a college diploma.

It is somewhat ironic that Gordon passed away on the day before Election Day 2014. He was famous for telling anyone who listened that he never voted. He practiced what he preached: voting is irrational, as public choice reasoning explains.

If you have failed unaccountably to become familiar with Gordon Tullock’s incredibly creative contributions to the literatures of public choice and beyond, a good place to start is the 11-volume Selected Works of Gordon Tullock, edited by the late Charles K. Rowley and published by Liberty Fund.