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Ehrlich: The Wrong Way to Enact The Wrong Policy — The FCC’s No Good, Very Bad Day

“This is no more a plan to regulate the Internet than the First Amendment is a plan to regulate free speech,” said Federal Communications Commission Chair Tom Wheeler, whereupon he cast the deciding vote for the most far-reaching plan ever developed to regulate the Internet.  Let’s hope he isn’t in charge of the First Amendment, too.

As a veteran of the Clinton Administration, whose policy of light regulation set the stage for today’s burgeoning Internet, Wheeler’s decision is a disappointment, to say the least. This Administration – an administration that in almost every other aspect I support – is shackling the Internet in a regulatory straitjacket designed for the monopoly phone system eight decades ago in order to implement “net neutrality.”  It isn’t going to be a very good fit.

Neutrality is the idea doctrine that everything on the Internet should travel at the same speed, whether it’s a high-definition concert or video game, a signal from a remote heart monitor, an email to Aunt Tilly, or a video of a cat playing the xylophone.  Advocates prefer this “one size fits all” approach to letting the market decide how price and quality should be lined up, much the same way Sears does when it offers the consumer “good,” “better,” and “best.”

But advocates – often paid by the big Internet sites who like the Internet just like it is, thanks – have conflated this issue and used language as surreal as Wheeler’s, claiming this market-based process is equivalent to letting service providers throttle or impede the traffic they don’t like, or asserting that “priority” service will kill the innovative Internet, as if first class travel killed air travel or Priority Mail ended daily delivery to the home.

But it’s one thing to implement a mistaken policy.  It’s even worse to do so in a mistaken way.  Right now, as we speak, there is a bipartisan effort underway in the Congress that would enact the core protections of “neutrality,” but would do so by statute, period, full stop, as opposed to the long and tortuous road today’s decision will find itself on when it is challenged (and probably overturned) in the Courts.

The difference is important.  Aside from eliminating the possibility of legal challenge, The Congressional route would eliminate the regulatory baggage that today’s “reclassification” potentially allows.  For example, the FCC can force a provider of a phone-like service to offer their infrastructure to competitors at government-reviewed prices, and can even regulate prices generally.  Chairman Wheeler says the FCC will “forebear” these extreme regulatory prerogatives, but if he’s serious about that, then why not embrace a Congressional law that makes that clear?

What I fear, and fear greatly, that the advocates for “reclassifying” the Internet as a phone-like service really want more than “net neutrality” – they want the Internet to be a public utility for all purposes.  After all, they might argue – and some have, calling on us to emulate failed public-sector Internets in places like Australia – the Internet is just so damned important that it needs to be under public control.

Yes, the Internet is important.  So is food, but we let farmers grow it.  And the Internet is not at all like public utilities we’ve known, like electricity and the old phone system.  The Internet is not a series of “dumb pipes” that blindly carry content the way the phone system was a “dumb system” that just closed circuits or “dumb wires” carried electricity.  It’s a complex system that requires management and that doesn’t tolerate “busy signals” or “brown outs” if there’s overload.

But more importantly, unlike electricity or phones, there are many ways to provide broadband connectivity in the market today.  Virtually every household in America now can receive broadband from three or four sources – from cable systems, from fiber or, when fiber isn’t there, from ever-improving DSL over the old phone lines, from mobile sources (in which we are the world’s leader), or from satellite, often the last alternative, but usually an acceptable one.

What the “public utility” view really argues is that the government should pick one of these, or some combination of these, to meet our broadband needs rather than letting this competition play itself out, which is something like deciding the winner of a ballgame in the middle of the second inning.  It’s this very “platform competition” that has allowed the U.S. to vault past most of our industrialized competitors, certainly those that don’t crowd their populations into cramped apartment blocks that are cheap to wire.  Is that what we, as Democrats, really want?

There’s still time to adopt a legislative compromise, achieve the “neutrality” objective, and put the issue to bed for good.  And if the making of sound policy doesn’t move my Democratic friends, consider this:  A future Republican President is elected and announces that the FCC will change course and go back to the framework first laid out by President Clinton.  Without a statute in place, there is nothing to prevent President Jeb, Rand, Ben, or whomever from putting net neutrality on the shelf and leaving the Internet without even the most basic consumer protections most would agree are necessary.

And during the debates leading up to that election, President Rick or Rick or Carly will look over at Secretary Clinton and ask if the Clinton Administration made a mistake when it championed the 1996 Telecommunications Act and brought over a trillion dollars of investment in to build the Internet.

If good policy doesn’t move you to accept the legislative solution, perhaps that unfortunate political outcome will.


Why GDP and productivity growth may be underestimated

On Friday, the very fine economists at the Bureau of Economic Analysis will release their estimate of fourth quarter GDP growth.  Current estimates peg the US economy’s growth at roughly 3% for the quarter.

But here’s the rub:  The rise of the data-driven economy means government economic statistics may significantly understate US GDP growth and productivity growth. Official numbers are afflicted by huge and growing blind spots that increasingly distort the published figures.  To summarize, we are building a mammoth data-driven economy that, perversely, is only partly visible in the economic data.

To give just one simple example:  As of January 29, the official statistics report that the real value of of Internet access consumed by households has fallen by 5% over the past year.   The official statistics also report that real value of cable and satellite television and radio services has fallen by 2% over the same stretch.  And supposedly the real consumer value to households, as measured by the government, of mobile, cable, and internet access together has risen by a measly 0.4% over the past year.

These numbers can’t be right (for more of the theory here, see PPI’s 2012 paper “Beyond Goods and Services:The (Unmeasured) Rise of the Data-Driven Economy” )

Or to give another example, private investment in big data.  All sorts of organization are building up huge data stores with long-term value.  For example, the shift to electronic health records is predicated on the value of that data for lowering health care costs and improving patient treatments. (see, for example http://www.healthit.gov/providers-professionals/benefits-electronic-health-records-ehrs).

In theory, the investment in big data should be reported as part of GDP. Indeed, the BEA has recently started reporting spending on R&D and “entertainment, literary, and artistic originals” as part of investment spending.  And the original researchers on intangible investment did in fact include investment in databases.

However, in practice, the BEA does not include investment in big data in GDP: The tech equipment and the programming, yes, but  not the actual labor and costs necessary to collect and clean the data. For example, when a hospital employs medical coders to clean up their electronic patient records, that coder’s salary is recorded as an expense, but not as a contribution to GDP.  Similarly, the costs of converting from paper to electronic records is not being counted a part of GDP.

The distortion in the statistics from omitting big data is becoming bigger as big data becomes more important.  I cite health care because health care organizations are devoting vast resources to electronic health records, but the same holds for any company collecting big data.

We can list example after example where the data-driven economy is simply missed by the current statistics.  An earlier PPI paper,   Data, Trade and Growth, showed that the government does a terrible job measuring cross-border data flows, because many of them do not leave a monetary footprint. to the extent that the US holds a commanding position in cross-border data trade, this omission may be important for GDP and productivity growth.

Finally, it’s worth noting that reshoring may be artificially depressing the growth and productivity statistics, just as offshoring artificially inflated growth and productivity gains in the early part of the 2000s (this give me a chance to plug a new conference volume edited by myself and Susan Houseman, entitled “Measuring Globalization: Better Trade Statistics for Better Policy“). I will address this point at length in a future post.

 

 

 

 

 

 

 


Press Release: Osborne to Lead PPI Project on Reinventing America’s Schools

For Immediate Release
January 21, 2015

OSBORNE TO LEAD PPI PROJECT ON REINVENTING AMERICA’S SCHOOLS

WASHINGTON, D.C.—David Osborne, co-author of Reinventing Government and other highly regarded books on public sector reform, will direct a new Progressive Policy Institute (PPI) Project on Reinventing America’s Schools. The project will examine K-12 innovation, with a special focus on the emergence of new governance arrangements that allow for more school and teacher autonomy, tailored instruction to diverse student needs, and greater accountability to the public.

“As one of America’s leading experts on public innovation, David is uniquely suited to lead our work on public school reinvention,” said PPI President Will Marshall. “As our political leaders turn their attention to reducing economic inequality, it’s hard to imagine a more urgent priority than closing the achievement gaps in our K-12 system.”

“I am delighted to be working again with PPI, which played a pioneering role in the public school choice and charter school movements,” said Osborne. “We believe that creating a public education system of charter and charter-like schools is the key that will unlock the door to dramatic improvement, as it already has in cities such as New Orleans, Washington, D.C. and Denver. Our hope is that this research will speed the transformation of school districts throughout the country.”

In an op-ed for last Sunday’s Washington Post, Osborne argued that giving teachers more control would improve school performance and help retain quality teachers in the classroom.

Osborne is the author of the forthcoming book, Reinventing America’s Schools: Creating a 21st Century Education System, and the co-author of five books including: The Price of Government: Getting the Results We Need in an Age of Permanent Fiscal Crisis (2004), The Reinventor’s Fieldbook: Tools for Transforming Your Government (2000), Banishing Bureaucracy: The Five Strategies For Reinventing Government (1997), and Laboratories of Democracy (1988). He has also authored numerous articles for the Washington Post, the Atlantic, the New York Times Magazine, Harpers, The New Republic, Governing and other publications.

In 1993, Osborne served as a senior advisor to Vice President Gore, to help run what the Vice President often called his “reinventing government task force,” the National Performance Review. He was the chief author of the September 1993 NPR report, which laid out the Clinton Administration’s reinvention agenda, called by Time “the most readable federal document in memory.”

The Project on Reinventing America’s Schools is made possible by generous support from the Walton Family Foundation and The Eli and Edythe Broad Foundation.

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Obama’s Muni Broadband Initiative: Bad Economics, Bad Politics

Here are some staggering statistics: Since 2006, state and local real investment in highways and streets has fallen by 22%.  Their spending on sewer systems, in real terms, is also down by 22%. And real investment by state and local governments in water systems has fallen by a stunning 34% (chart below).

Meanwhile, over the same period, private real investment by telecommunications and broadcasting companies is up by 13%, according to statistics from the Bureau of Economic Analysis.

broadband

Why, then, does President Obama want to load yet another spending burden–muni broadband–on localities that are already stretched too thin to cover their existing obligations? On Wednesday the President unleashed a set of initiatives designed to make it easier for cities and towns to build their own broadband networks.   Setting up muni broadband networks certainly has some superficial appeal—apparently creating more competition for private ISPs and offering cheaper rates to poor residents.

But there’s an enormous problem: State and local governments are already  struggling to come up with the funds to maintain the current infrastructure of roads, bridges, sewer and water systems.  Government infrastructure spending in real terms is way down compared to before the recession, leading to potholed roads, leaky water systems, and inadequate sewers.

Meanwhile private investment in telecom and broadcasting has continued to rise, boosting network speeds for both wireless and wired broadband.  Private companies are putting private money into improving the nation’s networks, without any cost to the taxpayers.

So if state and local governments have any spare change—or rather, if they have any of the taxpayer’s spare change—they shouldn’t put it into building broadband networks that would duplicate already existing private networks. Rather, they should fix the roads, bridges, and other infrastructure for which they are legally and politically responsible, and for which there are no private alternatives.

Focusing on rebuilding traditional infrastructure can have big economic payoffs. As Diana Carew and myself noted in a March 2014 PPI policy memo– ”Infrastructure Investment and Economic Growth:  Surveying New Post-Crisis Evidence”–recent studies show that investment in transportation infrastructure can have large positive multiplier effects on the local economy.

Finally, running a muni broadband network is hard and expensive, especially since broadband networks–unlike roads and water systems–need continuous upgrading to keep with technological change.  Does the Democratic party–and local politicians—really want to be on the phone when voters complain about their Internet service? In the end, Obama’s muni broadband plan looks like both bad economics and bad politics.

 


Fixing Shabby America

America’s infrastructure is like a house where the carpets are worn, the shower is leaking, and cracks in the wall let through the winter winds. The average age of U.S. highways and streets now stands at about 28 years, almost double the average age fifty years ago. (That figure factors in the amount spent on repairs and upgrading).

To avoid the U.S. becoming a shabby nation, Congress should act on raising the gas tax.  By itself, that won’t solve America’s infrastructure woes. But at least we can patch the biggest cracks.

shabby

 

 


Congress Answers PPI Call, Exempts End-Users From Dodd-Frank

The Senate voted 93-4 Thursday to reauthorize the Terrorism Risk Insurance Act (TRIA) for six years. The legislation, which is expected to be signed into law by President Obama, includes a provision exempting “end-users”– non-financial institutions, such as farms, ranches, manufacturers, small businesses, etc.– from certain inadvertent regulations imposed by the 2010 Dodd-Frank Wall Street reform law.

In a 2011 policy brief, The Risks of Over-Regulating End-User Derivatives, PPI Senior Fellows Jason Gold and Anne Kim warned policymakers to be wary of these unintended requirements as they implemented the law and called on Congress to rectify the issue:

No one doubts that the abuse of some forms of exotic derivatives contributed to the systemic risk that led to the 2008 crisis. But derivatives are an important tool used by major American manufacturing and service companies (“end users”) to manage and protect against risks—not create them. These derivatives contribute little—if anything—to systemic risk.

Federal agencies are nonetheless contemplating regulations that could put the conventional derivatives companies use to hedge against risk in the same categorical box as the speculative trades or trades done by systemically risky firms, even though Congress did not intend for this to occur.

Subjecting these derivatives to the same limitations as riskier speculative trades—such as by imposing “margin” requirements and other overly tough regulations—would unnecessarily burden American companies. It would tie up capital that would otherwise be directed to investment and hiring, drive up the cost of producing goods and services, and ultimately cost American jobs. Ironically enough, the result would be to create more potential risk for the economy, not less.

As we emerge from the worst recession in generations, policymakers are confronted with the dual task of implementing regulations that promote private sector economic growth while also mitigating systemic risk. Sensible regulations to deal with end-user derivatives and the companies that use them are an important piece of meeting this challenge.

See: The Risks of Over-Regulating End-User Derivatives.


The Permanent Campaign: Lowlights of 2014

It’s time for the traditional end-of-year reminiscences of 2014, with plenty of best-and-worst lists for political people.  I’ll fish in with a few lowlights of the political year.

1) Worst primary campaign:  there were too many underwhelming primary campaigns to count, much less list, but you’d have to include on any list the early-favorite Tea Party candidates for the Senate in Georgia, Paul Broun and Phil Gingrey, who finished fourth and fifth; Milton Wolf of Nebraska, whose own issues kept him from taking advantage of an incredibly vulnerable Sen. Pat Roberts; and Lt. Gov. Mead Treadwell of Alaska, who managed to lose both Establishment and Tea Party support to finish third in a U.S. Senate primary.  Democratic Gov. Neil Abercrombie of Hawaii deserves Honorable Mention status for losing his re-election primary by an astounding 66/31 margin.

2) Worst general election campaign: Again, there are plenty of competitors, but Michigan Republican Terri Lynn Land managed to make her Senate candidacy non-viable down the stretch; Oregon GOP Senate candidate Monica Wehby self-destructed with repeated personal problems and gaffes; Maryland Democratic gubernatorial nominee Anthony Brown squandered a huge lead to lose in a heavily Democratic state; and Ohio Democratic gubernatorial nominee Michael Fitzgerald’s campaign completely imploded just as he should have been making a move.

3) Worst candidate moment:  There’s a hands-down “winner” here: Iowa Democratic Senate nominee Bruce Braley’s comments to Texas trial lawyers urging them to keep an “Iowa farmer,” the much-revered Chuck Grassley, from taking over the Judiciary Committee.

We’ll have some more positive memories next week.