issue: Digital Innovation

The internet as we know it relies on Section 230

Posted on by Alyssa Brown

With the Supreme Court set to take on Gonzalez v. Google this term — a case with momentous implications for the legal viability of internet services as we know them — the fate of Section 230 of the Communications Decency Act is in question.

Section 230 is the statute that grants online platforms protection from liability for the content posted by their users, a fundamental protection that has been integral to the internet ecosystem’s explosive growth. By allowing internet platforms to take down third-party content that they deem harmful to their users in “good faith,” while also ensuring that they are not treated as the publishers of such content, Section 230 is the legal mechanism that has facilitated innovative business models which give a platform to user-generated content, shaping a robust digital economy enjoyed by both consumers and entrepreneurs today.

From a consumer standpoint, these business models provide a plethora of free resources, entertainment, and educational materials. In the case of entrepreneurs, the online creator economy is estimated to be worth more than $100 billion worldwide, with more than 425,000 full-time equivalent jobs reportedly supported by the YouTube platform alone.

In Gonzalez v. Google, however, the central question goes beyond Section 230’s protections for third-party content, asking instead whether the targeted algorithms employed by these platforms enjoy the same protections.

Most major online platforms use data at various levels to recommend content to users, whether by using specific personal or demographic information to tailor the experience to a user’s specific interests, or by presenting users with popular or relevant content at the top of the feed. These automated decisions curate a feed appealing to the user and beneficial to the content creator, whose work is then highlighted to new audiences.

Colloquially, those referring to social media algorithms are most likely referring to the sophisticated code used by many of these companies to target content to their users. However, from a technological standpoint, the term “algorithm” refers to any type of content sorting — whether it be a simpler iteration that might show content ordered chronologically or alphabetically, or the more complex, individually curated version. There is no default method of content sorting, meaning that every company or developer must choose an algorithm to sort content. The only difference lies in the complexity of the algorithm they chose to employ.

It is difficult to draw legal lines around this complexity. For example, if a platform lists a seemingly harmful piece of content first, thus making it the most obvious choice for users to select, are they liable for that content only if proven to be the result of a curated algorithm, or are they also liable if the reason it is listed first is that the feed is shown chronologically? Either way, there is some risk of exposing users to harmful third-party content. Prohibiting one platform’s algorithms — say Google’s — thus doesn’t provide a general solution.

That means the Supreme Court would either have to define algorithms in such a way that only specific types are implicated for liability, or rule that Section 230 liability protections are lost for all types of content displayed online.

Let’s be clear: A court decision that ended Section 230’s liability protections would make hosting third-party content functionally impossible for websites. On YouTube alone there are over 500 hours of content uploaded every minute, making vetting every video prior to each upload a monumental task. The risk of getting sued will lead most companies to conclude that it’s not worth it for them to offer third-party content. And in the case where only data-driven, targeted algorithms are ruled to be exposed to liability, how likely is it that users would sort through 500 hours of content with no curation in hopes of discovering useful information?

Moreover, the ramifications of making all content providers liable to lawsuits will spread across the entire Internet ecosystem, including online shopping, travel sites, and app stores, all of which rely on user reviews that are curated to reduce fakes and “ballot-stuffing.” In an era of deep fakes and sophisticated artificial intelligence chatbots, it’s all the more essential for online platforms to be able to apply algorithms that users can trust.

There’s no doubt that Section 230 raises difficult issues that need to be carefully considered by policymakers. But subjecting online platforms to lawsuits because their algorithms occasionally highlight content that someone objects to would fundamentally destroy the internet economy, while failing to address the threat posed by truly dangerous online content.

The Economic Performance of the Digital Sector Since the Pandemic Started

Posted on by Alyssa Brown

As we move into 2023, the digital sector still faces the key regulatory issues that dominated the previous year: Competition, privacy, and content moderation. But as the legislative, executive, and judicial branches tackle these critical questions, it is important to look back and assess the performance of the digital sector on the key economic metrics of job growth and inflation.

For clarity we split the digital sector into three subsectors:

  • E-commerce/retail (“movement of goods”)
  • Internet/content/broadband (“movement of data”)
  • Computer/communication manufacturing (“hardware”)

 

E-commerce/retail: To compete with e-commerce leaders such as Amazon, retailers with a large physical presence such as Walmart and Target have been scaling up their investment in online sales and fulfillment. At the same time, smaller retailers increasingly use online ordering, so the boundary between “brick-and-mortar” and e-commerce has become increasingly porous.  Moreover, privacy and content moderation issues such as accountability for user reviews impact all retailers. In addition to retail, this subsector also includes local delivery (NAICS 492) and fulfillment (NAICS 493).

Internet/content/broadband: With the advent of social networks and streaming, the line between content creation and content distribution has become blurry. Considerations of privacy and content moderation are high on the policy checklist. This subsector includes content creation and distribution (video, audio, print); broadband and broadcasting; wireless; software; internet publishing and search; and computer systems design.

Hardware: Especially with the funding from the CHIPS Act and the focus on export controls, this subsector is facing a different set of policy issues. We include computer and electronic equipment manufacturing, and related wholesaling.

Job Growth

(Note:These figures have been updated to account for the 2/3/23 revisions to the job data)

As of December 2022, the United States currently enjoys a 3.5% unemployment rate, the same as pre-pandemic February 2020. To a large extent, this strong labor market has been driven by job growth in the digital sector. In total the digital sector added 1.4 million net new jobs from 2019 to 2022,  accounting for 67% of net private sector job gains over the same period. Table 1 breaks down the pandemic job growth by digital subsector.

We see that the e-commerce/retail subsector accounted for net job growth of 926,000 jobs from 2019 to 2022, or 44% of private sector job growth, as consumers embraced online shopping during the pandemic, and retailers and third-party logistics companies built and staffed fulfillment centers.

The internet/content/broadband subsector created 472,000 jobs, accounting for 22% of private sector job growth. Altogether, the digital sector accounted for 67% of private sector job growth from 2019 to 2022.

The importance of the digital sector for job growth is emphasized when we look at production and nonsupervisory workers, who generally are less educated and lower-paid (Table 2). The digital sector has created 1.1 million net new production and nonsupervisory jobs from 2019 to 2022,  while the rest of the private sector has lost almost 500,000 production and nonsupervisory jobs.

In particular, the e-commerce/retail subsector has added 812,000 production and nonsupervisory jobs during the three pandemic years. That’s likely to reflect the growth of e-commerce fulfillment and delivery workers. This gain was essential to the recovery because the rest of the private sector has still not regained its pre-pandemic level of production and nonsupervisory employment.

From the perspective of policy, the current regulatory structure turned out to encourage strong job growth in a difficult economic environment. That’s not to say the current regulations cannot be improved, but we should be wary of making major changes without understanding the consequences for jobs.

Table 1. Digital Sector Drives Job Growth During Pandemic
2019-2022
Increase in jobs, thousands Share of private sector growth
Private sector 2,133
E-commerce/retail* 926 44%
Internet/content/broadband** 473 22%
Hardware*** 22 1%
Data: BLS, PPI calculations

 

 

Table 2. …Especially for Production and Nonsupervisory Jobs
2019- 2022
Increase in production and nonsupervisory jobs, thousands Share of private sector growth
Private sector 665
E-commerce/retail* 812 122%
Internet/content/broadband** 306 46%
Hardware*** 24 4%
Data: BLS, PPI calculations

 

Inflation

Before the pandemic, the digital sector had significantly lower inflation than the economy as a whole, whether measured by producer prices or consumer prices. During the pandemic period, overall consumer price inflation accelerated by approximately 3 percentage points, from roughly 1.5% annually in the pre-pandemic period (2012-2019) to roughly 4.5% annually during the pandemic years (2019-2022).

However, the acceleration of inflation was much smaller in the digital subsectors. For example, inflation in the internet/content/broadband subsector only accelerated by 0.3 percentage points when measured by producer prices, and 1.7 percentage points when measured by consumer prices.

Please note that the BLS does not publish a separate measure of e-commerce inflation for consumer goods and services, which is why that line is missing from Table 4. However, in a 2022 paper written for PPI’s Innovation Frontier Project, Marshall Reinsdorf wrote that “the pandemic greatly accelerated adoption of digital innovations such as e-commerce, so it’s reasonable to suspect that the price statistics are undercounting the impact of low digital inflation.”

From the perspective of policy, it’s reasonable to say that the current regulatory structure allowed digital companies to behave in a way that muted the pressure to increase prices. Especially given the inflationary bias in today’s economy, the government should be wary of making changes that impose large new costs on digital companies.

Table 3. Digital Producer Price Inflation Stays Low
Average annual price increase
2012-2019 2019-2022 Increase in inflation rate, percentage points
Final demand less food and energy 1.7% 4.7% 3.0%
Electronic and mail order shopping services* 1.5% 1.8% 0.3%
Internet/content/broadband** 0.7% 1.6% 0.9%
Hardware*** -1.0% 1.1% 2.1%

Based on median inflation for subsectors with multiple products or industries.

Data: BLS, PPI calculations

 

Table 4. Digital Consumer Price Inflation Stays Low
Average percentage price increase
2012-2019 2019-2022 Increase in inflation rate, percentage points
Consumer prices 1.5% 4.6% 3.1%
Internet/content/broadband** -0.4% 1.3% 1.7%
Hardware*** -7.6% -5.6% 1.9%

Based on median inflation for subsectors with multiple products or industries.

Data: BLS, PPI calculations

Appendix: Categories

In this section we define the three digital subsectors, and which statistical series we use to calculate jobs, producer price inflation, and consumer price inflation for each of them. Please note that for subsector inflation measures, we aggregate multiple price series using median inflation rather than weighted means.

*E-commerce/retail

In previous work, we distinguished between ecommerce and brick-and-mortar retail. That distinction is no longer appropriate, because retailers with large physical presence such as have also been building out their online ordering and fulfillment operations. Moreover, the latest NAICS codes do not break out electronic shopping as a separate industry anymore.

Employment data

  • Retail sector (including online ordering and fulfillment operations for single companies)
  • Couriers and messengers (including local delivery)
  • Warehousing and storage (including fulfillment centers)

 

Producer price inflation data

  • Electronic and mail order shopping services

 

** Internet/content/broadband

In earlier work, we used a narrower definition of tech. As barriers have become blurred between content and distribution, and various modes of distribution, it has become appropriate to broaden the definitions.

Employment data

  • Motion picture and sound recording industries
  • Publishing industries, including software
  • Broadcasting and content providers, including social networks and streaming services
  • Telecommunications
  • Computing infrastructure providers, data processing, and web hosting, including cloud computing
  • Web search portals, libraries, archives, and other information services.
  • Computer systems design and related services

 

Producer price inflation data

  • Bundled access services
  • Cable and other subscription programming
  • Data processing and related services
  • Internet access services
  • Internet publishing and web search portals (including advertising)
  • Software publishers
  • Video programming distribution
  • Wireless telecommunications carriers
  • Information technology (IT) technical support and consulting services (partial)

 

Consumer price inflation data

  • Wireless telecom services
  • Residential telecom services
  • Internet services and electronic information providers
  • Cable and satellite television service
  • Video discs and other media
  • Recorded music and music subscriptions

 

***Hardware

In previous work, we did not split out hardware. But the recent CHIPS legislation, and the focus on rebuilding the U.S. domestic semiconductor industry, means that it is appropriate to break out hardware separately. We note that the employment data includes relevant wholesalers, who may be “factoryless” firms designing and marketing digital products, but not actually manufacturing them.

Employment data

  • Computer and electronic product manufacturing
  • Computer and computer peripheral equipment and software merchant wholesalers

 

Producer price inflation data

  • Communications equipment manufacturing
  • Computer & peripheral equipment manufacturing
  • Semiconductor and other electronic component manufacturing

 

Consumer price inflation data

  • Computers and peripherals
  • Computer software
  • Telephone hardware, calculators, and other consumer information items
  • Televisions

High overall inflation and low digital inflation may spur digitization

Posted on by The Progressive Policy Institute

Will the combination of high cost increases and low digital inflation spur reluctant companies to digitize?

One of the pleasant economic surprises in recent months has been the low rate of inflation for digital goods and services, compared to the overall inflationary surge. The latest producer price report, released November 15, shows that a basket of digital goods and services (described below) had a median year-over-year price increase of 1.9%. By comparison, the overall year-over-year price increase for final demand, less food and energy, was 6.7%.

We wrote about this big gap between “New Economy” digital inflation and “old economy” inflation  in a December 2021 blog item. In June 2022, leading economic statistician Marshall Reinsdorf wrote a paper for PPI examining the continued slow rate of price increases for most digital goods and services.

The growing gap between overall inflation and digital inflation means that the relative price of digital goods and services is falling. To put it another way, in the low-inflation era that preceded the pandemic, many companies  enjoyed the benefit of low costs without having to make expensive and potentially risky investments in digitizing their operations.

Now that easy period is over. Companies are looking at technology as a way out of their high-cost trap. Business spending on software, computers, and communication gear hit an all time high in the third quarter of 2022. The layoffs at companies such as Amazon and Facebook notwithstanding, there’s no evidence that companies in the aggregate are cutting back on tech investment. A survey from Gartner predicts a 5% gain in tech spending in 2023.

Nobody likes inflation. But there may be a silver lining if the threat of rising costs forces companies to take digital steps that should have come years ago.

 

 

 

Our price index of digital goods and services includes:

Bundled access services
Cable and other subscription programming
Communications equipment mfg
Computer & peripheral equipment mfg
Data processing and related services
Electronic and mail-order shopping services
Internet access services
Internet publishing and web search portals
Semiconductor and other electronic component mfg
Software publishers
Video programming distribution
Wireless telecommunications carriers
Information technology (IT) technical support and consulting services (partial)

 

 

 

 

 

Innovation Networking Happy Hour

 

Come network with PPI and DPZ staff about digital innovation policy!

Wednesday, September 28, 6:00 p.m.

DPZ Headquarters

Werftstraße 3, 10557 Berlin, Germany

Join the Progressive Policy Institute (PPI) and Das Progressive Zentrum (DPZ) for a networking happy hour! This is an opportunity for like-minded folks to get together and discuss ways we can improve digital innovation policy while meeting the staff of PPI and DPZ in Berlin.

Digital Decade 2030

Digital Decade 2030

Thursday, September 27, 2022

11:00 a.m. — 12:45 p.m. CET

 Résidence Palace

155 rue de la Loi, 1040 Brussels

 

About this event

Europe has ambitious targets for telco connectivity – and very real investment needs. But what’s the best way to attract the capital Europe so clearly requires? Some say the best idea is a tax or fee leveraged on so-called “content and application providers” to create a unique, two-sided market – generating new revenue streams for telcos but adding additional costs to consumers and content producers alike. Others see an opportunity for the European Commission to build on its landmark approach to modern telecommunications: creating framework conditions that attract investment, open markets to new entrants and drive forward a vibrant European data economy in a triple win for citizens, businesses and government alike.

At this high-level roundtable, co-convened by two leading transatlantic think tanks – The Lisbon Council in Brussels and Progressive Policy Institute (PPI) in Washington DC – leading telecommunications-sector experts will present new evidence and incisive analysis intended to form a backdrop to ongoing debate on Europe’s telco financing needs. Michael Mandel, vice-president and chief economist of PPI, and Malena Dailey, technology policy analyst, will present Funding the Next Generation of European Broadband Networks, a new policy brief comparing telco investment strategies between the U.S. and Europe and asking a crucial question: who got it right?

A High-Level Panel of leading telco experts will chime in with additional contributions on the outlook ahead.

Panelists:

Malena Dailey, technology policy analyst, PPI; co-author, Funding the Next Generation of European Broadband Networks

Michael Mandel, vice-president and chief economist, PPI; co-author, Funding the Next Generation of European Broadband Networks

Konstantinos Masselos, president, Hellenic Telecommunications and Post Commission, Greece; professor, department of informatics and telecommunications, University of Peloponnese; vice-chair (incoming), Body of European Regulators for Electronic Communications (BEREC)

Rita Wezenbeek, director, connectivity, directorate-general for communications networks, content and technology, European Commission TBC

Paul Hofheinz, president and co-founder, the Lisbon Council (Moderator)

RSVP here.

Regulating Tech in the Digital Age: Lessons from China

Regulating Tech in the Digital Age: Lessons from China

Wednesday, September 7, 2022

5:30 p.m. — 8:30 p.m.

Open Gov Hub

1100 13th St NW Suite 800, Washington, DC 20005

About this event

How is China approaching tech regulation? What should policymakers and regulators learn from China’s approach? And how should this impact the way the rest of the global community approaches China?

Join us for an expert panel discussion on tech regulation, geopolitics and globalism. Stay for a reception with light bites and beverages as we bring together the DC tech policy community with the Tony Blair Institute’s London, Singapore and San Francisco teams.

The Panel

Max Beverton-Palmer (Moderator) – Director, Internet Policy at the Tony Blair Institute for Global Change

Xiaomeng Lu – Director, Geo-technology at Eurasia Group

Matt Nguyen – Policy Lead, Internet Policy at the Tony Blair Institute for Global Change

Jordan Shapiro – Economic and Data Policy Analyst at Progressive Policy Institute

Prof. Jing Tsu – Professor at Yale University

 

RSVP here.

Shapiro for The Hill: New Digital Privacy Bills Won’t Protect Women Seeking Abortions

Posted on by The Progressive Policy Institute

By Jordan Shapiro, Economic and Data Policy Analyst

 

Digital privacy laws are not ready for a post-Roe v. Wade future. New bills circulating on the Hill are an important step toward safeguarding Americans’ personal data, but they are not a panacea to protect women seeking an abortion or the friends and family members who might be supporting them, or even just know of their intentions.

It’s no secret that today, personal and health data about human preferences, location, characteristics and behavior are collected through phones, apps, websites, advertisements, internet sites and service providers; if a device is connected to the internet, it probably collects user data. These data are used to provide helpful information and services, but as the United States lacks universal digital privacy protections, firms are solely responsible for data privacy and security.

At the same time, law enforcement has wide latitude to purchase and request personal data from companies. They can obtain a court order about a particular crime and companies are obliged to provide information related to the crime, some companies have made special portals to more easily provide data. Even without a court order, law enforcement can purchase bulk data from data brokers about suspected crimes or general surveillance. These data can contain location information, internet searches queries, among other personal information. Companies can push back but with a court order or subpoena are obliged to comply with law enforcement.

Surveillance of this nature has historically enjoyed wide support as protection against terrorism and other societal harms. But the combination of prolific personal data collection and law enforcement surveillance are predicated on the assurance that data about everyday interactions and behaviors are not under scrutiny by law enforcement. The overturning of Roe v. Wade calls this trust into question.

Read the full piece in The Hill.

Digital Documents as a Tool for Inclusion

Posted on by The Progressive Policy Institute

Photo identification is necessary for modern life. However, more than 21 million Americans do not possess valid ID, and those without home addresses cannot register for state driver’s licenses. Without that physical license, a person can’t get a job, receive aid or health care, vote, or represent themselves in court. Luckily, IDs aren’t the only way to prove identity. Those born in the US have official paper trails through birth certificates and social security cards. To lose these documents and to obtain new copies require paying a fee or appearing in court. How can legislators ensure documents are accessible and protected? The City of Austin Innovation Office’s LifeFiles initiative offers a unique and scalable approach to inclusive documents.

LifeFiles distinguishes itself from global digital ID programs in its decentralized administration and accessibility. In its initial prototype funded by Bloomberg, LifeFiles sought to help people experiencing homelessness gain autonomy over identity documents by creating an official, digital repository of documents like birth certificates. Using a web application, the program was designed for all levels of tech literacy and access: First, by making it accessible from any computer and second, by offering multi-modal sign in methods, password, biometrics, social attestation, or a security question to unlock the documents. Initial testing enabled official free notarization of uploaded documents using blockchain so the digital repository could be used in government settings like applying for a driver’s license or for food and social welfare benefits.

LifeFiles is open source and never collects user data. It uses a combination of blockchain and encryption to secure user documents. Blockchain technology creates an encrypted hash to ensure secure notarization. Then, public-private key infrastructure shares documents, giving an identity verifier the ability to check the blockchain ledger to guarantee authenticity. Decentralized identifier technology (DID) allows these official documents to be accessed via web browser without having a record of identifying information saved in that browser. Technological alternatives to LifeFiles without DID are less secure.

Though piloted as an inclusion tool, digital documents are universally advantageous. User-controlled release of identifying data and encryption make LifeFiles secure and private. The system may also lessen the paperwork burden for individuals and governments through official, centralized, digital storage of essential documents. LifeFiles researchers concluded the program may eventually lower the costs of administering IDs.

The city of Austin’s Chief Innovation Officer, Daniel Culotta, suggests the program could function nationally. Without further grant funding, LifeFiles halted its testing of prototype documents, but the code is still publicly available for replication and scaling. If the government administers the program, onboarding is as simple as volunteer-led document uploading clinics.

This pilot has potential to be adopted by many states and localities. Currently there are 47 states including Washington DC where digital notarization is legal. Eventually, widespread adoption of digitized records will save money, and digital copies of birth certificates at the time of birth will prevent the loss of important records later on, all with users’ autonomy over their identities.

LifeFiles is an open-source response to the difficulties citizens face when they lose important documents. If states fully support this approach, it could aid more than 20 million Americans in controlling their identity and accessing services.

 

Digital Privacy in America: How does the ADPPA fit into global privacy legislation?

Posted on by Alyssa Brown

Earlier this month, a bipartisan group of representatives and senators released a discussion draft of a federal digital privacy bill: the American Data Privacy and Protection Act. It has now moved out of committee and, if passed, would create new legal rights for all Americans regarding the collection, access, and security of their personal data.

This is not the only consumer privacy bill considered by Congress, and there may be others. As written, this bill would align the United States with other nations, such as the European Union, that have thus far set global standards for digital privacy. Introduced in 2018, the European Union’s digital privacy law filled an important gap in regulating consumer privacy. Four years on, the data revealing how the law interacts with innovation and whether it succeeds in its goal of protecting consumers is still unclear. This should give US lawmakers pause to potentially explore more creative solutions for digital privacy.

The Progressive Policy Institute released a comparative report providing a general framework for analyzing privacy legislation across three separate but interrelated layers: legal access, security, and innovation.

Legal access defines what rights individuals have to see, access, update, and delete their data. Security describes the technical responsibilities for protecting collected data. And the third level, innovation, addresses how the laws interact with economic growth.

How does the new bill fit into these layers?

1. Legal Rights

If passed, the ADPPA would codify a set of data collection and access rights for all Americans who share data with private companies. It’s important to note that ADPPA does not apply to government collection or storing of personal data. As noted in PPI’s report analyzing countries’ privacy legislation, Canada, the European Union, and the United Kingdom put some controls on government use of data, but China did not.

ADPPA requires firms that collect consumer data to gain clear “affirmative express consent.” Consent for data disclosure is firmly rooted in the European Union’s landmark data protection law, the General Data Protection Regulation. It is typically solicited via checkboxes on web pages, and the bill requires clear, plain language description of data collection needs. Specifically highlighted in the bill is the right for consumers to opt-out of targeted advertising and a prohibition of targeted advertising to children.

Once the data is collected, ADPPA states that individuals have the right to access, correct, delete, and transfer data about themselves, with private companies; China and the European Union provide similar access rights to citizens. How to exercise these rights must be clearly stated in easy-to-read privacy policies.

Overall, the bill provides very similar data rights as other countries. 

2. Security

Global privacy laws typically address security as a principle and design feature, the U.S. bill follows this trend. Without being overly prescriptive, as digital security is highly technical and evolving, it directs data collectors to implement a risk-based approach depending on the level of sensitivity of the data collected. High-risk data includes biometric or genetic information, passport or social security numbers, and private communications like text messages or email.

In line with other data privacy laws around the world, ADPPA requires large data collectors to appoint a data protection officer and to first conduct a data protection impact assessment, which is a plan for data security and risk.

Additional security and privacy measures recommend data minimization (an essential pillar of the GDPR), or restricting data collection to specific uses and deleting data after use. Data minimization is important because if data is not collected or not stored, it can’t be improperly used or exposed. (they direct not recommend, and i write measures and only add one additional measure. Is this bill simply a copy of the GDPR, does it try to be the same thing in the American context. How it relates to the ADPPA discussion.)

3. Innovation

It’s challenging to predict how a privacy law like ADPPA will impact digital innovation. Crucially, a federal privacy law will provide clear guidance for online companies that serve Americans across multiple states. In the current system, where states are passing digital privacy laws only for their residents, a federal law would ease compliance burdens on firms.

Similar to the GDPR, the bill exempts researchers, journalists, and small data holders except for those who derive 50%of their revenue from data sales. However, it does not clarify whether research conducted by big firms for platform improvements or marketing is exempt. The bill’s right to opt-out of targeted advertising and data transfers, which include data sales, may negatively impact certain industries like advertising and data brokers. Additionally, the bill recommends a study for a universal opt-out portal, which could be an innovation, but also could bankrupt the industries that rely on that data.

These provisions have broad implications for the data economy and should be evaluated carefully. Notably missing from the bill are recommendations for studies of other privacy-preserving technologies or security technologies. To assess the full impacts on innovation it requests an economic impact study five years after the enactment of the Act.

Conclusion

This draft bill is the newest of many privacy bills to be considered by Congress. Many of its provisions mirror the GDPR, as many global privacy laws do, with a major exception that this law does not apply to government data collection.

A key point of consideration for American legislators as they consider this bill is that it replicates many statutes from the GDPR. Enacted in 2018, we still don’t yet know the full impact of regulations like the GDPR on long-term digital innovation or whether its consumer protections are effective, but more information is coming out all the time. A new study from the University of Oxford in 2022 found that small business profits were most affected by the GDPR regulation. A National Bureau of Economic Research study found that the GDPR decreased the number of apps on the Google Play app store and depressed new entrants into the app market. As of the writing of this post, this author found no data detailing the state of data breaches since the introduction of the GDPR.

It’s undoubted that consumers deserve enhanced transparency and protection of their personal data online. If ADPPA passes, it would provide new data collection and protection rights for Americans which is an essential step toward digital privacy. But remember that the United States has a unique and strong innovation culture that is not necessarily well-reflected in the GDPR and other similar global privacy legislation. Those approaches shouldn’t be the only model being considered by lawmakers to enhance digital privacy. Congress has the opportunity to use existing research and data on alternative privacy-protecting technologies and ideas to set new global standards.

To prepare for the future of the digital economy, we need to increase chip manufacturing

Posted on by Alyssa Brown

Congress has the opportunity to increase chip manufacturing in the United States through the United States Innovation and Competition Act from the Senate, or the America Creating Opportunities for Manufacturing, Pre-Eminence in Technology and Economic Strength (COMPETES) Act from the House. Unfortunately, a stalemate over semi-unrelated trade provisions in the bill are preventing its passage, delaying $52 billion in funding provisioned to increase production in the United States. Continued stalemate is bad news for the future of the American economy.

Computer chips, or semiconductors, live in almost every electronic device we use on a daily basis. They’re needed for cars, cellphones, medical equipment, and national security. The growing thirst for chips came to a head in 2021 and 2022, when a national shortage drove up the prices of cars and other essential electronics.

The United States is the main designer of semiconductor chips with almost 50% of global sales, according to the Department of Commerce. But designing the chip is not the same as actually building it. Despite the dominance of U.S. design, only one U.S.-owned semiconductor foundry, or factory, exists in the United States, run by Infineon in Minnesota. Surprisingly, the U.S. lost its once supreme position in semiconductors by not investing in semiconductor “fabs,” leading it to only produce 11% of global semiconductors in 2019. Instead, Taiwan is the global leader in semiconductor manufacturing with two of the largest semiconductor foundries in the world, UMC and TSMC.

Moreover, the U.S. has fallen behind in two distinct ways. U.S. companies have fallen behind in the cutting-edge technologies that are used to make the “advanced” chips that power smartphones and game consoles. TSMC and Samsung are the only general-use chip manufacturers that can produce the most advanced chips.

Meanwhile, the U.S. has also not invested in the facilities that make the “mainstream” chips that power, among other systems, speedometers or car brakes. Chips for cars, while easier to manufacture, are cheaper and have a lower profit compared to smartphone and computer chips, which are the state-of-the-art versions that drive innovation in computing capabilities.

Chipmaking requires a lot of investment, resources, and research and development to keep up with the needs of computing. The global chip shortage demonstrated the challenges for digital societies in keeping up with demand; the European Union passed The European Chips Act in February 2022 in response to the shortage.

Congressional leaders have been negotiating to discuss differences in the Senate and House bills, which are extensive. Provisions around issues, such as the denial of “de minimis” tariff waivers on small packages from China, eased filing of anti-dumping lawsuits such as those recently targeting solar panel imports, digital trade negotiating goals, energy and research, space, green energy, and more are the subjects of disagreement. In contrast, only one major provision separates the two chambers on chips: PAYGO, with the House in support and the Senate against the budget provision.

In light of the importance of chips for everyday life and for future innovations, resolving the single disagreement over chips is both more pragmatic and necessary to increase American competitiveness and security in this sector.

Why Digital Privacy Is So Complicated

Posted on by The Progressive Policy Institute
EXECUTIVE SUMMARY 
The exact definition of digital privacy is complex, imperfectly aligned with typical understandings of privacy in an analog context. Historically, the vast majority of human actions and interactions existed beyond the scope of surveillance. Today, it’s nearly impossible to go about our daily lives without digital tools that facilitate modern life, but also collect data about individuals. When this growing flood of data is linked to an individual it is called “personal identifying information” (PII), the centerpiece of the debate over digital privacy.

The discussion of digital privacy is complicated precisely because it operates on three distinct but interrelated levels. First, privacy’s social and legal dimensions depend on whether individuals, corporations, or governments are assumed to hold primary rights to personal data collected about those individuals. In Europe, for example, the individual holds primary rights over their data, while in China, the state takes precedence.

The second level of the privacy discussion addresses data use and the technical protection and security of personal information to safeguard it from unwanted intrusion or theft while allowing individuals transparent access to their data. These complicated technical issues arise no matter privacy’s social and legal structure.

The third level of the privacy debate deals with the economics of PII. How does the chosen privacy model interact with innovation and growth? And how can it be assured that individuals get the appropriate benefits from their data?

This paper will lay out the privacy models of the United States, Europe, and China, with smaller sections on the United Kingdom, Canada, and India. For each area, we will discuss the social and legal structure, the technical design of security and transparency, and the economic implications of privacy and innovation. This paper sets out a framework for PPI’s ongoing privacy work. It lays the groundwork for future discussions of privacy legislation in the United States.

DOWNLOAD AND READ THE FULL REPORT

 

Mobile IDs would serve American consumers better

Posted on by The Progressive Policy Institute

How can we move the humble state driver’s license or ID card into the 21st century? Today, U.S. state licenses are the principal consumer ID for day-to-day purposes. They certify identity and age using anti-counterfeiting features and are used to verify driving, or non-driving, privileges.

However, they have two major flaws. First, showing identification cards reveals all personal information to the identifier. If the ID is scanned, personal information is then stored with the scanner. Second, current state IDs are only usable in-person, despite the trend of moving public and private services online. Estimates suggest that in 2022, Americans will be spending 60% of their time online often giving away personal information for every new site or transaction.

However, some states are using existing and well-tested technology to make their state ID cards more useful and more private at the same time without compromising security: digital ID.

Digital IDs are authorized digital copies of a physical card that, using encryption and secure hardware, verify identity without sharing personal details. They bring identity verification from the physical sphere to the digital one, filling a security gap online by offering verifiable, and private, identification for public sector benefits and services but also private transactions. In addition, digital ID programs can facilitate greater children’s privacy, by requiring age verification to access certain websites.

On the rise globally, Estonia, Canada, Germany, India, the U.K., and the European Union, among others, already use or have announced digital ID programs.

In the United States, which has no national ID, Arizona and Louisiana adopted programs where residents can digitize their state ID cards. Since its launch in 2016, a million Louisianans use the digital ID accessible from the state’s ID app. Arizona’s digital ID launched in 2022 in partnership with Apple and Google, too, announced a new mobile wallet with digital ID features at Google I/O 2022. Their program, rather than using a state-specific app, allows users to add their mobile ID directly to their smartphone mobile wallet; if Arizona’s model is successful, other states may follow. 

Naturally, there is consumer skepticism that a digital system could be as secure, or more secure, than a physical card. Tying immutable identity characteristics to government databases requires high levels of trust, security, and privacy.

India’s digital ID program has been infamously insecure, exposing the biometrics and unique identity number a million residents. Kenya’s digital identity program was halted by the Kenyan High Court, which ruled that enrolling all citizens in a biometric ID database was illegal without clear documentation of data privacy risk assessment and mitigation strategies. The United States, too, lacks universal privacy protections for citizens.

The U.S. case is different from other digital ID systems as the country has no national ID — the Louisiana and Arizona digital ID pilot do not propose that. In addition, REAL IDs, which are the current gold standard in the U.S. for secure, physical ID cards, are not linked to citizen biometrics or immutable characteristics apart from a photo compatible with facial recognition scans. These features help keep physical ID cards secure. The Louisiana and Arizona mobile ID systems do not capture any additional data that is not already captured by the state Department of Motor Vehicles. In the Arizona case, the digital copy is stored in a smartphone using mobile wallet technology. Personal information is not shared with the phone or service provider.

The digital ID system being implemented by Arizona is based on the same technology that allows consumers to add credit cards to their digital wallets for wireless payments. They require the use of a pin or biometric authentication, and due to dynamic encryption, which assigns a unique, random number to every transaction, are more secure and private than a traditional card. If a phone is lost, it can be remotely wiped, and users will still be able to use their physical credit or ID card. Digital state IDs, using this design, could be used in any situation where identity verification is required but need not be revealed, like traffic stops, in bars, with the TSA, and even in online shopping or website sign-up, all while keeping user identity secure.

ID cards are essential tools to verify access to services. In their current form, they require giving away personal information without giving users a way to securely identify themselves in a crucial modern space: online. Mobile IDs bridge this gap and, with appropriate security and privacy measures, can serve consumers more effectively than standard ID cards alone.

 

How do mobile wallets work?

Tech and Telecom Prices Still Resist the Inflationary Surge

Posted on by The Progressive Policy Institute

When we look back on this period, a big inflation story will be the dog that didn’t bark. While prices for traditional goods like energy, food, and autos have skyrocketed, digital economy inflation has remained almost non-existent.

This relative lack of inflation in the tech, broadband and ecommerce worlds — including ecommerce margins — is a stunning phenomenon that deserves a lot more attention than it is getting. Why are these companies holding the line on inflation when old-line industries are bingeing on double-digit price increases?

One real possibility is that innovation and investment in the digital sector may have a dampening effect on inflation. Basic economics tells us that when tech and telecom companies spend tens of billions of dollars to create new capacity and deploy new technology, it’s going to be hard for anyone to raise prices, including themselves. PPI’s Investment Heroes report from last year showed that eight out of the top 10 companies in terms of domestic capital spending — Amazon, Verizon, AT&T, Alphabet, Intel, Facebook, Microsoft and Comcast — were in the tech, ecommerce, and broadband sectors. PPI has not yet done the most recent Investment Heroes report, but it’s clear that massive spending on information technology, 5G networks, and ecommerce fulfillment centers is holding down digital prices.

Let’s take a look at the data from the January 2022 Producer Price report, released February 15. Overall, this report show relatively high inflation, with final demand prices up 9.7% over the past year, and the prices of final demand less food and energy up 8.3% (the last line of the table below).

But in the middle of this price surge, tech and telecom prices showed relative small increases or even decreases. The table below compares pre-pandemic inflation (January 2019 to January 2020) with the most recent year (January 2021 to January 2022).

We see that in the latest year, the producer price of cable and other subscription programming, internet access services, and data processing and related services are all falling. The producer price of wireless communications is basically flat (we note that the consumer price of wireless is down by -0.5% over the past year, consistent with the picture painted by the producer price data).

Margins for electronic and mail order shopping services are rising at only a 1.1% rate (we’ll discuss these further below). Prices for advertising sales by internet publishers and web search portals are rising at a 3.5% pace, only slightly faster than the pre-pandemic inflation rate of 3.4%.  Relative to January 2015, prices for advertising sales by internet publishers and web search portals are down by 16.9%.*

The one major exception to the low inflation story is the producer price of computer and electronic product manufacturing, which did take a substantial jump, probably in part because of supply chain disruptions.

 

Tech and Telecom Producer Prices Show Very Little Inflation
(change in producer prices)
Jan19-Jan20 Jan21-Jan22
Cable and other subscription programming 2.8% -1.8%
Internet access services 0.5% -1.3%
Data processing and related services 3.0% -0.3%
Wireless telecommunications carriers 0.2% 0.1%
Information technology (IT) technical support and consulting services (partial) 1.4% 0.9%
Electronic and mail-order shopping services 1.4% 1.1%
Software publishers -0.9% 1.1%
Wired telecommunications carriers 2.4% 2.6%
Internet publishing and web search portals – advertising sales 3.4% 3.5%
Computer & electronic product mfg 1.3% 4.1%
Comparison: Final demand for goods and services less foods and energy 1.6% 8.3%

 

For retail industries, the BLS collects “margin” prices, which is the selling price of a good minus the acquisition price of the good.  A bigger margin indicates that the retailer is either getting a higher profit, or having to cover increased costs for labor, energy, and other inputs.

The chart below shows that in the year ending January 2022, overall retail margins rose by 11.3%, a big jump over their pre-pandemic rate of 1.7%. General merchandise store margins rose by 10.3%, while the margins of motor vehicle and parts dealers rose by almost 25%.

Note that this increases could reflect the higher cost of running brick-and-mortar establishments during a pandemic, or they could reflect higher profits. But what is clear is that ecommerce margins have barely rose in the year ending January 2022.

 

 

 

*I looked at long-term trends in internet and print advertising prices in a 2019 paper, “The Declining Cost of Advertising: Policy Implications.”

 

American Innovation Under Threat

Posted on by The Progressive Policy Institute
Restrictive Legislation and Global Competition
SUMMARY

A package of antitrust legislation recently introduced in Congress aims to improve competition in the U.S. technology sector. The proposed provisions in these bills would limit digital platforms’ ability to integrate product features, promote new products, or even compete in new market segments.

We conclude that such restrictions will harm U.S. scientific and technological leadership, hurting U.S. competitiveness and living standards.

Antitrust regulations that reduces commercial scale and product scope weaken incentives for corporate research and undermine the ability to innovate.

We highlight how these limitations may affect American scientific and technological leadership in the world. We also consider the role of information technology firms in advancing U.S. technology, the foreign competition they face, and the fragile nature of the U.S. innovation ecosystem.

You can download and view the entire slide deck by visiting the Innovation Frontier Project’s website.

Innovation, Free Apps, and the App Store

Posted on by The Progressive Policy Institute

Tech platforms should be judged on how well they foster consumer welfare, innovation, investment, productivity and job creation.  Sometimes these values will conflict with each other, but they provide a good framework for thinking about the benefits and costs of platforms that go beyond the usual antitrust issues.

From that perspective, a recent opinion piece in Wired levies a criticism of the current design of Apple’s App Store that is important, if true. The authors, the legal director of Public Knowledge and then executive director of the Coalition for App Fairness, argue that when “Apple demands 30 percent of developers’ revenue, it limits their freedom to offer novel and innovative customer experiences.” They go on to say that the “biggest loss” from the App Store “has nothing to do with developers and users who have to work around Apple’s restrictions—it’s those apps and services that don’t exist at all because app store rules make them impossible.”

However, this criticism—that the pricing structure of the App Store results in too little app innovation and too few apps–is an odd one. As of the end of 2020, the App Store stocked 1.8 million apps. According to marketing research firm Sensor Tower, 85 percent of those apps were “free” to users, in the sense developers did not charge for downloads or  collect in-app charges.

But note that these apps are “free” to developers as well, in the sense that Apple receives no other revenue other than the fee for the developer account ($99 per year for an individual account, with a waiver for nonprofits, accredited educational institutions and government entities that will distribute only free apps ). This pricing structure creates very low barriers to entry for new apps, spurring both innovation and competition.

Free apps are responsible for much of the consumer welfare, innovation, investment and job creation enabled by the App Store. For example, consider the banking apps which are offered by virtually every large and small bank today. Despite the large amounts of financial transactions flowing through these apps, they fall into the “free” category to both consumers and the banks. Banking apps were absolutely essential during the pandemic, enabling customers to do banking transactions including depositing checks, without having to go into branches.  Indeed, banks compete to see what new functions can be added to their apps to make them more useful for their customers.

Another growing category of free apps are designed to control and interact with connected devices–the “internet of things.”  These connected devices can be anything from electric bikes to power tools to automobiles to smart homes to agricultural sensors. The variety is nearly infinite, but one common characteristic is that their associated apps are directed toward innovation and making the connected device more useful.  These apps are often a key selling point for the product, with the customer getting them as part of the purchase rather than paying to download separately.

Free apps also run the gamut of nonprofit organizations, from innovative educational organizations such as Khan Academy to nonprofit health service providers such as Kaiser Permanente to churches and other religious organizations.  Donations can be made through these apps as well.

In an era of rampant ransomware and supply chain attacks, a free or nearly-free distribution channel that is carefully vetted for malware would seem to be a plus for innovative apps. Especially as the internet of things becomes more important, apps associated with connected devices will become the leading edge of innovation.  Despite what the authors of the Wired piece argue, the pricing structure of the App Store fosters rather than impedes innovation and creativity.

 

 

Why A Digital Advertising Services Tax Will Undercut the Small Business Recovery: The Maryland Case

Posted on by The Progressive Policy Institute

EXECUTIVE SUMMARY

As of November 2020, employment in Maryland was down more than 4 percent compared to a year earlier. Small businesses are suffering. Nevertheless, the state’s revenues for the 2021 fiscal year are coming in better than expected in spring 2020, buoyed by federal stimulus and continued employment of white collar workers.

Under the circumstances, enacting a new tax that would be especially harmful to small businesses seems like a mistake. However, in spring 2020 Maryland state legislators approved a new tax on annual gross revenues derived from digital advertising services in Maryland, with the proceeds to be devoted to education. The bill, which broadly covered “advertisement services on a digital interface,” was vetoed in May 2020 by Governor Larry Hogan, with the veto potentially in line to be overridden by the state legislature in the session that began mid- January 2021.

In this paper we will explore the economics of digital advertising and the economics of a digital advertising services tax, with special attention to Maryland. We make four main points:

  • The price of digital advertising has fallen by 42 percent since 2010 across the United States. This decline has fueled a sharp reduction in ad spending as a share of GDP.
  • Our calculations suggest that the falling price of digital advertising is saving Maryland businesses and residents an estimated $1.2 billion to $2 billion per year, based on the size of the state’s economy.
  • Passing the digital advertising services tax is likely to reduce the cost benefits of digitaladvertising to Maryland businesses and residents. In particular, the tax will drive up the price of help-wanted ads in Maryland, making it harder to connect unemployed Maryland residents with local jobs. In addition, employers will rely less on public ads and more on personal connections with friends and family, disadvantaging less- connected groups such as minorities and immigrants.
  • Raising money for education is a worthwhile goal. But the appropriate source of funds are broad-based taxes such as sales tax or an income tax, rather than a narrow and distortionary tax on one small but vital segment of the economy. In addition, moving to a combined corporate income tax framework could help reduce income shifting and increase tax revenues.

 

THE ECONOMICS OF DIGITAL ADVERTISING

Before discussing the particulars of the Maryland digital advertising tax, we’ll consider the broader economics of digital advertising. Prior to the widespread use of the Internet, the legacy media–newspapers and local television and radio stations– had a near-stranglehold on local advertising. Newspapers, especially, used that market power to raise advertising rates, because local retailers and other businesses had no other good alternatives if they wanted to reach nearby consumers. According to data from the Bureau of Labor Statistics, the average price of newspaper advertising tripled between 1980 and 2000, rising far faster than the overall consumer price level (which doubled over the same period).1

As a result, businesses had to pay increasingly large sums for consumer-oriented advertising in the pre-Internet days. For retailers, restaurants and other local businesses who wanted to reach new customers, there were few viable alternatives.

Equally important, local employers had to shell out for “help-wanted” ads in newspapers in order to find good workers. Newspapers could and did jack up the price of these employment ads because businesses—especially small businesses—had no other way to reach potential employees before the era of digital advertising.

When we look back to the era before digital advertising, it is stunning how newspapers used help-wanted advertising as a high-priced cash cow. Consider, for example, the price of help-wanted ads in the Washington Post before the widespread use of digital advertising. In 1980 the Washington Post charged potential employers $1.98 for a single line in an employmentclassified ad, placed a single time in a dailyedition.

By 1990 the price of that same single line in a Washington Post help-wanted ad had risen to $6.70, a 240 percent increase. The price increases continued for the next decade, with the price of a line in a help-wanted ad rising to $11.06 by 2000, another 65 percent gain, far exceeding the 34 percent increase of the consumer price index over the same period.2

These ads were expensive—running just one five-line help wanted ad for just one week in 2000 would cost around $85, without volume discounts and including the more expensive Sunday edition. Small businesses who did not have their own HR departments, especially, had no other choice except to pay big bucks to the newspapers in order to hire.

Employers got huge price relief as the Internet became more important. Rather than being forced to run high-priced ads in newspapers, they could shift their help-wanted ads to online portals such as Craigslist, Monster.com and Indeed.com, which were both much cheaper and much easier for jobseekers to search. For comparison, today a Craigslist job posting in the DC area—which gives employers a full paragraph to work rather than just five lines–costs $45 for 30 days (Baltimore is priced at $35 per ad).3

Since 2010, the overall price of digital advertising has fallen by 42 percent, according to the BLS. (That figure excludes print publishers such as newspapers.). By comparison, the price of newspaper advertising, both print and digital, is down by only 7 percent since 2010.

This drop in price for digital advertising has been a tremendous boon for businesses, especially small businesses like restaurants and retailers, who used to have a limited set of options for consumer advertising. Businesses of all typesnow find it much cheaper and easier to post help wanted ads and find qualified help.

On a macro level, businesses and consumersare benefiting from the lower cost of digitaladvertising. In 2019, advertising amounted to about 1 percent of gross domestic product (GDP). That’s down from 1.5 percent in 2000, and an average of about 1.3 percent in the 1991-2000 period.4

In other words, the shift to digital advertising has lowered ad spending by about 0.3-0.5 percent of GDP. This is money that goes directly into the pockets of businesses and consumers.

What about Maryland? According to the Bureau of Economic Analysis (BEA), Maryland’s state GDP was roughly $400 billion in 2019.5 Applyingnational figures, that suggests digital advertisingis saving Maryland businesses and consumers about $1.2-2.0 billion per year.

IMPACT OF DIGITAL ADVERTISING TAX

Keeping in mind the lower price of digital advertising, what economic impacts would we expect from the proposed digital advertising services tax? H.B. 732 proposed a new tax on the annual gross revenues derived from digital advertising services in Maryland. The tax rate would vary from 2.5 percent to 10 percent of the annual gross revenues derived from digital advertising services in Maryland, depending on a taxpayer’s global annual gross revenues. To be required to pay the tax, a taxpayer must have at least $100 million of global annual gross revenues and at least $1 million of annual gross revenues derived from digital advertising services in Maryland.

Note that this is a tax on gross receipts, a type of state tax that has been judged by economists as intrinsically problematic.6 Gross receipt taxes are exceptionally sensitive to market structure, since the tax can be theoretically applied at each stage of the advertising production and sales process, which could lead to double (or multiple) taxation. In this case, the Maryland tax authorities will have to determine the “real” seller of the digital advertisements, which in many cases is not obvious.

Note also that the legislation does not actually specify what it means for digital advertising services to be “in Maryland.” That task is left up to the state’s Comptroller. But it seems clear that at a time when users are increasingly concerned about privacy, the legislation will effectively force advertisers to identify the location of people who view or click on digital ads. That is a move in the wrong direction, and might even violate the laws of some states or countries where the digital advertising companies are headquartered.

Because the digital advertising services tax, as proposed, is a tax on gross receipts rather than income, it has the potential to badly hurt profit margins. Consider Yelp, for example, the well-known company whose mission is to connect consumers with local businesses. As reported in Yelp’s 2019 annual report, the company has global revenues of $1 billion, virtually all fromdigital advertising, and an after-tax profit marginof 4 percent. Since Maryland accounts for 2 percent of U.S. GDP, that suggests Yelp’s Maryland revenues are $20 million, well over the threshold for applying the 10 percent tax rate in the proposed legislation.

The implication is that the proposed digital advertising services tax could turn Yelp’s Maryland business into a money-losing proposition. That’s insane. Yelp’s only options would be to either withdraw from the Maryland market or significantly raise its advertising prices (which would be difficult to do in a competitive market).

Whether digital advertising companies raise their rates or withdraw from Maryland, it would be bad news for local businesses trying to recover from the pandemic recession, and bad news for consumers who would just be crawling out of their pandemic-induced depression. Using digital advertising, owners are able to reach customers, showcase products, even confirm they are still open. Raising the price of digital advertising and reducing its availability could help slow those recovery efforts.

Or consider the impact of the proposed tax on “help wanted” postings. Since these ads have to identify a location of the job, it will be easy to connect the receipts to Maryland. Clearly what will happen is that Craigslist and other job sites will likely put a surcharge on Maryland- based help-wanted ads to account for the digital advertising services tax. The implication is that advertising for a job in Maryland will be more expensive than it was prior to the tax. That may even put Maryland employers at a disadvantage in attracting talented workers.

At the margin, Maryland employers will reduce their purchases of digital help-wanted advertising. In that way, the introduction of a digital advertising services tax will slow down the rate of hiring in the state.

The other likely effect is that employers will rely more on personal networks such as friends and family to fill positions, rather than advertising on the open internet. This is bad news for groups that are less well-connected, such as low-income workers, minorities and immigrants.

THE NEED TO RAISE REVENUE

Some people argue that taxing advertising to pay for education is a good trade-off for society. After all, the benefits of education are undeniable, while advertising is annoying to many people.

But advertising does have the virtue of allowing consumers to uncover cheaper and better goods and services, and aiding jobseekers in finding better employment opportunities. Recent economic research has actually looked at the plusses and minuses of taxing or fining advertising and transferring the proceeds to low-income workers.7 Calibrating the model using real world numbers, they found that the “advertising equilibrium modeled is surprisingly close to being efficient.” The implication, at least from the initial research, is that taxing digital advertising doesn’t gain much.

What are the alternative sources of revenue for education in Maryland? There is now the possibility of additional state support packages from the federal government in 2021. And in terms of taxes, without delving deeply into details, economists believe that the best taxes are broad and non-distortionary. That would argue in favor of increasing the top tier of the Maryland income tax, now set at 5.75 percent for taxable income over $250,000, especially since many high-income individuals have done well during the pandemic recession. Such an increase would raise revenues without imposing large deadweight losses on the state economy.

On the corporate income side, one possibility is for Maryland to shift to a system of “combined filing” for state corporate income tax. That would treat a parent company and its subsidiaries as one entity for state income tax purposes, according to the Center for Budget and Policy Priorities, “thereby helping prevent income shifting” and potentially raising money.8

By comparison, a tax on digital advertising would dampen the ability of Maryland businesses to reach out to customers precisely at the time when it is needed—coming out of the pandemic recession. Small Maryland businesses trying to regain their customers need as much access to digital advertising as possible. Putting a tax on digital advertising is like taxing the future—and that’s never a good idea.