Back in 2012, the Progressive Policy Institute identified the shortfall in business capital spending— or the “investment drought”, we termed it—as one of the major economic problems facing the U.S. economy. As we wrote then, “su1stainable economic growth, job creation, and rising real wages require domestic business investment.”
Unfortunately, three years later, the United States is still suffering from an investment drought. Capital per worker-hour has fallen since 2010, meaning that the average American worker has less equipment, buildings, and software to use, exactly the opposite of what we would want. More worrisome, this is not simply a short-run trend. In fact, the 10-year growth rate of productive capital is only 2 percent, by far the lowest in the post-war era (Figure 1).
Leading economists are increasingly concerned that the weakness in domestic investment is making it hard for businesses to boost productivity, measured by output per hour. The 10-year growth rate of nonfarm business labor productivity is only 1.3 percent, compared to 3 percent as recently as 2005. In a recent speech, Jason Furman, head of the White House Council of Economic Advisers called the decline in prod2uctivity growth “an investment- driven slowdown.”
A 2015 report by the OECD on productivity addresses the recent productivity slowdown and the question of whether it is temporary or “a sign of more permanent things to come.” They assert the importance of innovation for achieving growth, writing “productivity is expected to be the main driver of economic growth and well-being over the next 50 years, via investment in innovation and knowledge-based capital.”
International engagement is integral to PPI’s mission of policy innovation, going back to the “third way” dialogues we helped to launch back in the 1990s. In addition to multiple visits to Brussels and other European capitals over the past several years, PPI went to Australia last summer to unveil a unique study of the “App Economy” Down Under. Underscoring the value of such global outreach, the host for that July 2014 event, Communications Minister Malcolm Turnbull, just became Australia’s Prime Minister.
Extending our efforts in the Asia-Pacific region, we’ve just returned from a fascinating two-week foray to Japan, Vietnam, and Indonesia. Here’s a brief report on our trip, which centered on two new studies of the App Economy in Southeast Asia, as well as our work to support President Obama’s push for the Trans-Pacific Partnership (TPP).
It began on Sept. 7 (Labor Day) in Tokyo, where PPI’s traveling party was briefed by top officials of Ministry of Economy, Trade, and Industry (METI) on Japan’s priorities for the TPP negotiations, Among other things, we discussed TPP’s importance in supporting increased trade by small and mid-sized U.S. and Japanese firms, and we emphasized TPP’s critical role in promoting the cross border data flows on which the global economy increasingly depends.
At the Ministry of Defense, we received a broad survey of regional security concerns, including China’s “creeping expansion” and island-building activities in the South China Sea. This briefing helped to provide context for Prime Minister Shinzo Abe’s controversial new security proposals, which are intended to allow Japan’s armed forces more latitude in joining mutual defense efforts in the region, including joint exercises with U.S. forces.
Energy also figured prominently in our talks. From directors of the Agency for Natural Resources and Energy and Office for International Nuclear Energy Cooperation, we learned that the post-Fukushima shutdown of nuclear energy has left Japan importing an amazing 96 percent of its energy, leaving it hugely dependent on coal and Middle East oil. Little wonder that Japan is gradually bringing nuclear reactors back on line and trying to tilt its portfolio more toward natural gas and renewable solar and wind power. The United States could support these efforts by a key ally by lifting outdated restrictions on U.S. oil and gas exports.
Other key meetings in Tokyo included a wide-ranging conversation on U.S.-Japan relations and the progress of “Abenomics” with the Japan Institute of International Affairs (JIIA), as well as a roundtable discussion with the American Chamber of Commerce in Japan on the investment climate in Japan, the government’s efforts to stimulate economic growth, and the attempts to stimulate innovation in regenerative medicine.
PPI next traveled to Vietnam, a country in the throes of rapid economic development and modernization. In Ho Chi Minh City, we met with city officials eager to lower legal and regulatory barriers to foreign investors, as well as leaders of the city’s University of Technology and Education, an American-founded college that is trying to meet the economy’s insatiable demand for engineers and technicians.
If Ho Chi Minh City is Vietnam’s business center, Hanoi is the seat of a government firmly controlled by the Communist Party. There, PPI released“Vietnam and the App Economy,“ a report by our chief economic strategist Michael Mandel. Using a methodology Mandel pioneered in measuring the number of U.S. app-related jobs since the introduction of the smartphone in 2007, the study shows that Vietnam ranks surprisingly high in app job growth – first, in fact, in Southeast Asia (including Thailand, Malaysia, Singapore, Indonesia and the Philippines).
The report warns, however, that new regulations under consideration – for example, a rule that would prohibit data from leaving Vietnam – could crimp the development of the country’s nascent digital sector. What’s more, the wisdom of a heavy state role in certain sectors, such as telecom and mobile broadband, was the subject of some very spirited discussions with our hosts.
PPI’s visit and Dr. Mandel’s report were well-received in the Vietnamese media, gaining positive coverage from the Vietnam News Agency, ICT News Vietnam,Vietnam Breaking News, The Voice of Vietnam, andVietnamPlus.
PPI also released a second report, “TPP and the Benefits of Freer Trade for Vietnam: Some Lessons from U.S. Free Trade Agreements,”at an event organized by the American Chamber of Commerce in Hanoi, which included leading Vietnamese economists and economic reformers. Written by Ed Gerwin, who directs PPI’s Trade and Global Opportunity project, the report shows how countries that use high-standard free trade agreements to enhance transparency and the rule of law, adopt higher labor and environmental standards, and make other key reforms often see significant growth in foreign investment, greater innovation, and broader participation in global commerce. Gerwin’s report garnered media coverage in The Hill and theCommunist Party of Vietnam’s Online Newspaper.
Our schedule also included meetings with top-level officials from Vietnam’s Ministries of Foreign Affairs, Information and Communication, and Science and Technology, as well as visits to Saigon Hi-Tech Park, the U.S. Embassy, Viettel Corporation, FPT Software, and Vietnam Silicon Valley.
From Hanoi it was on to our final destination, Indonesia. At a packedpublic forum in Jakarta hosted by Mastel, an association of leading Indonesian and foreign companies, we released another Mandel study, “Indonesia: Road to the App Economy.”That was followed by a roundtable featuring top Indonesian government officials, business leaders and economists. PPI’s core premise – that emerging market economies, such as Indonesia, should not overlook possibilities for growth arising from the intangible, or data-driven economy, as well as traditional, labor-intensive manufacturing – sparked a lively discussion.
The report and Dr. Mandel’s public comments were quoted inCNN Indonesia, Bisnis Indonesia (the leading business print newspaper in the country), Detik.com (the number one online news outlet in Indonesia), andKompas Online(the number one print newspaper by circulation).
The PPI delegation included Will Marshall, Michael Mandel, Lindsay Lewis, Cody Tucker, and Ed Gerwin. We will continue to find ways to engage on policy issues globally, as the new economy being fostered by U.S. innovation needs better international understanding and increased appreciation. We hope you will find the opportunity to join us in the coming year as we push for unique policy solutions at home and abroad.
JAKARTA—The Progressive Policy Institute (PPI) today released a new policy report at a public forum in Jakarta, which measures the growing contribution of digital innovation to the Indonesian economy, compares the environment for investment in Indonesia to other locations in Southeast Asia, and warns of potential policy pitfalls and regulations that might harm future digital growth and economic prosperity in the country.
The report, “Indonesia: Road to the App Economy,” is an effort to measure the thousands of app-related jobs created in Indonesia since the introduction of the smartphone in 2007. Based on a methodology PPI Chief Economic Strategist Dr. Michael Mandel has developed to estimate app job growth in the United States, Great Britain, Australia, and Vietnam, the study is the first to quantify the number of Indonesian jobs directly related to the building, maintenance, support and marketing of applications for smart-devices.
“Up to this point, Indonesia has not been focused on app development. Nevertheless, the country has a rapidly growing number of app developers—these are the people who design and create the apps distributed domestically and internationally,” said Dr. Mandel, author of the report. “Moreover, Indonesian companies that do app development also have to hire sales people, project managers, database programmers, and other types of workers. Finally, each app developer supports a certain number of local jobs.
“In this paper, we estimate that Indonesia has roughly 22,000 App Economy jobs across the entire country. In addition, we show that Indonesia comes in third in our App Economy ranking of major Southeast Asia countries, behind Vietnam and just behind Singapore.
“Why is this important? The implication is that production of mobile apps—both for the domestic and global economies—could become an increasing source of growth in coming years for Indonesia. The Indonesian government is facing an important economic policy decision. Countries are better off nurturing a strong position in mobile app development. The key to growth is to be a creator of mobile apps, not simply a user. That strategy creates a workforce with the right skills and training to prosper in the global economy going forward.”
Indonesia’s growth rate has been slowing in recent years. In the second quarter, GDP grew 4.7% over the same quarter of the previous year, the smallest gain since 2009. Part of that slowdown is due to global economic weakness that has hurt commodity exports. However, that only points out the need to find another, more sustainable engine for growth for the Indonesian economy.
President Joko Widodo, in office since October 2014, seeks to transform Indonesia from an economy that imports manufacturing products such as telecommunications equipment into one that produces them. Indeed, his administration’s emphasis on production has included domestic content rules for smartphones using advanced networks, as a way of allowing Indonesia to participate in the global mobile revolution as producer rather than a consumer.
In this paper we take another perspective on Indonesia’s economy. Rather than focusing on hardware, we examine the potential of the production of mobile applications (“apps”) as a source of growth and jobs for Indonesia. The App Economy, as it is sometimes called, is the whole ecosystem of jobs, companies, and in- come connected with the production and distribution of mobile apps.
Many people mistakenly think of mobile apps as simply games or chat programs or social media. Games and social media are important—but in reality, they are only a small part of the App Economy. Apps are used by major multinationals, banks, media companies, retailers, and governments. As of July 2015, there were 1.6 million apps available for Android, and another 1.5 million available on Apple’s App Store.
App development is one route to economic success for a country such as Indonesia that has a large internal market. Today, many countries try to develop their manufacturing sector as a means to growth, emulating China and Korea. However, such a strategy necessarily requires a large investment in physical capital, not just for the factories but for the transportation infrastructure and power grid as well. Building and improving highways, rail lines, and ports is expensive and time consuming.
By comparison, mobile app development requires far less physical capital, and has the potential for paying off much more quickly. Moreover, going forward, mobile apps could be a major source of value-added and growth. What’s required is a skilled workforce and good telecom connections, both domestically and internationally. But once these are in place, a country such as Indonesia can become part of the global App Economy, creating good jobs and growth at home.
PPI Senior Fellow Hal Singer’s analysis on the impact of the FCC’s net neutrality ruling was cited in the Wall Street Journal:
Before Obamanet went into effect, economist Hal Singer of the Progressive Policy Institute predicted in The Wall Street Journal that if price and other regulations were introduced, capital investments by ISPs could quickly fall from the $77 billion invested in 2014—between 5% and 12% a year, according to his forecast.
Now Mr. Singer has analyzed the latest data, and his prediction has come true. He found that in the first half of 2015, as the new regulations were being crafted in Washington, major ISPs reduced capital expenditure by an average of 12%, while the overall industry average dropped 8%. Capital spending was down 29% at AT&T and Charter Communications, 10% at Cablevision, and 4% at Verizon. ( Comcast increased capital spending, but on a new home-entertainment operating system, not broadband.)
Until now, spending had fallen year-to-year only twice in the history of broadband: in 2001 after the dot-com bust, and in 2009 after the recession. “In every other year,” Mr. Singer wrote for Forbes, “ISPs—like hamsters on a wheel—were forced to upgrade their networks to prevent customers from switching to rivals offering faster connections.”
PPI Unveils Report Measuring Vietnam’s App Economy at Public Forum in Hanoi
Report estimates 29,000 App jobs in Vietnam
HANOI—The Progressive Policy Institute (PPI) today released a new policy report at a public forum in Hanoi, which measures the growing contribution of digital innovation to the Vietnamese economy, compares the environment for investment in Vietnam to other locations in Southeast Asia, and warns of potential policy pitfalls and regulations that might harm future digital growth and economic prosperity in the country.
The report, “Vietnam and the App Economy,” is an effort to measure the thousands of app-related jobs created in Vietnam since the introduction of the smartphone in 2007. Based on a methodology PPI Chief Economic Strategist Dr. Michael Mandel has developed to estimate app job growth in the United States, Great Britain, and Australia, the study is the first to quantify the number of Vietnamese jobs that are directly related to the building, maintenance, support and marketing of applications for smart-devices.
“Vietnam has a rapidly growing number of app developers—these are the people who design and create the apps distributed domestically and internationally,” writes Dr. Mandel, author of the report. “Moreover, Vietnamese companies that do app development also have to hire sales people, project managers, database programmers and other types of workers. Finally, each app developer supports a certain number of local jobs.
“In this paper, we estimate that Vietnam has roughly 29,000 App Economy jobs across the entire country. In addition, we show that Vietnam has the top-rated App Economy in Southeast Asia (including Singapore, Indonesia, Malaysia, Thailand, and the Philippines).
“Why is this important? The App Economy is the whole ecosystem of jobs, companies, and income connected with mobile apps. The rise of the App Economy may offer low- and middle-income countries such as Vietnam a faster route to economic success.”
In addition, PPI’s mission to Vietnam includes meetings with: Vietnam Ministry of Foreign Affairs; Vietnam Ministry of Information and Communication; Vietnam Ministry of Science and Technology; Ho Chi Minh City Department of Planning and Investment; Ho Chi Minh City University of Technology and Education; Saigon Hi-Tech Park Management Board; U.S. Embassy Vietnam; American Chamber of Commerce Vietnam; Viettel Corporation; FPT Software; and Vietnam Silicon Valley.
Please contact Cody Tucker at ctucker@ppionline.org with media requests or questions.
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The Progressive Policy Institute is an independent, innovative and high-impact D.C.-based think tank founded in 1989. Through research, policy analysis and dialogue, PPI develops break-the-mold ideas aimed at economic growth, national security and modern, performance-based government. Today, PPI’s unique mix of political realism and policy innovation continues to make it a leading source of pragmatic and creative ideas. PPI is a non-profit, nonpartisan, 501(c)(3) educational organization.
All around the world we are seeing the rise of the App Economy—jobs, companies, and economic growth created by the production and distribution of mobile applications (“apps”) that run on smartphones. Since the introduction of the iPhone in 2007, the App Economy has grown from nothing to a powerful economic force that rivals existing industries.
Many people mistakenly think of mobile apps as simply games. In Vietnam, the mobile game app Flappy Bird got an enormous amount of attention after being released in 2013 by Vietnam-based developer Nguyễn Hà Đông, at one point becoming the number one downloaded free game on the iOS app store.
Games are important—but in reality, mobile games are only a small part of the App Economy. Apps are used by major multinationals, by banks, by media companies, by retailers, and by governments. As of July 2015, there were 1.6 million apps available for Android, and another 1.5 million available on Apple’s App Store.
Apps are the essential front door to the Internet. In the United States, most people use apps to access the Internet on their smartphones. They log onto the Face- book app, or their bank app, or the app of their airline. One could spend an entire day on the Internet while only using apps.
They said it wouldn’t happen. They offered assurances from three Wall Street analysts, who insisted that Internet service providers (ISPs) would continue to invest at the same levels regardless of the regulatory climate.
When it issued its Open Internet Order in February of this year, the Federal Communications Commission (FCC) never counted on its prediction being falsified before the U.S. Court of Appeals for the District of Columbia Circuit would rule on the legality of the agency’s net neutrality rules. But then came the second quarter S.E.C. filings of the largest ISPs. And the news was grim.
AT&T’s capital expenditure (capex) was down 29 percent in the first half of 2015 compared to the first half of 2014. Charter’s capex was down by the same percentage. Cablevision’s and Verizon’s capex were down ten and four percent, respectively.
This capital flight is remarkable considering there have been only two occasions in the history of the broadband industry when capex declined relative to the prior year: In 2001, after the dot.com meltdown, and in 2009, after the Great Recession. In every other year save 2015, broadband capex has climbed, as ISPs—like hamsters on a wheel—were forced to upgrade their networks to prevent customers from switching to rivals offering faster connections.
What changed in early 2015 besides the FCC’s Open Internet Order that can explain the ISP capex tumble? GDP grew in both the first and second quarters of 2015. Broadband capital intensity—defined as the ratio of ISP capex to revenues—decreased over the period, ruling out the possibility that falling revenues were to blame. Although cord cutting is on the rise, pay TV revenue is still growing, and the closest substitute to cable TV is broadband video. Absent compelling alternatives, the FCC’s Order is the best explanation for the capex meltdown.
Despite Comcast’s modest increase in capex in the first half of 2015—attributed to “customer premises equipment” to support its X1 entertainment operating system and other “cloud-based initiatives”—the net decrease across the six largest ISPs amounted to $3.3 billion in capital flight.
Why care about capital flight here? Every million-dollar increase in broadband capex in a given year generates almost 20 jobs through the multiplier effect. Chase a billion dollars in investment from the broadband ecosystem with heavy-handed regulation and you can wipe out 20,000 jobs. And if a billion dollars of withdrawn capital destroys 20,000 jobs, imagine what three billion . . . Shutter the thought.
In unrelated news, AT&T announced in June that it would invest $3 billion in Mexico to “extend mobile Internet to 100 million consumers and businesses” by 2018. It’s not as if investment dollars of the largest U.S. companies are fungible. Right?
Sadly, this capital flight was predictable. Reclassifying ISPs as public utilities under Title II of the Communications Act reduces the expected return of broadband investment. Although the ultimate purpose of Title II is to pry open the incumbents’ networks to resellers at regulated access rates, the FCC’s Open Internet Order promises to “forbear” from appropriating the ISPs’ property this way, at least as long as the political winds stay below a fresh gale.
Some analysts such as Anna-Maria Kovacs of Georgetown’s Center for Business and Public Policy tried to warn the FCC about the likely investment effects. Her submission was relegated to footnote 1229 on page 197 of the Order, while the FCC credited contrary (and demonstrably false) predictions of Philip Cusick (J.P. Morgan), Paul Gallant (Guggenheim), and Paul de Sa (Bernstein Research) in footnote 34 on page 13.
Economists fared no better. A seemingly relevant paper published in the prestigious Journal of Law and Economics in 2009 estimated that an increase in “regulatory intensity” in the European Union reduced “incumbents’ infrastructure stock by approximately 47 percent over the long term.” The FCC’s Order ignored that study altogether, as well as a rich economics literature with similar results.
Although the FCC’s Order failed to perform any cost-benefit analysis, a companion statement issued by the agency pursuant to the Congressional Review Act speculated that the Open Internet rules would generate $100 million in annual benefits for content providers. (I’ve assessed this casual empiricism here.)
Given the roughly $78 billion in ISP capex in 2014, Title II would need to scare off a mere 0.13 percent of ISP capex (equal to $101 million) to generate net losses for the economy. Based on the results from the first half of 2015, we’re heading for a capex decline nearly 100 times that level. Put differently, if just three percent of the observed $3.3 billion decline in ISP capex in the first half of 2015 can be attributed to Title II, the Order fails a cost-benefit test.
On December 4, some unfortunate FCC attorney will have to defend the Open Internet Order before a panel of judges on, among other things, cost-benefit grounds. With luck, a judge will ask about those assurances from the three Wall Street analysts.
The Federal Communications Commission (FCC) recently proposed amending its low-income “Lifeline” program—which provides a $9.25 per month credit for consumers of voice services—to permit recipients to apply that same subsidy instead to broadband services. Who could argue against increasing options for low-income Americans?
Before critiquing the FCC’s proposal, it’s important to point out that expanding broadband access is a laudable goal. But financing this expansion through the Lifeline program will eventually lead to the perverse outcome of taxing broadband in order to subsidize it. Better to raise the funds for subsidized broadband from taxes imposed on behavior we want to discourage.
To an economist, a subsidy (or a tax) is warranted only in the presence of a market failure. When the market produces too much a product—think driving—it’s because producers are not internalizing a negative externality (traffic or air pollution). When the market produces too little—think general (as opposed to applied) research and development (R&D)—it’s because producers are not internalizing a positive externality or spillover.
This understanding leads to a simple policy prescription: Tax the industries that produce negative externalities and subsidize those that produce positive spillovers. Yet our politicians won’t support a gas tax to finance our crumbling roads, reflecting their constituents’ myopic desires, even if the result runs counter to economic theory.
Broadband is a classic case of positive spillovers in that every person who joins the network makes the network more valuable for existing users and for application providers. In addition to tapping into those positive spillovers, a broadband subsidy could stimulate more broadband investment: If a broadband provider needs a 30 percent take rate to deploy fiber to a neighborhood, and if a broadband subsidy gives it assurance that that target will be exceeded, the neighborhood has a better chance of being deployed.
Now back to the FCC’s Lifeline proposal. Lifeline is currently funded by a “universal service fee” that shows up on your phone bill for services that are designated as interstate (as opposed to intrastate). The FCC imposes a fee on providers of these voice services, who in turn pass that fee onto their customers. Roughly half of the funds that flow to low-income residential users are raised on the backs of businesses, creating a cross-subsidy of sorts. The FCC proposes to leave the funding alone (for now), but to give Lifeline recipients the option to apply the existing subsidy to broadband instead of voice service.
By my calculations (produced below), to induce non-adopting Americans to share in the costs of broadband, the annual subsidy would cost between $1.1 billion (for a modest addition of 10 million of the 32 million disconnected homes) and $4.3 billion (for 20 million homes, leaving just 12 million disconnected). The immediate problem is that a large chunk of this cost estimate does not fit within the contours of the existing Lifeline budget, which stood at $1.7 billion in 2014.
How did I arrive at these cost estimates? A 2014 study by three FCC economists estimates that up to 10 million disconnected homes would be willing to subscribe to broadband if a subsidy of 15 percent were offered. The annualized cost of connecting the first 10 million disconnected homes would be $1.1 billion (equal to 10M x 15% x $60 per month x 12 months). Because the next tranche of non-adopters are less inclined to adopt, a larger subsidy would be required to reduce the disconnected share further. To the extent that 20 million homes could be induced to adopt broadband in response to a 30 percent subsidy, the subsidy would cost $4.3 billion per year (equal to 20M x 30% x $60 per month x 12 months).
Telling Lifeline-enrolled families that already purchase a bundled voice and broadband service that they can apply their existing $9.25 per month subsidy to broadband rather than voice is not going to reduce the number of disconnected broadband households (nor would it make their lives any better). And Lifeline-enrolled families that didn’t have broadband because they purchase voice on a standalone basis would be forced to lose their voice subsidy if they applied the subsidy to broadband instead (making their lives only slightly better). Tapping the existing base of Lifeline funds just won’t make a big difference when it comes to shrinking the digital divide.
And therein lies the problem. The current base of revenues—interstate voice services—are under siege as consumers increasingly obtain voice service as a free add-on to a wireless broadband data package. To raise the funds to make a real dent in the number of disconnected homes and improve lives, the Lifeline revenue base likely would have to be expanded to include broadband services.
As unelected officials, the FCC Commissioners would be happy to oblige. Some activists are practically begging the FCC to tax broadband to preserve the Universal Service program. And the FCC is not bashful about taxing and spending: In 2014, the FCC expanded the E-Rate program by $1.6 billion to give schools and libraries greater access to broadband.
But for the same reason we would never finance a general R&D subsidy by taxing firms engaged in general R&D, it makes no sense to tax broadband in order to subsidize it. Indeed, for those 10 to 20 million non-adopting households that would come aboard in response to a modest subsidy, there are likely millions of price-sensitive broadband households that would leave the broadband market in response to a modest tax. Unlike interstate voice revenues, which are paid in part by businesses, fixed broadband revenues are overwhelmingly paid by residential consumers. Thus, bringing broadband into the revenue base would cause U.S. households to bear a larger burden of the universal service subsidy.
Even worse, as soon as the FCC imposes a federal universal service fee on broadband to meet the surging demand for broadband among low-income Americans, the states are free to get in on the action. By reclassifying broadband as a “telecommunications service” in its February Open Internet Order, the FCC activated a series of dormant state and local telecom-based fees that had never been extended to broadband; Internet service was previously designated as an “information service,” and thereby immunized from this form of state taxation.
Recognizing this risk, the FCC preempted states from moving forward with their own universal service fees for broadband until the FCC adopted fees at the federal level: “[W]e preempt any state from imposing any new state USF contributions on broadband—at least until the Commission rules on whether to provide for such contributions.” The combined universal service fees from the FCC and the states would perversely contribute to the digital divide by driving even more price-sensitive adopters out of the broadband market.
To avoid this spiral, we need to look elsewhere for the financing of a broadband subsidy. Were it designed by an economist, the subsidy would be financed through the general treasury so as to reduce any distortions in the broadband marketplace. And the source of the funds would be the elimination of existing subsidies for sugar, corn, coal, or oil—all of which generate negative externalities.
Raising taxes on broadband users in order to subsidize broadband makes no economic sense.
PPI Chief Economic Strategist Michael Mandel’s recent work on measuring innovation was featured in the Wall Street Journal:
In a new study, Michael Mandel of the Progressive Policy Institute notes that previous innovation waves straddled numerous disciplines: information processing, transportation, medicine, energy and materials. There’s a reason why, in the 1967 film “The Graduate,” Dustin Hoffman’s character is told “there’s a great future in plastics.” The development of thermoplastics in the 1930s and 1940s made possible products that are now ubiquitous in business and household life.
Where are the comparable advances in materials today? The Nobel prize was awarded in 1987 for the discovery of high-temperature superconductors—material that can carry electric current without resistance at temperatures above extreme cold. But as Mr. Mandel notes, few commercial superconductor applications are on the market. Nanotechnology—building materials out of microscopic particles—has found its way into tennis balls and odor-resistant fabrics but hardly measures up to steel or plastic in its breadth of uses.
The staggering sums invested in biosciences haven’t yielded breakthroughs comparable to antibiotics in the 1930s and 1940s. The human genome was sequenced more than a decade ago. Yet as Mr. Mandel notes, there is still no approved gene therapy for sale.
Quantifying innovation is difficult: Government statistics don’t adequately measure activities that only recently came into existence. Mr. Mandel circumvents this problem by surmising that innovation leaves its mark in the sorts of skills employers demand. For example, the shale oil and gas revolution is apparent in the soaring numbers of mining, geological and petroleum engineers, whereas the ranks of biological, medical, chemical, and materials scientists have slipped since 2006-07.
Yesterday, a stellar constellation of regulatory economists—including three economists affiliated with the Progressive Policy Institute—submitted an amicus brief to the D.C. Circuit Court of Appeals, demonstrating that the Federal Communications Commission’s 2015 Open Internet Order failed a cost-benefit test.
How could this happen?
When proposing a remedy to address a perceived market failure, a regulatory agency may fail a cost-benefit test in three ways. First, the agency can overstate the benefits of its proposed remedy. Second, the agency can understate the costs of its proposed remedy.
Third, and a bit less obvious, the agency can ignore a less-restrictive alternative that would generate the same purported benefits but at a lower cost, thereby rendering its proposed remedy inefficient. For example, if the net benefits of a proposed remedy are $10 million per year, but a less-restrictive alternative generates net benefits of $15 million, then the proposal fails a cost-benefit test, even though the proposed remedy would have generated benefits in excess of costs.
The FCC committed all three errors in its Open Internet Order (OIO). As Chris Cillizza of the Post says in his recurring award for Worst Week in Washington, “Congrats, or something.”
The amicus brief explains in great detail how the FCC committed the first two errors.
In terms of overstating benefits, the OIO fails to consider that the profitability of (and thus the incentive to engage in) discriminatory conduct vis-à-vis content providers depends on whether the Internet service provider (ISP) could generate higher profits from the promoted (affiliated) products to cover the lost margins from departing broadband customers. The anticompetitive behavior feared by the Commission has simply not come to pass, which explains why the OIO is hard-pressed to cite any recent examples of consumer harm. A very limited number of service disruptions or degradations have actually occurred—among literally millions of opportunities for such behavior—and many of these have been dealt with expeditiously through private negotiations.
And in terms of understating costs, the OIO ignores or dismisses the economic evidence of the impact of Title II on investment in the late 1990s and early 2000s, and thereby dismisses the very real threat to ISP investment. Rather than ground its findings on economic scholarship, the OIO relies instead on the casual empiricism of an advocacy group that operates outside of the constraints of academic reputations, to reach the extraordinary conclusion that telco investment was “55 percent higher under the period of Title II’s application” than in the later period. These results hinge on which years are included in the Title II era: If one includes the years 1999 and 2000 as part of the pre-2005 period, then removal of Title II appears to have caused a decline in Bell investment. But those early years are associated with the dot.com boom and long-haul fiber glut, and it is difficult to remove Bell investments in backbone infrastructure from the capex figures.
The amicus brief spends less time on the third element of cost-benefit, largely due to a 4000-word limitation. So more on that here.
The OIO casually dismisses a less-restrictive alternative for handling paid priority disputes—namely, case-by-case enforcement—as being “too cumbersome” to enforce, despite the fact that: (1) the 2015 OIO itself embraces case-by-case review to address interconnection disputes and other conduct such as zero-rating; (2) the 2010 Open Internet Order embraced case-by-case to address paid priority disputes; (3) the FCC’s May 2014 Notice of Proposed Rulemaking would have permitted ISPs and content providers to engage in “individualized bargaining” subject to ex post review; and (4) the FCC relies upon case-by-case to adjudicate discrimination complaints against traditional video distributors. Why is this conduct different from all other conduct?
Recognizing this disparate treatment of paid priority and interconnection, the OIO argues that case-by-case enforcement “is an appropriate vehicle for enforcement where disputes are primarily over commercial terms and that involve some very large corporations. . . .” (paragraph 29). But interconnection disputes can involve small content providers as well. And if the concern is an asymmetry in litigation resources, the case-by-case regime can level the playing field by shifting evidentiary burdens and providing interim relief.
Indeed, the 2010 Open Internet Order considered and rejected a “flat ban” on paid priority in favor of a case-by-case approach; embracing the ban in 2015 presumably pushed the FCC towards its dreaded reclassification decision. This dramatic policy reversal begs the question: What happened in the intervening five years that caused the Commission to lose confidence in case-by-case adjudication for paid priority? The OIO does not give an answer.
It would seem that an overt and pronounced shift in regulatory policy would necessitate a clear and confident finding that such an alternative policy approach toward the Internet would produce better results—more innovation, more investment, and more consumer benefits. When viewed with an economic lens, the OIO fails a basic cost-benefit analysis.
Are we getting enough broadband competition? And if not, where should we look for a new Internet access provider to keep broadband prices in check and to spur incumbents to increase speeds?
The answer may be staring you in the face . . . assuming you are reading this from a wireless device. Even if you’re looking at a desktop, your smartphone is likely within reach. And therein lies the key to broadband competition.
This week the Senate Commerce Committee is holding a hearing on “Wireless Broadband and the Future of Spectrum Policy.” With luck, policymakers will see the connection between more spectrum and broadband competition.
With the recent transition from third-generation to 4G, wireless networks now offer speeds—between 30 and 40 Mbps down—that are comparable to the average speeds attainable on a cable connection. And 5G wireless speeds promise to be even faster.
A super-charged wireless broadband offering would force DSL providers to upgrade to fiber, which in turn would cause cable operators to enhance their speeds.
When confronted with the notion of wireless-wireline substitution, the naysayers point to data limitations on wireless plans. But those limits are there to preserve the wireless experience given the constraints associated with commercially available spectrum. Relieve those constraints and wireless becomes an even closer substitute to wireline broadband (as those pesky data limits are likely raised).
How much additional spectrum is needed? A recent study estimates that the United States will need more than 350 MHz of additional licensed spectrum to support projected commercial mobile wireless demand, which represents a 50 percent increase in the supply of licensed broadcast spectrum.
And the source of this newfound spectrum? After the broadcasters’ spectrum, the next tranche of beachfront property would come from federal agencies, which have little incentive to give up the goods.
To align the broadcasters’ interests with those of wireless consumers, the Federal Communications Commission (FCC) came up with a novel idea—an “incentive auction” that permits broadcasters to share a portion of the proceeds from the sale; those who don’t participate will now be forced to explain to shareholders why they can put the spectrum to greater use.
Economists have a fancy word for this problem—some firms (think polluters) don’t “internalize” the cost of their actions. Sitting on valuable spectrum, while not as onerous as polluting, doesn’t cost an agency a dime. The key is to make these agencies internalize the cost of their actions (or inaction), as the FCC is about to do for the broadcasters.
There may be some impediments to importing the incentive auction wholesale into the realm of government agencies. Although the Department of Defense was compensated for its relocation costs via a portion of the proceeds from the recent AWS-3 auction, paying an agency to surrender spectrum may not induce the same response as paying a profit-maximizing firm. Another complication is that some underutilized spectrum is shared by several agencies. Still other agency heads might think that an influx of auction revenues would be met with offsetting budget cuts by Congress.
Several clever ideas have been floated to overcome this inertia and force agencies to internalize the cost of their spectrum holdings. Some have suggested that underutilized spectrum count against an agency’s budget at market rates; if the agency doesn’t relinquish the spectrum or put it to greater use, the agency sees its budget chopped. Alternatively, we could encourage direct transactions (sales or leasing plans) between private carriers and government agencies, cutting the FCC and Congress out of the loop.
For those who doubt that an agency could ever respond to financial incentives, there’s always command-and-control techniques; for example, Congress could establish a spectrum czar tasked with shifting a certain percentage of spectrum from the public to the commercial sector every year.
Whichever way is ultimately chosen, we must expedite the process. A study by CTIA estimates that it takes a staggering 13 years on average for wireless spectrum to be deployed after the legislative and regulatory process begins.
That’s unacceptable, particularly given the critical role that wireless broadband plays in the economy. MIT economist Jerry Hausman estimated that the FCC’s delay in licensing the first spectrum for cellular service, which was caused by regulatory indecision, cost U.S. consumers $31 billion to $50 billion in lost welfare annually for between seven and ten years.
According to a 2010 FCC analysis, making 300 MHz available by 2014 would create over $100 billion in economic value for the country. Given the shift in traffic from wireline to wireless networks since 2010, and given the potential of wireless to be an even more effective restraint on wireline broadband prices, the social value of an infusion of the same magnitude today could be worth even more.
Congress should assign a task force comprised of engineers and economists to investigate the best approaches and present a plan in 90 days. The cost of delay is simply too much to bear.
If you’re a Democratic policy maker worried about retirement savings for the little guy, would you deny millions of small savers access to financial advisers in ways that could cost them $80 billion in the next market downturn? Would you ask working families to pay more to keep the adviser they have?
The obvious answer to both is no. But the White House and the Labor Department have teamed up to propose a new “fiduciary rule” on brokers and advisers serving individual retirement account investors, which would produce precisely these unintended consequences.
The White House starts with good intentions—a concern that too many Americans are unprepared for retirement, and need to save more, and invest wisely. But instead of urging Americans to save, the administration has launched a campaign against a phony villain. If you’re not on a path to a secure retirement, the White House implies, it’s because evil financial advisers are ripping you off.
Here’s an astounding fact. Since the recovery started in 2009, California businesses have created 1.5 million new private sector jobs. That puts California number one in private sector job creation among all states, slightly ahead of second place Texas, and more than double that of third place Florida. Moreover, total job creation in California since 2009 exceeds that of Germany, Europe’s largest and most successful economy.
How can this spectacular performance be explained? The answer: creativity and innovation. Since 2009, the Golden State’s economy has ridden the power of the sizzling tech/info revolution. From mobile to social media, to online video and the Internet of Things, California-based companies are leading the way.
This paper has two main goals. First, we document how the tech/info boom is helping propel the California economy. We carefully define the tech/info sector, building on our previous studies of California and other tech hubs around the world. We then show that the tech/info sector has directly accounted for more than 30% of the increase in real wage payments in California. These gains have boosted tax revenues and helped California run a budget surplus. In addition, the strong growth in California’s tech/info sector has translated into faster non-tech job growth than the rest of the country.
Update (6/11/15): PPI applauds the FCC’s adoption of the “effective competition” order on June 2 (explained below). This order acknowledges the reality that on most cable systems, the video channels subject to “effective competition” from other providers, both satellite and landline. The FCC order says in part: “As a result, each franchising authority will be prohibited from regulating basic cable rates. unless it successfully demonstrates that the cable system is not subject to Competing Provider Effective Competition.”
This is not the FCC making new law…rather, this is the FCC enforcing the provisions of existing law, which clearly states the conditions under which basic cable service rates can be freed from local regulation. Given the importance of eliminating or rewriting outmoded regulations wherever possible, the FCC has done the right thing.
5/13/15
PPI favors the elimination or rewriting of outmoded regulations wherever possible. We believe that clearing the deadwood of obsolete rules is a win-win for consumers, workers, and businesses, allowing regulators to focus limited resources on more important issues while freeing companies to innovate faster.
That’s why we strongly favor FCC Chairman Tom Wheeler’s proposal to streamline the “effective competition” rule for cable video providers. Cable television has long been one of the most regulated industries in the economy, including regulation of their rates by local authorities. The justification for such price controls—not acceptable for most industries—was the lack of meaningful competition from other video providers.
But the world has changed. Today many if not most cable video systems face a wide range of competitors from satellite providers such as DISH and telecom companies such as AT&T and Verizon, not to mention new internet-based video services such as Netflix and Amazon.
The legislation governing cable operators allows them to be relieved of some regulatory burdens—including rate regulation by local authorities–if the FCC rules that they face “effective competition.” The legislation includes several possible tests for effective competition, including a satellite video provider or other competitor having 15% of the pay video market, or if a phone company is offering video service in the area.
These hurdles are not hard to reach, given the prevalence of satellite and other video competitors. As a result, the FCC has ruled in favor of effective competition on almost all the hearings on this subject since 2013.
Nevertheless, up to now, cable video companies have had to go through a long and burdensome process to get regulatory relief. That is why Wheeler is proposing to simplify the process by adapting it to market realities. Challengers would have to demonstrate that effective competition did not exist in a particular location. The net result is that a larger number of cable video providers would have greater freedom to compete and innovate.
Given the amount of competition to cable, it is unlikely that cable video rates would suddenly jump. After all, with the prevalence of alternatives, and subscriber growth having topped out, why should cable companies drive away customers?
We have had disagreements with Chairman Wheeler, particularly around the Open Internet issue. But on this issue, his approach to cleaning up the regulatory process makes excellent sense for both consumers and companies.
Political gridlock is a problem, but in a 50-50 country you have to expect some issues will be hard to move forward. In today’s Washington, however, Congress is stuck and immobilized even on issues where most of its members agree. That’s gridlock on steroids, and it’s destructive to our civics.
Consider the recent debate over the Internet protection rules called net neutrality. These rules aren’t controversial – leaders of both parties and probably two thirds or more of the members of Congress agree that all traffic should move freely on the Internet and that Internet providers should not be able to block lawful websites or relegate competitors to second-class “slow lanes” online.
But despite this broad consensus, Congress has refused to act, leaving net neutrality in a litigation limbo that could last 3 years or more.
Some Republicans refuse to pass a net neutrality law because they aren’t willing to give a President they dislike a win, even when they agree with him. Some Democrats won’t budge because they would rather hold on to the more intrusive “utility-style” style regulatory approach employed by the FCC that goes far beyond what is necessary to protect the open Internet.
The result is a too-familiar story of a government that fails to act through normal channels, leaving the rest of the government to scramble for “work-arounds” and half-measure solutions.
The Federal Communications Commission has attempted to fill the gap left by a congressional inaction with its own set of Internet regulations. But due to the politics of the agency and potential gaps in its legal authority, the FCC rules go far beyond consensus net neutrality reforms, putting the entire Internet ecosystem at risk.
