While we’re generally big fans of the Biden Administration, Biden’s Department of Justice (DOJ) has made a big misstep by sending a letter endorsing proposed tech antitrust legislation in the House and Senate.
Four key reasons:
First, these bills are not ready for prime time. They need more interagency review, beyond the opinion of the DOJ’s acting assistant attorney general for legislative affairs. In particular, there are major cybersecurity concerns, and the Cybersecurity and Infrastructure Security Agency (CISA) and the rest of the Department of Homeland Security needs to weigh in.
Second, the Senate should have the chance to act first. The DOJ shouldn’t be encouraging the House to vote on a bill that has no chance of passing the Senate.
Third, these bills would make inflation worse at just the wrong time. At a time when Americans are oppressed by soaring prices, inflation in the digital sector is running at only a 1% pace. Forced break-ups will eliminate economies of scale and almost inevitably drive up prices.
Fourth, the digital sector, led by the big tech companies, is outperforming the rest of the economy on just about every dimension that consumers and workers care about.
The tech/ecommerce sector has added 1 million jobs since the pandemic started, while the rest of the economy has lost 3 million jobs. Many of these new jobs are in political swing states.
Biden identified the need for more investment in his State of the Union Speech. Many old-line companies—in particular, energy and auto companies– cut back on capital spending during 2020 and 2021, while enterprises in the tech, telecom and ecommerce sectors kept investing at the same or higher rates.
The big tech companies are helping boost American competitiveness by spending on research in key areas like artificial intelligence and quantum computing.
Given all the real problems in the economy, PPI believes that it is remarkably counterproductive to go after the companies that are benefiting consumers and workers.
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.”
A new reportfrom the Progressive Policy Institute(PPI) explains how the ubiquity of algorithms and their ever-expanding sophistication often come at a cost to consumers and the public at large. And Congressional proposals to break up Big Tech companies, rather than address the root causes of “algorithmic harm,” represent a solution in search of a problem — not a sober assessment of this highly problematic phenomenon. The report, “Breaking Up Big Tech Will Not Prevent Algorithmic Harm to Society,” is authored by Dr. Kalinda Ukanwa, Assistant Professor of Marketing at the University of Southern California’s Marshall School of Business.
“This paper argues that forcing Big Tech companies to sell parts of their businesses will not prevent algorithms at large from circulating extremist, incendiary, and other harmful content,” writes Dr. Ukanwa. “Algorithms are everywhere, and they all operate on the same two guiding principles. To attack the algorithm problem at its roots, society must implement policy that applies to all algorithms.”
Although the way in which algorithms circulate content may not appear problematic at first glance, as Dr. Ukanwa explains, the patterns of recycling and amplifying content categories that typify them are what create echo chambers, often to harmful effect. In service of their main objective — increased engagement and greater profits for developers — algorithms can promote everything from biased understandings of societal concepts to blatantly harmful content.
The report concludes that current bills proposed in Congress are ill-equipped to protect consumers from algorithmic harm because they fail to take into account algorithmic design principles and the wide-ranging nature of algorithmic activity.
Dr. Kalinda Ukanwa is an Assistant Professor of Marketing at the University of Southern California’s Marshall School of Business. A quantitative modeler, Professor Ukanwa researches how algorithmic bias, algorithmic decision-making, and consumer reputations impact firms. She is the winner of the 2018 Eli Jones Promising Young Scholar Award and a finalist for the 2018 INFORMS Service Science Best Student Paper Award, 2019 Howard/ AMA Doctoral Dissertation Award, and the 2020 AMS Mary Kay Doctoral Dissertation Award.
The Progressive Policy Institute (PPI) is a catalyst for policy innovation and political reform based in Washington, D.C. Its mission is to create radically pragmatic ideas for moving America beyond ideological and partisan deadlock. Learn more about PPI by visiting progressivepolicy.org.
Algorithms are all around us. In the United States, a person could have hourly interactions with an algorithm and not even realize it. Some people use algorithm-driven devices like smartphones, digital clocks, or personal digital assistants (e.g., Amazon’s Alexa or Apple’s Siri) to wake them up in the morning. Others navigate to work, school, and other destinations with algorithmic GPS technologies, such as Google Maps, Apple Maps, Waze, or Garmin GPS devices. Many institutions use algorithms to decide whether applicants get jobs, places to live, seats at schools, loans from banks, insurance for medical bills, and public assistance benefits to feed themselves. In fact, when it comes to mobile or internet activity, almost every component of the digital world employs algorithms. Search engine results on Google, Bing, or Yahoo!, consumer product recommendations on Amazon or Netflix, customer service chatbots, and targeted digital advertisements are driven by algorithms. Using social media sites and mobile apps like Facebook, Twitter, TikTok, or Instagram means interacting with an algorithm. Their algorithms will monitor whether the content posted is appropriate or should be removed. They will determine whether posts will be featured or trending on other users’ feeds. At night, an algorithm may put people to sleep by reminding them that it is their bedtime based on their past sleeping behavior. Then algorithms wake us up again the next day, bright and early. It is easy to see why the claim that algorithms are everywhere is not hyperbole.
Regardless of what tasks algorithms are designed to accomplish, virtually all of them operate on two guiding principles: 1) optimize an objective they have been given, and 2) learn how they can best optimize that objective from historical data (i.e., training data).[1] For example, Facebook whistleblower Frances Haugen shared in interviews and congressional testimony that one of the biggest objectives of Facebook’s algorithms is to make money from the ads they display on their site. However, Ms. Haugen also testified that Facebook’s pursuit of this objective sometimes came at the cost of what was good for the public.[2]
After Haugen’s bombshell testimony about the harm Facebook’s algorithms enact against everyday people, there has been a groundswell of support for congressional action to reduce algorithmic harms by breaking up Big Tech — the collective of top tech companies that run many aspects of billions of consumers lives. The notion is that breaking up Big Tech companies like Facebook, Google, Apple, and Twitter will free society from the algorithmic echo chambers that endlessly and increasingly circulate harmful content.[3] However, breaking up Big Tech will not eradicate algorithmic harm. Why? Because virtually all algorithms operate on the previously mentioned two guiding principles: 1) optimize an objective, and 2) learn from training data how to best optimize that objective. Hence, the harrowing problems that algorithms perpetuate are not unique to algorithms deployed by Big Tech companies. Algorithms used by small companies, nonprofits, and governments operate the same way. While breaking up Big Tech could temporarily reduce the scale of harmful content, doing so will not stop algorithmic bias and echo chamber facilitation in its tracks. This is because other organizations deploying algorithms will fill the vacuum. As long as algorithms, in their current design, operate in the background of daily life, people will continue to suffer from harmful and biased algorithmic outcomes.
This is how algorithms work. To make money from an online ad, users must see or click on the ad. The ad within a page is surrounded by user-generated content. People are drawn to the page in the first place by the content posted. If Facebook’s algorithm is given the objective to maximize the number of views or clicks of the ad, then it will use information about user content and user viewing and clicking behaviors that led them to click on ads.
Algorithms continually evolve. Just as humans change as they learn new things, algorithms change by updating themselves as they learn from training data. In the case of the Facebook algorithm, to accomplish the objective of getting users to look at an ad and click on it, the algorithm must learn what kind of content users like. The algorithm accomplishes this task by inspecting the content users have typically viewed in the past. The algorithm seeks patterns in terms of content characteristics that increase user engagement (likes, clicks, and reshares of a post). Algorithms can also learn from patterns in content that users have posted themselves. For example, if a user frequently posts about, views, and engages with fashion, beauty, and weight loss content, the algorithm learns over time that the user is interested in those topics.
Algorithms often become even more advanced by learning which users have similar interests across an entire consumer base.[4] This algorithmic capability is often called “look-alike modeling.”[5] If the algorithm learns that the aforementioned user who seems to like beauty, fashion, and weight loss topics is a 16-year-old girl from a Columbus, Ohio, suburb, it may look at the behaviors of other teenaged girls who live in mid-western suburbs to discover general patterns that are common among them all. Then the algorithm exploits these learned similarities across users by sending them content they have not seen before about beauty, fashion, and weight loss. Because similar users are receiving in their content feed more of the same type of content that they may or may not have engaged with before, they stay longer on the site. Consequently, content and advertisement views increase.
Although this kind of content circulation might not seem problematic at first glance, this continual recycling and amplifying the same content categories to the same users is how echo chambers arise (scenarios where beliefs are reinforced and amplified inside a closed communication system).[6] If girls are clicking on harmful content that leads to feeling bad about or even harming their bodies, the algorithm may exploit that knowledge and amplify the volume of similar content directed to those girls through trends, news feeds, and highlights of posts by friends in their networks. If algorithms learn that young men who feel disenfranchised from society like to click on extremist hate content, then algorithms will direct more content to them based on the same topics. Such potentially harmful recommendation patterns serve the algorithm’s main objective: to increase average engagement with content and the amount of time users spend on the site so that users view and click more ads (and deliver more profit to the algorithm’s developers).
Algorithms can also be problematic if they inherit a biased understanding of societal concepts. If user behavior or content is imbued with inherent biases, then the algorithm will also learn and amplify those biases. For example, imagine that a website creates a social media post with a list of the smartest people in the world. Say the post features the 2021 Nobel Prize winners, and the post generates a lot of engagement (likes, reshares, reposts). An algorithm would learn that this type of content is engaging and would update its understanding of the content characteristics associated with “smart.” Though most would agree that Nobel Prize winners are indeed some of the smartest people in the world, 77% of the 13 Nobel Prize winners in 2021 are white and male.[7] The algorithm could learn from the website’s post and other widespread, highly engaging content that “smart” is associated with white and male. It will serve and boost similar content, and in doing so, produce mass-scale biased output that amplifies the idea that people who are not white and not male are not associated with “smart.”
Thoroughly solving the issues brought to light by Haugen first requires acknowledgement that algorithmic harm is not solely created by Big Tech. The algorithm problem spans across all sectors and organizations, large and small. An effective and feasible solution requires a tactical approach more closely aligned with the design and inner workings of algorithms. An effective solution must also consider the incentives at play for organizations like Facebook. For-profit firms will seek to maximize profit. They will consequently build profit maximization into the objectives of the algorithms they use. Therefore, one solution is to require that constraints be built into algorithmic objective functions to ensure that algorithms serve not only the firm’s goals, but also the public good. Research has shown that designing algorithms to maximize profits while minimizing social harm can be done.[8]
While free market and commercial rights advocates might decry this proposal, opponents should note that similar restrictions are commonplace in other sectors of business activity. For example, mainstream TV entertainment companies have had to follow the Federal Communication Commission’s (FCC) rules for decades that limit the types of content they can expose the public to.[9] It is plausible that TV entertainment companies could increase ratings and revenue if they included more hardcore pornographic or ultra-violent content in their entertainment products. But should they? Despite society’s regrettable predilections and companies’ constant pursuit of maximal profits, regulations successfully prevent viewers from seeing pornographic and ultra-violent content on mainstream TV in order to protect viewers from the social harm such content can cause. Importantly, there has been no need to break up big entertainment companies to achieve the objective of reducing social harm. Instead, regulators provide guidelines detailing what type of content was acceptable for viewers to be exposed to prevent public harm while also allowing companies to grow and flourish.
Regulators today can take a similar approach to reducing algorithmic harm. Algorithms can be reprogrammed to optimize their objective while fulfilling constraints designed to protect the public. For example, a Facebook algorithm could still identify and disseminate popular beauty content among teenage suburban girls, as long as the content does not contain glorification of anorexia, bulimia, or other body dysmorphic behaviors. Furthermore, Facebook could mitigate algorithmic bias in the beauty content served by incorporating characteristics that ensure content features a variety of beauty standards into their algorithm’s design.
To rebuild and reprogram algorithms with constraints requires substantial investment, resources, and research into algorithmic approaches that achieve company objectives while reliably minimizing societal harm. Modifying existing algorithms also requires firms to actively audit, monitor, and update their work because the algorithms learn from data and change constantly. To catalyze the process of algorithm redesign, a credible and capable third-party entity must be empowered to spur action. Fortunately, many of the large companies perpetuating algorithmic harm on a massive scale have the very resources required to successfully accomplish this task. The Big Tech companies in particular are best positioned to lead the way because they possess the knowledge, talent, and financial resources. In contrast, smaller companies with fewer resources may struggle to update their algorithms with the required restrictions, even if they possess the requisite knowledge.
CONCLUSION
Current bills proposed in Congress and the Senate are not well-equipped to protect consumers from algorithmic harm because the underlying policies do not take algorithmic design principles and the ubiquitous nature of algorithmic activity into account. Presently, the proposed legislation aims to ameliorate algorithmic harm by restricting the power that Big Tech platforms currently have over smaller home-grown competitive offerings. However, this article argues that forcing Big Tech companies to sell parts of their businesses will not prevent algorithms at large from circulating extremist, incendiary, and other harmful content. Algorithms are used by large companies and small, and by for-profits and nonprofits. Algorithms are everywhere, and they all operate on the same two guiding principles. To attack the algorithm problem at its roots, society must implement policy that applies to all algorithms. Breaking up Big Tech will not accomplish that objective.
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REFERENCES
[1] Stuart J. Russell and Peter Norvig, Artificial Intelligence: A Modern Approach, 4th ed., (Hoboken, NJ: Pearson, 2020).
[2] Seth Flaxman, Sharad Goel, and Justin M. Rao, “Filter Bubbles, Echo Chambers, and Online News Consumption,” Public Opinion Quarterly 80, no. S1 (2016): pp. 298-320, https://doi.org/10.1093/poq/nfw006.
[3] Cat Zakrzewski and Cristiano Lima, “Former Facebook Employee Frances Haugen Revealed as ‘Whistleblower’ Behind Leaked Documents that Plunged the Company Into Scandal,” The Washington Post, October 4, 2021, https://www.washingtonpost.com/technology/2021/10/03/facebook-whistleblower-frances-haugen-revealed/.
[4] Jun Yan et al., “How Much Can Behavioral Targeting Help Online Advertising?” ACM Proceedings of the 18th International Conference on World Wide Web, April 2009, https://doi.org/10.1145/1526709.1526745.
[5] Anna Mariam Chacko et al., “Customer Lookalike Modeling: A Study of Machine Learning Techniques for Customer Lookalike Modeling,” Intelligent Data Communication Technologies and Internet of Things: Proceedings of ICICI 2020, February 2021, pp. 211-222, https://doi.org/10.1007/978-981-15-9509-7_18.
[6] Kelly Hewett et al., “Brand Buzz in the Echoverse,” Journal of Marketing 80, no. 3 (May 2016): pp. 1-24, https://doi.org/10.1509/jm.15.0033.
[7] Niklas Elmehed, “All Nobel Prizes 2021 – NobelPrize.org,” Nobel Prize, https://www.nobelprize.org/all-nobel-prizes-2021/.
[8] Kalinda Ukanwa and Roland T. Rust. “Algorithmic Bias in Service,” USC Marshall School of Business, (November 2021), https://ssrn.com/abstract=3654943.
[9] “Obscene, Indecent and Profane Broadcasts,” Federal Communications Commission, accessed January 30, 2022, https://www.fcc.gov/consumers/guides/obscene-indecent-and-profane-broadcasts.
Today, the House of Representatives passed the America COMPETES Act, which will help ease supply chain tension, invest in American innovation, and strengthen our standing in the race to technological leadership.
Aaron White, Director of Communications for the Progressive Policy Institute (PPI) released the following statement:
“The Progressive Policy Institute is encouraged to see the House passage of the America COMPETES Act, a companion bill to the Senate’s bipartisan United States Innovation and Competition Act, which will invest in American innovation, ease the tensions on U.S. and global supply chains, and strengthen America’s standing in our race with China for technological leadership.
“This bill has the potential to spur long-term growth through significant investment in scientific innovation and new-age manufacturing and logistics advancements. The American technology sector has long been a leading global innovator; by investing in emerging technologies, research and development, the future workforce and the U.S. high-tech productive base, America can once again lead the world with a robust 21st century economy and expand opportunity for generations to come.
“Notably, it is unfortunate that House Republicans refused to vote for legislation that mirrored bipartisan bills and committee provisions, particularly given the Senate was willing to compromise and pass their companion bill on a bipartisan vote months ago. Important issues like supporting American innovation, technological leadership, and strengthening our economy should transcend partisanship, especially as we recover from the pandemic.
“We must acknowledge that there is still room for improvement. As the Senate and House begin the conference process for the United States Innovation and Competition Act and the America COMPETES Act, PPI encourages conference committee members to more closely examine the trade provisions within the final bill, and take the time needed — through hearings, public comments or other means — to consider the wide ranging implications for U.S. exporters and importers of several of the bill’s trade provisions.
“We also encourage the conference committee to consider reverse the Trump and GOP-era tax increase on scientific research that took effect this year. If left in place, this tax change threatens to undo much of the good that this legislation would do for American innovation. Finally, we hope lawmakers will wait for an official score from the Congressional Budget Office before voting on passage of the bill in its final form. Even if some public investments generate high enough returns to justify borrowing to pay for them, as PPI believes may be the case for some provisions in this bill, it is essential that our leaders have the necessary information to consider all the costs and tradeoffs.
“We thank Speaker Pelosi and Majority Leader Schumer for their continued work in advancing this legislative package, and congratulate President Biden for spearheading this historic advancement in American economic leadership. The finished product will be a major win for American workers, consumers, and manufacturers alike.”
U.S. Technological Innovation Needs Government Procurement to Succeed
Ongoing geopolitical pressures, primarily the modern rise of China, have brought American technological superiority back to the fore as a central political objective. By revitalizing corporate science and economic innovation through government procurement, policymakers can promote U.S. scientific leadership while protecting our national security, argues a new report from the Progressive Policy Institute (PPI)’s Innovation Frontier Project.
The report, authored by Sharon Belenzon and Larisa C. Cioaca of Duke University’s Fuqua School of Business, is titled “Government Procurement: A Policy Lever to Revitalize Corporate Scientific Research.”It details the history of government procurement from the 1957 Sputnik shock to the rise of China, along with evidence that an increase in procurement contracts leads firms to invest more in upstream R&D, especially when private market incentives are weaker.
“There’s no reason that America can’t lead the world again in science and technology. And as the authors of this report argue, the rise of China represents not only a threat, but an opportunity,” said Jack Karsten, Managing Director of the Innovation Frontier Project at PPI. “By bolstering corporate scientific research with the right targeted reforms to the procurement process, the U.S. government can constructively address the national security challenges it faces while reinvigorating domestic innovation.”
Belenzon and Cioaca call for the government to incentivize the participation of the private sector in procurement, while still responsibly and efficiently managing taxpayer dollars. They recommend that policymakers consider returning to the practice of rewarding firms that demonstrate technological superiority, encouraging domestic innovation while keeping us competitive abroad.
PPI releases this report as the U.S. House of Representatives considers the America COMPETES Act, a package meant to address supply chain issues, increase domestic production, and invest in American scientific and technological leadership. The legislation would appropriate $45 billion to prevent supply chain shortages and disruptions and $52 billion for semiconductor production in America, along with a collection of bipartisan science, research and technology bills.
Based in Washington, D.C., and housed in the Progressive Policy Institute, the Innovation Frontier Project explores the role of public policy in science, technology and innovation. The project is managed by Jack Karsten. Learn more by visiting innovationfrontier.org.
The Progressive Policy Institute (PPI) is a catalyst for policy innovation and political reform based in Washington, D.C. Its mission is to create radically pragmatic ideas for moving America beyond ideological and partisan deadlock. Learn more about PPI by visiting progressivepolicy.org.
As the United States engages in what the Biden administration has referred to as “strategic competition” with China over economic leadership, a newly released House bill seeks to secure America’s role on the global stage by promoting technological innovation. The America COMPETES Act both stimulates investment in research and revitalizes industrial capabilities in the American technology sector. From funding research in new network technologies to eliminating green card caps for recipients of doctoral degrees in STEM fields, the bill acknowledges that the key to facilitating long term economic growth is investment in scientific development. It is promising to see Democrats encourage innovation as a driver of growth and, while not perfect, the bill provides much needed resources to address numerous areas where the American economy has fallen behind.
Over the past two decades, American domestic expenditure on research and development as a share of GDP has risen only slightly while other major economic rivals have experienced significant gains. In 2003, American investment in R&D made up approximately 2.6% of gross domestic product, compared to 3.1% in 2019. Over the same period, China and South Korea effectively doubled their own R&D spending as a share of GDP, with South Korea boasting 4.6% of GDP being attributed to R&D spending compared to 2.3% in 2003, and China seeing an increase from 1.1% to 2.2%. Additionally, between 2012 and 2021, the Chinese government made significant investments into higher education, increasing the number of PhD graduates in the country by 40%. To keep up, it is essential for the U.S. to support STEM programs at every level of education, from K-12 to those pursuing advanced degrees. The House seeks to accomplish this with this bill, prioritizing research across STEM fields to facilitate purpose-driven R&D to address pressing societal challenges such as environmental sustainability, while also supporting a new generation of teachers, researchers and professionals trained in STEM. These are worthy investments in domestic talent which can drive long run growth.
Another notable aspect of the bill is the focus on domestic manufacturing of tech-sector inputs, such as microchips, to address shortages of input goods which currently threaten to interrupt production of products such as cars, medical equipment, and consumer tech devices. Included is an allocated $52 billion to support the domestic production of semiconductors, a product market which has faced shortages heavily exacerbated by the ongoing pandemic. The Department of Commerce reported this week that demand for chips increased 17% from 2019 to 2021 with no comparable increase in supply. In 2019, buyers of semiconductor products had a median inventory of 40 days, compared to just five days in 2021 — meaning a week-long disruption in the supply chain has the potential to cripple high-tech industries reliant on microchips the short term, an especially daunting threat in the era of pandemic shutdowns. The Department of Commerce found that a driving force behind the issue was a lack of production capacity, and with the U.S. currently accounting for just 12% of global production. Funding to expand this has the potential to go a long way in addressing supply shortages while also opening new opportunities for domestic production and trade.
The bill enjoys wide support among House Democrats as well as President Biden, who applauded the bipartisan effort to promote America’s ability to compete in the global economy. The Senate version — the United States Innovation and Competition Act — passed with 68 votes in May of 2021, highlighting the bipartisan nature of the issue.
However, one controversial difference between the House and Senate bills as they impact the American tech sector is the inclusion of the SHOP SAFE Act in the House bill. The SHOP SAFE Act was introduced last September and sought to reduce the prevalence of counterfeit products sold online by imposing legal liability on e-commerce platforms for the sale of counterfeit goods. However, because many e-commerce platforms rely on the presence of third-party sellers, this would force small and large platforms to scrutinize even the smallest sellers to avoid penalties. This well-intentioned provision will likely hurt smaller e-commerce platforms who lack the tools to moderate listings on their sites to the level required to avoid penalty. Companies are given avenues to avoid liability if moderation procedures for listings follow certain practices, but the vague standard given will make it difficult for smaller platforms to compete with large e-commerce sites which can do so effectively at a relatively low cost. While much of the bill promotes the American technology industry’s ability to compete, this type of penalty will undermine the ability for U.S. companies to compete with Chinese giants such as Alibaba in the e-commerce space, running counter to the legislations intended purpose.
Ultimately, the America COMPETES Act has the potential to spur long term growth through significant investment in scientific innovation and emerging technology. Though imperfect, the sentiment behind the bill is a positive one. The American technology sector has long been a leading global innovator and by investing in the future of the industry Congress can promote both global competition and a robust domestic economy driven by new technologies.
Aaron White, Director of Communication for the Progressive Policy Institute (PPI), released the following response in reaction to the Senate Judiciary Committee’s advancement of the American Innovation and Choice Online Act:
“For those of us that believe in good governance and the importance of legislative deliberation and debate, today’s markup of the American Innovation and Choice Online Act was embarrassing for the Senate.
“The Judiciary Committee’s markup made it crystal clear that there are still significant, unresolved concerns on both sides of the aisle. As written, the bill sparks major national security and privacy risks, includes overly broad and burdensome language, and will harm American consumers, workers, and the digital economy.
“Senator after Senator raised concerns that this was a rushed legislative process, and this bill is not ready for primetime, yet Senator Klobuchar chose to force this vote. The Senate should do its job and return to the legislative process that all Senators can be proud of. This bill should not see the Senate floor until the legitimate concerns of Senators are addressed.
“The digital economy is a hallmark American achievement that has created millions of middle-class jobs. Scrutiny is important and healthy; but the Senate must address their concerns in a deliberative fashion — not in a haphazard, potentially reckless manner.”
Ahead of tomorrow’s Senate Judiciary Committee markup, an amended version of Senator Klobuchar’s American Innovation and Choice Online Act has been released. While the amendment makes clear the bill’s sponsors are cognizant of the shortcomings associated with the legislation, it is functionally devoid of the changes necessary to prevent the harm the bill currently poses to American consumers. The result is a bill which puts aside the objective of consumer welfare and threatens the way in which both users and businesses utilize integrated online services.
In no section is this more glaringly obvious than in the amended language around subscription-based services. The amendment seeks to fortify Senator Klobuchar’s claim that the bill does not interfere with Amazon’s ability to offer Prime delivery services by clarifying that companies cannot be held liable for “offering a fee for service subscription that provides benefits to covered platform users”. What the amendment ignores, however, is the mechanisms through which the bill harms Prime in the first place. By opening the company up to legal liability on the grounds that Prime’s benefits to consumers give an unfair advantage to Amazon itself, the amended bill still could render Amazon Prime infeasible under the threat of significant fines should they continue to offer the service. For the estimated 153 million Americans subscribed to Amazon Prime, this could mean the loss of popular services such as two-day shipping, while third-party retailers who take advantage of Amazon’s Fulfillment By Amazon (FBA) service to offer Prime delivery on third-party products lose valuable access to Amazon’s established customer base. Moreover, Amazon’s FBA service might itself become a victim of self-preferencing charges, since lawsuits would certainly be filed arguing that Amazon was charging third-party sellers too much for logistic services compared to a hypothetical price that it was charging itself.
The implementation of such a carve-out for subscription services introduces additional complications for online platforms which also come at the expense of the consumer. By shielding from liability in cases where a fee is charged to users, companies are incentivized to begin charging for services which are currently available free of cost to ensure that they remain accessible to consumers in their current form. For example, under the original language of the bill, Google is not able to display Google services such as maps or company profiles at the top of search results, as such a practice is considered as self-preferencing. The amendment makes it so that to preserve this feature, Google must offer a paid subscription to services such as Google Maps, essentially making it so that companies seeking to avoid penalties under this bill must implement fees to consumers for already popular services to avoid legal liability.
The disregard for the bill’s implications regarding consumer welfare raises an important question: Who is antitrust legislation meant to benefit? In theory, promotion of competition on online platforms may lower prices and increase choice, but the line of thinking promoted by this bill turns a blind eye to the reality of how users and businesses engage with internet services. For consumers, integrated online services are a valued feature of the products provided by platforms. By taking this integration away or requiring that it be offered at cost, Americans who depend on these services will be left worse off with the passage of this bill. The committee is clearly trying to defend itself against valid criticism of the bill with such last-minute tweaks, but the deeper question is, how do these proposed changes in any material way promote innovation, competition or consumer welfare?
Today, the Progressive Policy Institute (PPI) released a new research deck on how Senators Amy Klobuchar and Chuck Grassley’s anti-tech antitrust bill, the American Innovation and Choice Online Act, could do irreparable harm to the services and products millions of Americans rely on every day.
“The bill is notable for combining very broad language, very heavy penalties, and very narrow grounds for affirmative defense,” said Dr. Michael Mandel, Vice President and Chief Economist for the Progressive Policy Institute. “The problem is that this three-way combination goes far beyond imposing normal compliance costs and regulatory burdens, creating huge financial and business risks for even ordinary business decisions.”
Well-liked services such as Google Search, Fulfillment by Amazon, and the Apple App Store, could have to be substantially reconfigured and/or limited, according to the deck’s authors, Mandel, John Scalf of NERA Economic Consulting and D. Daniel Sokol of University of Southern California Gould School of Law. Popular smartphone features and user reviews on online marketplaces could be affected as well. These proposed standards would not only undermine the tech companies that would be subjected to the legislation, but inevitably harm its users.
Consumers could also suffer from reduced innovation, as the targeted companies would have to obtain regulatory pre-approval with every new product or meet the unspecified criteria in the bill.
A mark-up of the bill is scheduled for Thursday of this week in the Judiciary Committee. Read PPI’s statement on the markup and the bill here.
This deck was authored by Michael Mandel of the Progressive Policy Institute, John Scalf of NERA Economic Consulting, and D. Daniel Sokol of the University of Southern California Gould School of Law.
The Progressive Policy Institute (PPI) is a catalyst for policy innovation and political reform based in Washington, D.C. Its mission is to create radically pragmatic ideas for moving America beyond ideological and partisan deadlock. Learn more about PPI by visiting progressivepolicy.org.
The American Innovation and Choice Online Act Would Likely Harm Consumers
SUMMARY:
Recently, Senator Klobuchar introduced the American Innovation and Choice Online Act (“AICOA”) proposing sweeping regulations for a handful of tech companies that operate digital services used by both businesses and consumers.
While the Bill is ostensibly intended to prevent self-promotion and discriminating against competitors, it would end up sweeping up a broad range of ordinary business operations that provide huge benefits to consumers.
The Bill is notable for its combination of very broad and vague language for defining illegal activity; very heavy penalties for companies and corporate officers; and very narrow language for affirmative defense.
Moreover, the Bill makes no mention of consumer benefits as an affirmative defense and hence advances the interests of certain businesses over the interests of consumers and small businesses that use such services.
The problem is that this three-way combination goes far beyond imposing normal compliance costs or regulatory burdens, by creating huge financial and business risks for even ordinary business decisions.
In response, well-liked services such as Google Search, Fulfillment by Amazon, and the Apple App Store, will have to be substantially reconfigured and/or limited. These proposed standards would not only undermine the tech companies that would be subjected to the legislation, but inevitably harm its users as well.
In fact, because the Bill fails to distinguish between markets that are competitive and markets that suffer from market power, it would inevitably harm competition in digital markets as well. The Bill would essentially make it less likely that either firms subjected to the regulations or ones arbitrarily protected from them would invest in new, innovative consumer products.
Consumers could lose out on a range of products and services offered by the targeted companies that would be swept up by the Bill. Just a few of the products and services that could hampered by the Bill include:
Search engines that concentrate on delivering the most relevant results to consumers from Google
Online shopping with massive product catalogs and two-day shipping from Amazon
Smartphones and a vast library of third-party apps that have revolutionized everyday life from Apple
Consumers would also suffer from reduced innovation, as the targeted companies would have to obtain regulatory pre-approval with every new product to meet the unspecified criteria in §2(a) and (b) of the Bill.
Far beyond its stated goals, the Bill could end up harming consumers by breaking the products and services that they have come to greatly value and depend on.
View the full research deck by Dr. Michael Mandel of the Progressive Policy Institute, Dr. John Scalf of NERA Economic Consulting, and Professor D. Daniel Sokol of the University of Southern California Gould School of Law.
Today, the Senate Judiciary Committee announced a markup of an antitrust bill aimed at a handful of America’s most successful technology companies, led by Senator Amy Klobuchar (D-MN). The bill will harm American consumers and American middle-class jobs from coast to coast.
Dr. Michael Mandel, Vice President and Chief Economist of the Progressive Policy Institute, released the following statement:
“The digital economy should be a source of pride for Democrats. Digital inflation is low, wage growth in the tech-ecommerce sector is extremely rapid, and digital job creation is strong – especially in pivotal swing states.
“Instead, if this bill is passed, it will undercut the tech and ecommerce industries – which are vital to our 21st century economy – and give China the edge in leadership and the digital economy. The Senate and House bills are unpopular with voters in the battleground congressional districts, and will likely stunt job growth in these pivotal swing states ahead of the 2022 election.
“Senate Democrats should rethink their push to cater toward the extremes of the party and instead focus on pragmatic, pro-growth legislation that makes the digital economy stronger.”
The headline of a November 18 article in Ars Technica says it all: “FAA forced delay in 5G rollout despite having no proof of harm to aviation: US delays even as 40 countries use C-band with no reports of harm to altimeters.”
What’s the story here? An interagency squabble between the FAA and the FCC could damage the US ability to implement 5G service, just as the economy is starting to accelerate. 5G provides essential new capabilities for businesses in areas from digital manufacturing to logistics to agriculture. A 2020 PPI report projected that 5G-enabled enterprises could create 4.6 million jobs over the next 15 years, and hundreds of thousands of jobs in the near-term. The Biden Administration must step in and make sure that this issue is settled as quickly as possible, in a way that accounts for safety without holding back growth.
Mobile providers have just spent $80 billion on licenses for what is known as C-band spectrum, which has very desirable characteristics for 5G service, in terms of speed and coverage. The issue is that aircraft altimeters, which measure the altitude of a plane, utilize frequencies that are close to the C-band spectrum used for 5G. Aware of this problem, the FCC put in a large “guard band” of unused spectrum between the 5G frequencies and the altimeter frequencies.
The FAA decided that the FCC’s actions weren’t good enough, and warned of “potential adverse effects on radio altimeters.” This forced Verizon and AT&T to delay their planned roll-out of the new 5G capabilities for at least a month while the agencies duked it out.
But here’s the thing. This C-band spectrum is already in use in 40 other countries which have experienced no problems with altimeters. Moreover, US airlines continue to fly to these countries As Roger Entner wrote, if the interference problem is as dire as the FAA says, “why have the airlines and aeronautics manufacturers not grounded planes” in those countries?
Moreover, the FAA is relying on studies which appear to be using unrealistic assumptions. Based on these assumptions, existing systems would already be interfering with altimeters. For example, Peter Rysavy writes that
Navy radar, such as the AN/SPN-43 radar, operates in mid-band frequencies at extremely high power with ground transmitters pointing at aircraft in geographical areas where U.S. planes operate. Such potential interference, however, has not been a problem in the real world.
This is not the time for agency parochialism. The Biden Administration has to make sure that this problem gets resolved quickly and in accordance with science and good engineering practice.
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.
Today, the Innovation Frontier Project (IFP), a project of the Progressive Policy Institute, released a comprehensive research deck on the threats facing American innovation. The authors of the deck, innovation experts Ashish Arora and Sharon Belenzon of Duke University, found the United States has lost a substantial amount of corporate research since the 1980s, with only a handful of present-day U.S.-based companies investing in research at a meaningful level.
This deck also lays out clear political implications for lawmakers. The Biden Administration’s top strategic economic priorities are based on a foundation of strong U.S. competitiveness and innovation, yet Congress’s percolating anti-tech antitrust legislation would undermine these priorities by impairing the ability of America’s few leading R&D performers to develop new products and enter new markets. The restrictions on these companies will reduce our national investment in R&D and hurt American economic prosperity and national security.
“America’s technological leadership is being challenged, and if we undermine our business research leaders we risk losing this fight with China. The Biden Administration has identified key priorities in emerging technologies, but Congress’s anti-tech antitrust legislation would hurt these priorities. Our policymakers need to get smart about the steps needed to regain our footing as a technological leader,” said Dr.Michael Mandel, Chief Economist for the Progressive Policy Institute.
The deck findings issue a stark warning:
America’s technological leadership is under challenge.
The United States has lost a substantial amount of corporate research since the 1980s.
Corporate research is the source of many breakthrough innovations.
American leadership in emerging technologies depends on corporate research and only a few companies continue to invest in research at a meaningful level.
The antitrust proposals will impair the ability of these few leading R&D performers to develop new products and enter new markets.
The loss of tech companies with scale and scope would reduce U.S. investments in R&D and hurt American economic prosperity and security.
This deck was authored by Ashish Arora and Sharon Belenzon of Duke University. Mr. Arora is the Rex D. Adams Professor of Business Administration at the Duke Fuqua School of Business. He received his PhD in Economics from Stanford University in 1992, and was on the faculty at the Heinz School, Carnegie Mellon University, where he held the H. John Heinz Professorship, until 2009. Mr. Belenzon is a professor in the Strategy area at the Fuqua School of Business of Duke University and a Research Associate at the National Bureau of Economic Research (NBER). His research investigates the role of business in advancing science and has been featured in top academic journals, such as Management Science, Strategic Management Journal and American Economic Review. Mr. Belenzon received his PhD from the London School of Economics and Political Science and completed post-doctorate work at the University of Oxford, Nuffield College.
Based in Washington, D.C., and housed in the Progressive Policy Institute, the Innovation Frontier Project explores the role of public policy in science, technology and innovation. The project is managed by Jack Karsten. Learn more about IFP by visiting innovationfrontier.org.
The Progressive Policy Institute (PPI) is a catalyst for policy innovation and political reform based in Washington, D.C. Its mission is to create radically pragmatic ideas for moving America beyond ideological and partisan deadlock. Learn more about PPI by visiting progressivepolicy.org.
Facebook’s long-time unofficial motto was “move fast and break things.” We now see that this was a mistaken approach to building and governing a content platform. But some members of Congress who are seeking to hit back at Facebook seem to have been inspired by this same motto. Rather than taking a thoughtful approach and examining the consequences of new antitrust regulation on U.S. competitiveness and national security, the motto of these lawmakers seems to be: “Move fast, break the American tech industry and see what happens.”
We’ve tried the “move fast and break things” approach. It’s time for a new, more deliberate approach — a real effort to grapple with the benefits and harms of the tech industry and to build a regulatory framework to govern and promote the sustainable growth of American technology companies, while squarely taking on the challenge from techno-authoritarian states such as China and Russia.
What we should not do is overreact to the “Facebook Files” by passing recent bills introduced by Rep. David Cicilline (R-R.I.) and Sen. Amy Klobuchar (D-Minn.) that have nothing to do with the harms described by Facebook whistleblower Frances Haugen. These bills threaten to exacerbate those harms by creating hundreds of even less scrupulous mini-Facebooks that are beyond the reach of U.S. law enforcement and would eliminate the ability of consumers to rely on app stores to provide protection against the next social media harm.
