James Fallows on surveillance’s effect on the commercial Internet

I’m pleased that someone picked up on my offhand mention of the likelihood that deep and broad NSA surveillance will have a negative effect on the value of the Internet as a commercial platform for value creation and posted the link on reddit. Thanks!

Since I didn’t intend to provide any in-depth analysis on that point, and some of the reddit commenters are taking me to task for not doing so, I encourage reading James Fallows of The Atlantic on this point: Why NSA Surveillance Will Be More Damaging Than You Think. For example:

The problem for the companies, it’s worth emphasizing, is not that they were so unduly eager to cooperate with U.S. government surveillance. Many seem to have done what they could to resist. The problem is what the U.S. government — first under Bush and Cheney, now under Obama and Biden — asked them to do. As long as they operate in U.S. territory and under U.S. laws, companies like Google or Facebook had no choice but to comply. But people around the world who have a choice about where to store their data, may understandably choose to avoid leaving it with companies subject to the way America now defines its security interests. …

What governments do eventually becomes known. Eventual disclosure is likely when a program involves even a handful of people. (Latest case in point: Seal Team Six.) It is certain when an effort stretches over many years, entails contracts worth billions of dollars, and requires the efforts of tens of thousands of people — any one of whom, as we’ve seen from Snowden, may at any point decide to tell what he knows.

In launching such an effort, a government must assume as a given that what it is doing will become known, and then calculate whether it will still seem “worthwhile” when it does. Based on what we’ve seen so far, Prism would have failed that test.


History of economic thought course video: John Stuart Mill

Lynne Kiesling

You may know John Stuart Mill the utilitarian philosopher, the JS Mill of On Liberty and of Utilitarianism. You may know him as the philosopher who can’t hold his shandy in the Monty Python philosopher’s song.

What you may not know is how important an economist Mill was. He made some original contributions that bridged from the classical economics of Smith and Ricardo (and others) to the subsequent marginal revolution of Jevons, Menger, and Walras.

You can read some of them yourself in Mill’s Principles of Political Economy (1848), available at the Library of Economics & Liberty.

Google Reader coda: will it become social media?

Lynne Kiesling

Apparently I’m not the only one musing on the relationship between social media and RSS readers. Since I wrote the previous post, this Ars Technica post has suggested that Google will fold Reader into Google+.

To which I respond: Meh. Too social. Too visual. Not mobile friendly because it uses too much screen space (disclosure: Eli Dourado said the same to me on Twitter, and I concur). Not easy to either scan or dig deep or put aside for later. Meh.

Regulation’s effects on innovation in energy technologies: the experimentation connection

Lynne Kiesling

Remember the first time you bought a mobile phone (which in my case was 1995). You may have been happy with your land line phone, but this new mobile phone thing looks like it would be really handy in an emergency, so you-in-1995 said sure, I’ll get a cell phone, but not really use it that much. Then, the technology improved, and more of your friends and family got phones, so you used it more. Then you saw others with cool flip phones, in colors, and you did some searching to see if other phones had features you might like. Then came text messaging, and you experimented with learning a new shorthand language (or, if you’re like me, you stayed a pedant about spelling even in text messages that you had to tap out on number pad keys). You adopted text messaging, or not. Then came the touch screen, largely via the disruptive iPhone, and the cluster of smartphone innovation was upon us.  Maybe you have a smartphone, maybe you don’t; maybe your smartphone is an iPhone, maybe it isn’t. But since 1995, your choice of communication technology, and the set from which you can choose, has changed dramatically.

This change didn’t happen overnight, and for most people was not a discrete move from old choice to new choice, A to B, without any other choices along the way. Similarly for technological change and the production of goods and services. For both consumers and producers, our choices in markets are the consequence of a process of experimentation, trial and error, and learning. Indeed, whether your perspective on dynamic competition is based on Schumpeter or Hayek or Kirzner (or all of the above), the fundamental essence of competition in market processes is that it’s a process of experimentation, trial and error, and learning, on the part of both producers and consumers. That’s how we get new products and services, that’s how we signal to producers whether their innovations are valuable to us as consumers, that’s how innovation creates economic growth and vibrancy, through the application of our creativity and our taste for creating and experiencing novelty.

This kind of dynamism is common in our world, and is increasingly an aspect of our lives that creates value for us; mobile telephony is the most obvious example, but even in products as mundane as milk, the fundamental aspect of the market process is this experimentation, trial and error, and learning. How else would Organic Valley have started coming out with a line of milk that is entirely from pasture-raised cows? (I am happily consuming this milk; pasture-raised cows make milk with more essential fatty acids and conjugated linoleic acid, very important for health)

But this kind of dynamism, while common, is not pervasive. Institutions matter, and in particular, various forms of government regulation can influence the extent to which such technological dynamism occurs in a market. The example I have in mind as a counterpoint, the example I want to explain and understand, is consumer-facing electricity technologies, like thermostats and home energy management systems. For the past several years there has been considerable innovation in this space, due to the application and extension of digital communication technology innovations. But despite the frequent claims over the past few years that this year will be the year of the consumer energy technology, it keeps not happening.

Tomorrow in New Orleans, at the Southern Economic Association meetings, I’ll be presenting a paper that grapples with this question. My argument is that traditional economic regulation of the electricity industry slows or stifles innovation because regulation undercuts the experimentation, trial and error, and learning of both producers and consumers. As I state in the abstract:

Persistent regulation in potentially competitive markets can undermine consumer benefits when technological change both makes those markets competitive and creates new opportunities for market experimentation. This paper applies the Bell Doctrine precedent of “quarantine the monopoly” to the electricity industry, and extends the Bell Doctrine by analyzing the role of market experimentation in generating the benefits of competition. The general failure to quarantine the monopoly wires segment and its regulated monopolist from the potentially competitive downstream retail market contributes to the slow pace and lackluster performance of retail electricity markets for residential customers. The form of this failure to quarantine the monopoly is the persistence of an incumbent default service contract that was intended to be a transition mechanism to full retail competition, coupled with the regulatory definition of product characteristics and market boundaries that is necessary to define the default product and evaluate the regulated monopolist’s performance in providing it. The consequence of the incumbent’s incomplete exit from the retail market suggests that as regulated monopolists and regulators evaluate customer-facing smart grid investments, regulators and other policymakers should consider the potential anti-competitive effects of the failure to quarantine the monopoly with respect to the default service contract and in-home energy management technology.

In August 2011 I wrote about the Bell Doctrine, Baxter’s precedent from the U.S. v. AT&T divestiture case, and how we have failed to quarantine the monopoly in electricity. This paper is an extension of that argument, and I welcome comments!

If you’ll be at the SEA meetings, I hope to see you there; I am headed to NOLA tonight, and look forward to a fun weekend full of good economic brain candy.

Newspaper report implicates politicians, industry insiders in attempt to manipulate renewable credits market

Michael Giberson

Consumers remain wary of attempts to manipulate energy markets, but it can be hard for consumers to tell when markets are being manipulated. For example, JP Morgan has been accused of manipulating the California ISO power market, but the company denies the accusation. The markets are complicated, the regulatory filings in the complaint are less than transparent to non-specialists and not always public, and the disputes can go without final resolution for years.

So much easier for consumers when public officials get involved in market manipulation, because they can be counted on to brag about the manipulation and word gets out. For example, in New Jersey, as the Star-Ledger reports, Gov. Christie held a news conference to publicize his energy market manipulation efforts:

Yesterday, Gov. Chris Christie signed a law to revive the [state's solar power] industry, which ranks only behind California’s in terms of total solar-energy projects.

The market works because electric companies must buy solar credits, called SRECs, from panel owners on a state-planned market, or produce their own.

But the subsidy plus a federal incentive led to a huge buildup of projects in the state and a glut of SRECs. That drove prices down sharply, leading to fears of solar layoffs.

So legislators and the governor stepped in to dramatically increase the number of solar credits that New Jersey’s electric utilities must buy, a move meant to increase prices.

See also the Renewable+Law blog, “Bill to stabilize New Jersey Solar Market Signed into Law.”

It is clear from these descriptions that politicians, working with industry insiders, are working the rules in order to push market prices up. Smells like manipulation to me.

Reasons to end the War on Drugs. Now.

Lynne Kiesling

Today in Forbes Art Carden has an essay arguing that we should end the War on Drugs and make marijuana legal, now. He’s right. Here’s why.

  • As Art argues, the War on Drugs is a policy poster child for unintended consequences, because the inelastic demand for the regulated good means that stronger enforcement leads to more profits from selling the good. The War on Drugs increases drug dealer profits.
  • Because of those profits relative to other alternatives, the War on Drugs just doesn’t work. An example: here in Chicago we had a recent spate of unusual gun violence, and even though new police chief Garry McCarthy said last year that he thought the War on Drugs was ineffective, after this violent weekend he joined mayor Rahm Emanuel in promising more vigorous and aggressive enforcement and targeting of drug transactions. Note at the head of the lede that Mick Dumke says “The first time I heard a police officer argue that the war on drugs wasn’t working was in 1994.” Law Enforcement Against Prohibition has been saying it since 2002.
  • The War on Drugs violates the fundamental individual right that humans have of self-ownership; individuals have the right to choose their own actions without interference as long as their actions do not violate the fundamental individual rights of others.
  • The War on Drugs has created horrific law enforcement violations of individual rights: police brutality, increased police militarization, no-knock raids resulting in property destruction and death of innocent citizens when they get the wrong addresses, civil asset forfeiture rules that police departments have incentives to exaggerate so they can sell assets to raise revenue. The actions that the police rationalize using the War on Drugs increasingly are the actions of a police state.
  • The War on Drugs has virtually eliminated the constitutional protection of individual rights against unreasonable search and seizure, and is seriously eroding judicial due process rights.
  • The War on Drugs has costly and socially corrosive blowback in other areas. If you think that the invasive actions of the TSA are solely related to the War on Terror, you haven’t been paying attention. When the TSA crows about its “successes” in airport security, they are often items of “contraband”. The War on Terror is in part a red herring for the War on Drugs, and the two combine to give law enforcement officials substantial discretion in the militarization, unreasonable search, etc. mentioned above.
  • The War on Drugs has destroyed the fabric of urban families and communities much more than drug use would, through the disproportionate incarceration of young African American men (see above point about how regulation increases the profits from the drug trade).
  • In addition to the immorality of the War on Drugs described above, as a matter of public policy it fails benefit-cost analysis. Jeffrey Miron estimates the net effect annually of reducing enforcement, legalization, and taxation of marijuana to be $15 billion — an increase in tax revenue of almost $7 billion and a reduction in enforcement costs of $8 billion. The net social savings from extending legalization to other drugs is even larger. Think about the other uses of those resources — revenue for deficit reduction, reallocation of law enforcement activity to some other area where it may actually have meaningful beneficial impacts (like, say, intelligence gathering, community development, cops walking the beat).
  • The beneficial budgetary effects and reduced social corrosion that Miron suggests have actually happened recently in Portugal, which has liberalized its drug trade and consumption, with net beneficial financial and social effect.
  • The hypocrisy of the War on Drugs is astounding, particularly the president’s recent heavy-handed opposition to legalization after his admission in 2004 that the War on Drugs is a failed policy. In the face of the fact that the health effects of alcohol are more negative than of marijuana and the fact that general social mores have moved so that more than half of the U.S. population believes that marijuana should be legal, this hypocrisy is downright absurd.

Nick Gillespie says it well in this reason.tv video:

We cannot afford the War on Drugs, either morally or economically. End this costly, ineffective, corrosive policy. Now.


Welcome Sarah Skwire!

Lynne Kiesling

I am thrilled to welcome my friend, knitting buddy, poetry expert, and all around Renaissance woman Sarah Skwire as a guest blogger! Sarah’s incisive intellect enables her to see connections across literature, economics, and political theory, and we welcome her insightfulness whenever the economics bug bites. Welcome, Sarah.

Claims by lobbyists that deserve to be laughed at

Michael Giberson

Sometimes politicians and lobbyists make claims that deserve to be laughed at in the most public way possible.

Here is an example from the ethanol lobby, via The Hill‘s Congress Blog:

US ethanol makes history by sacrificing a subsidy

By Bob Dinneen, president and CEO, Renewable Fuels Association – 01/05/12 11:26 AM ET

With growing concerns about gridlock in Washington and greed on Wall Street, Americans are wondering whether anyone with a stake in public policies is willing to sacrifice their short-term advantage for a greater good.

Well, someone just did.

Without any opposition from the biofuels sector, the tax credit for ethanol blenders (the Volumetric Ethanol Excise Tax Credit – VEETC) expired on January 1.

In fact, American ethanol may well be the first industry in history that willingly gave up a tax incentive. Facing up to the fiscal crisis in this country, industry advocates have engaged in discussions with the Administration, Congress and our own constituents in an effort to frame forward-looking policies that balance the needs for deficit reduction and the development of clean-burning, American-made motor fuels.

Incentives should help emerging industries to develop and grow, not to be forever subsidized by the nation’s taxpayers. The Volumetric Ethanol Excise Tax Credit — which actually accrued to biofuels blenders, not producers – has helped the renewal fuels industry to stand on its own two feet. So now it is time for this subsidy to be phased out.

But make no mistake: While this subsidy has gone away, American ethanol is here to stay. From the economy to the environment and energy security, ethanol is an American success story.

With more than 200 biorefineries in nearly 30 states, American ethanol directly employs more than 70,000 workers in plants, on farms and at construction companies and suppliers, while indirectly supporting an additional 330,000 jobs. In the midst of more than 8 percent unemployment, the ethanol industry provides high-skill, high-wage jobs that can’t be outsourced, with more than 99% offering healthcare and other benefits. The industry contributes $53 billion to the Gross Domestic Product, raises household incomes by $16 billion and pays $7 billion in federal taxes and $4 billion in state taxes.

Nor are ethanol’s benefits limited to the rural communities where the industry provides jobs for workers, markets for farmers, customers for businesses, and tax dollars for the local schools and police and fire departments. In 2010, the use of 13 billion gallons of ethanol reduced the need for oil imports by 445 million barrels, making our nation less dependent on increasingly unstable regimes in the Middle East. On the environmental front, ethanol use reduces greenhouse gas emissions by 48 to 59 percent, compared to gasoline. At the nation’s gas pumps, blending ethanol with gasoline saved American families an average of $0.89 per gallon in 2010, according to a study conducted by economists at Iowa State University and the University of Wisconsin.

By helping to reduce the federal budget deficit and the nation’s dependency on imported oil, the US ethanol industry is doing its part to address America’s challenges. Meanwhile, the well-established and highly profitable oil industry is still receiving huge subsidies and refusing to give up any.

Having benefited from federal subsidies for the past century, Big Oil rakes in federal tax breaks and other advantages totaling from $3.6 to $4.5 billion a year. Indeed, the Environmental Law Institute recently reported that, from 2002 to 2008, federal subsidies to fossil fuels such as oil and coal totaled approximately $72 billion, compared to only $29 billion in incentives for renewable energy sources, such as solar, wind, geothermal and biofuels.

When it comes to crafting policies that promote fiscal responsibility and energy sustainability, the US ethanol industry has proven that it is willing to come to the table.

But every energy policy must be on the table.

From coal to hydroelectric, nuclear, wind, solar and geothermal energy, virtually every source of energy has been subsidized in its early years. But there is no reason for established industries, such as Big Oil, to enjoy eternal subsidies for almost a century.

What’s needed, instead, are timely, targeted, and temporary subsidies so that new energy sources  can be developed, commercialized and allowed to compete on a level playing field with established energy sources. That is why the biofuels industry is seeking opportunities to accelerate the development of new ethanol feedstocks, such as switch grass, wood wastes and even garbage, while modernizing the nation’s fueling infrastructure through blender pumps.

Now that the ethanol blenders’ tax credit has become history, let’s make history by incentivizing America’s energy future, not providing perpetual subsidies for fossil fuels.

 ** Bob Dinneen is the president and CEO of the Renewable Fuels Association, the national trade association of the US ethanol industry. **

You be the judge: A great moment in the history of U.S. public policy, or laughable nonsense?

Well, to be fair, not everything Dinneen says is laughable nonsense, for example he truthfully points out that the tax credit for ethanol blenders expired on January 1. Most of the rest of it is hilariously weak.

Note the related post from a few days ago: “Ethanol industry allows its politicians to permit expiration of its tax credit and tariff.”