DRI-183 for week of 3-1-15: George Orwell, Call Your Office – The FCC Curtails Internet Freedom In Order to Save It

An Access Advertising EconBrief:

George Orwell, Call Your Office – The FCC Curtails Internet Freedom In Order to Save It

February 26, 2015 is a date that will live in regulatory infamy. That assertion is subject to revision by the courts, as is nearly everything undertaken these days by the Obama administration. As this is written, the Supreme Court hears yet another challenge to “ObamaCare,” the Affordable Care Act. President Obama’s initiative to achieve a single-payer system of national health care in the U.S. is rife with Orwellian irony, since it cannot help but make health care unaffordable for everybody by further removing the consumer of health care from every exposure to the price of health care. Similarly, the latest administration initiative is the February 26 approval by the Federal Communications Commission (FCC) of the so-called “Net Neutrality” doctrine in regulatory form. Commission Chairman Tom Wheeler’s summary of his regulatory proposal – consisting of 332 pages that were withheld from the public – has been widely characterized as a proposal to “regulate the Internet like a public utility.”

This episode is riven with a totalitarian irony that only George Orwell could fully savor. The FCC is ostensibly an independent regulatory body, free of political control. In fact, Chairman Wheeler long resisted the “net neutrality” doctrine (hereinafter, shortened to “NN” for convenience). The FCC’s decision was a response to pressure from President Obama, which made a mockery of the agency’s independence. The alleged necessity for NN arises from the “local monopoly” over “high-speed” broadband exerted by Internet service providers (again, hereinafter abbreviated as “ISPs”) – but a “public utility” was, and is, by definition a regulated monopoly. Since the alleged local monopoly held by ISPs is itself fictitious, the FCC is in fact proposing to replace competition with monopoly.

To be sure, the particulars of Chairman Wheeler’s proposal are still open to conjecture. And the enterprise is wildly illogical on its face. The idea of “regulating the Internet like a public utility” treats those two things as equivalent entities. A public utility is a business firm. But the Internet is not a single business firm; indeed, it is not a single entity at all in the concrete sense. In the business sense, “the Internet” is shorthand for an infinite number of existing and potential business firms serving the world’s consumers in countless ways. The clause “regulate the Internet like a public utility” is quite literally meaningless – laughably indefinite, overweening in its hubris, frightening in its totalitarian implications.

It falls to an economist, former FCC Chief Economist Thomas Hazlett of Clemson University, to sculpt this philosophy into its practical form. He defines NN as “a set of rules… regulating the business model of your local ISP.” In short, it is a political proposal that uses economic language to prettify and conceal its real intentions. NN websites are emblazoned with rhetoric about “protecting the Open Internet” – but the Internet has thrived on openness for over 20 years under the benign neglect of government regulators. This proposal would end that era.

There is no way on God’s green earth to equate a regulated Internet with an open Internet; the very word “regulated” is the antithesis of “open.” NN proponents paint scary scenarios about ISPs “blocking or interfering with traffic on the Internet,” but their language is always conditional and hypothetical. They are posing scenarios that might happen in the future, not ones that threaten us today. Why? Because competition and innovation protected consumers up to now and continue to do so. NN will make its proponents’ scary predictions more likely, not less, because it will restrict competition. That is what regulation does in general; that is what public-utility regulation specifically does. For over a century, public-utility regulation has installed a single firm as a regulated monopoly in a particular market and has forcefully suppressed all attempts to compete with that firm.

Of course, that is not what President Obama, Chairman Wheeler and NN proponents want us to envision when we hear the words “regulate the Internet like a public utility.” They want us to envision a lovely, healthy flock of sheep grazing peacefully in a beautiful meadow, supervised by a benevolent, powerful Shepherd with a herd of well-trained, affectionate shepherd dogs at his command. Soothing music is piped down from heaven and love and tranquility reign. At the far edges of the meadow, there is a forest. Hungry wolves dwell within, eyeing the sheep covetously. But they dare not approach, for they fear the power of the Shepherd and his dogs.

In other words, the Obama administration is trying to manipulate the emotions of the electorate by creating an imaginary vision of public-utility regulation. The reality of public-utility regulation was, and is, entirely different.

The Natural-Monopoly Theory of Public-Utility Regulation

The history of public-utility regulation is almost, but not quite, co-synchronous with that of government regulation of business in the United States. Regulation began at the state level with Munn vs. Illinois, which paved the way for state government of the grain business in the 1870s. The Interstate Commerce Commission’s inaugural voyage with railroad regulation followed in the late 1880s. With the commercial introduction of electric lighting and the telephone came business firms tailored to those ends. And in their wake came the theory of natural monopoly.

Both electric power and telephones came to be known as “natural monopoly” industries; that is, industries in which both economic efficiency and commercial viability chose one single firm to serve the entire market. This was the outgrowth of economies of scale in production, owing to decreasing long-run average cost of production. This decidedly unusual state of affairs is a technological anomaly. Engineers recognize it in conjunction with the “two-thirds rule.” There are certain cases in which cost increases as the two-thirds power of output, which implies that cost decreases steadily as output rises. (The thru-put of pipes and cables and the capacity of cargo holds are examples.) In turn, this implies that the firm that grows the fastest will undersell all others while still covering all its costs. The further implication is that consumers will receive the most output at the lowest price if one monopoly firm serves everybody – if, and only if, the firm’s price can be constrained equal to its long-run average cost at the rate of output necessary to meet market demand. An unconstrained monopoly would produce less than this optimal rate of output and charge a higher price, in order to maximize its profit. But the theoretical outcome under regulated monopoly equates price with long-run average cost, which provides the utility with a rate of return equal to what it could get in the best alternative use for its financial capital, given its business risk.

In the U.S. and Canada, this regulated outcome is sought by a public-utility commission via the medium of periodic hearings staged by the public-utility regulatory commission (PUC for short). The utility is privately owned by shareholders. In Europe, utilities are not privately owned. Instead, their prices are (in principle) set equal to long-run marginal cost, which is below the level of average cost and thus constitutes a loss in accounting terms. Taxpayers subsidize this loss – these subsidies are the alternative to the profits earned by regulated public-utility firms in the U.S. and Canada.

These regulatory schemes represent the epitome of what the Nobel laureate Ronald Coase called “blackboard economics” – economists micro-managing reality as if they possessed all the information and control over reality that they do when drawing diagrams on a classroom blackboard. In practice, things did not work out as neatly as the foregoing summary would lead us to believe. Not even remotely close, in fact.

The Myriad Slips Twixt Theoretical Cup and Regulatory Lip

What went wrong with this theoretical set-up, seemingly so pat when viewed in a textbook or on a classroom blackboard? Just about everything, to some degree or other. Today, we assume that the institution of regulated monopoly came in response to market monopolies achieved and abuses perpetrated by electric and telephone companies. What mostly happened, though, was different. There were multiple providers of electricity and telephone service in the early days. In exchange for submitting to rate-of-return regulation, though, one firm was extended a grant of monopoly and other firms were excluded. Only in very rare cases did competition exist for local electric service – and curiously, this rate competition actually produced lower electric rates than did public-utility regulation.

This result was not the anomaly it seemed, since the supposed economies of scale were present only in the distribution of electric power, not in power generation. So the cost superiority of a single firm producing for the whole market turned out to be not the slam-dunk that was advertised. That was just one of many cracks in the façade of public-utility regulation. Over the course of the 20th century, the evolution of public-utility regulation in telecommunications proved to be paradigmatic for the failures and inherent shortcomings of the form.

Throughout the country, the Bell system were handed a monopoly on the provision of local service. Its local service companies – the analogues to today’s ISPs – gradually acquired reputations as the heaviest political hitters in state-government politics. The high rates paid by consumers bought lobbyists and legislators by the gross, and they obediently safeguarded the monopoly franchise and kept the public-utility commissions (PUCs) staffed with tame members. That money also paid the bill for a steady diet of publicity designed to mislead the public about the essence of public-utility regulation.

We were assured by the press that the PUC was a vigilant watchdog whose noble motives kept the greedy utility executives from turning the rate screws on a helpless public. At each rate hearing, self-styled consumer advocacy groups paraded their compassion for consumers by demanding low rates for the poor and high rates on business – as if it were really possible for some non-human entity called “business” to pay rates in the true sense, any more than they could pay taxes. PUCs made a show of ostentatiously requiring the utility to enumerate its costs and pretending to laboriously calculate “just and reasonable” rates – as if a Commission possessed juridical powers denied to the world’s greatest philosophers and moralists.

Behind the scenes, after the press had filed their poker-faced stories on the latest hearings, increasingly jaded and cynical reporters, editors and industry consultants rolled their eyes and snorted at the absurdity of it all. Utilities quickly learned that they wouldn’t be allowed to earn big “profits,” because this would be cosmetically bad for the PUC, the consumer advocates, the politicians and just about everybody involved in this process. So executives, middle-level managers and employees figured out that they had to make their money differently than they would if working for an ordinary business in the private sector. Instead of working efficiently and productively and striving to maximize profit, they would strive to maximize cost instead. Why? Because they could make money from higher costs in the form of higher salaries, higher wages, larger staffs and bigger budgets. What about the shareholders, who would ordinarily be shafted by this sort of behavior? Shareholders couldn’t lose because the PUC was committed to giving them a rate of return sufficient to attract financial capital to the industry. (And the shareholders couldn’t gain from extra diligence and work effort put forward by the company because of the limitation on profits.) That is, the Commission would simply ratchet up rates commensurate with any increase in costs – accompanied by whatever throat-clearing, phony displays of concern for the poor and cost-shifting shell games were necessary to make the numbers work. In the final analysis, the name of the game was inefficiency and consumers always paid for it – because there was nobody else who could pay.

So much for the vaunted institution of public-utility regulation in the public interest. Over fifty years ago, a famous left-wing economist named Gardiner Means proposed subjecting every corporation in the U.S. to rate-of-return regulation by the federal government. This held the record for most preposterous policy program advanced by a mainstream commentator – until Thomas Wheeler announced that henceforth the Internet would be regulated as if it were a public utility. Now every American will get a taste of life as Ivan Denisovich, consigned to the Gulag Archipelago of regulatory bureaucracy.

Of particular significance to us in today’s climate is the effect of this regime on innovation. Outside of totalitarian economies such as the Soviet Union and Communist China, public-utility regulation is the most stultifying climate for innovation ever devised by man. The idea behind innovation is to find ways to produce more goods using the same amount of inputs or (equivalently) the same amount of goods using fewer inputs. Doing this lowers costs – which increases profits. But why do to the trouble if you can’t enjoy the increase in profits? Of course, utilities were willing to spend money on research, provided they could get it in the rate base and earn a rate of return on the investment. But they had no incentive to actually implement any cost-saving innovations. The Bell System was legendary for its unwillingness to lower its costs; the economic literature is replete with jaw-dropping examples of local Bell companies lagging years and even decades behind the private sector in technology adoption – even spurning advances developed in Bell’s own research labs!

Any reader who suspects this writer of exaggeration is invited to peruse the literature of industrial organization and regulation. One nagging question should be dealt with forthwith. If the demerits of public-utility regulation were well recognized by insiders, how were they so well concealed from the public? The answer is not mysterious. All of those insiders had a vested interest in not blowing the whistle on the process because they were making money from ongoing public-utility regulation. Commission employees, consultants, expert witnesses, public-interest lawyers and consumer advocates all testified at rate hearings or helped prepare testimony or research it. They either worked full-time or traveled the country as contractors earning lucrative hourly pay. If any one of them was crazy enough to launch an expose of the public-utility scam, he or she would be blackballed from the business while accomplishing nothing – the institutional inertia in favor of the system was so enormous that it would have taken mass revolt to effect change. So they just shrugged, took the money and grew more cynical by the year.

In retrospect, it seems miraculous that anything did change. In the 1960s, local Bell companies were undercharging for local service to consumers and compensating by soaking business and long-distance customers with high prices. The high long-distance rates eventually attracted the interest of would-be competitors. One government regulator grew so fed up with the inefficiency of the Bell system that he granted the competitive petition of a small company called MCI, which sought to compete only in the area of long-distance telecommunications. MCI was soon joined by other firms. The door to competition had been cracked slightly ajar.

In the 1980s, it was kicked wide open. A federal antitrust lawsuit against AT&T led to the breakup of the firm. At the time, the public was dubious about the idea that competition was possible in telecommunications. The 1990s soon showed that regulators were the only ones standing between the American public and a revolution unlike anything we had seen in a century. After vainly trying to protect the local Bells against competition, regulators finally succumbed to the inevitable – or rather, they were overrun by the competitive hordes. When the public got used to cell phones and the Internet, they ditched good old Ma Bell and land-line phones.

This, then, is public-utility regulation. The only reason we have smart phones and mobile Internet access today is that public-utility regulation in telecommunications was overrun by competition despite regulatory opposition in the 1990s. But public-utility regulation is the wonderful fate to which Barack Obama, Thomas Wheeler and the FCC propose to consign the Internet. What is the justification for their verdict?

The Case for Net Neutrality – Debunked

As we have seen, public-utility regulation was based on a premise that certain industries were “natural monopolies.” But nobody has suggested that the Internet is a natural monopoly – which makes sense, since it isn’t an industry. Nobody has suggested that all or even some of the industries that utilize the Internet are natural monopolies – which makes sense, since they aren’t. So why in God’s name should we subject them to public-utility regulation – especially since public-utility regulation didn’t even work well in the industries for which it was ideally suited? We shouldn’t.

The phrase “net neutrality” is designed to achieve an emotional effect through alliteration and a carefully calculated play on the word “neutral.” In this case, the word is intended to appeal to egalitarian sympathies among hearers. It’s only fair, we are urged to think, that ISPs, the “gatekeepers” of the Internet, are scrupulously fair or “neutral” in letting everybody in on the same terms. And, as with so many other issues in economics, the case for “fairness” becomes just so much sludge upon closer examination.

The use of the term “gatekeepers” suggests that God handed to Moses on Mount Olympus a stone tablet for the operation of the Internet, on which ISPs were assigned the role of “gatekeepers.” Even as hyperbolic metaphor, this bears no relation to reality. Today, cable companies are ISPs. But they began life as monopoly-killers. In the early 1960s, Americans chose between three monopoly VHF-TV networks, broadcast by ABC, NBC and CBS. Gradually, local UHF stations started to season the diet of content-starved viewers. When cable-TV came along, it was like manna from heaven to a public fed up with commercials and ravenous for sports and movies. But government regulators didn’t allow cable-TV to compete with VHF and UHF in the top 100 media markets of the U.S. for over two decades. As usual, regulators were zealously protecting government monopoly, restricting competition and harming consumers.

Eventually, cable companies succeeded in tunneling their way into most local markets. They did it by bribing local government literally and figuratively – the latter by splitting their profits via investment in pet political projects of local politicians as part of their contracts. In return, they were guaranteed various degrees of exclusivity. But this “monopoly” didn’t last because they eventually faced competition from telecommunication firms who wanted to get into their business and whose business the cable companies wanted to invade. And today, the old structural definitions of monopoly simply don’t apply to the interindustry forms of competition that prevail.

Take the Kansas City market. Originally, Time Warner had a monopoly franchise. But eventually a new cable company called Everest invaded the metro area across the state line in Johnson County, KS. Overland Park is contiguous with Kansas City, MO, and consumers were anxious to escape the toils of Time Warner. Eventually, Everest prevailed upon KC, MO to gain entry to the Missouri side. Now even the cable-TV market was competitive. Then Google selected Kansas City, KS as the venue for its new high-speed service. Soon KC, MO was included in that package, too – now there were three local ISPs! (Everest has morphed into two successive incarnations, one of which still serves the area.)

Although this is not typical, it does not exhaust the competitive alternatives. This is only the picture for fixed service. Americans are now turning to mobile forms of access to the Internet, such as smart phones. Smart watches are on the horizon. For mobile access, the ISP is a wireless company like AT&T, Verizon, Sprint or T-Mobile.

The NN websites stridently maintain that “most Americans have only a single ISP.” This is nonsense; a charitable interpretation would be that most of us have only a single cable-TV provider in our local market. But there is no necessary one-to-one correlation between “cable-TV provider” and “ISP.” Besides, the state of affairs today is ephemeral – different from what is was a few years ago and from what it will be a few years from now. It is only under public-utility regulation that technology gets stuck in one place because under public-utility regulation there is no incentive to innovate.

More specifically, the FCC’s own data suggest that 80% of Americans have two or more ISPs offering 10Mbps downstream speeds. 96% have two or more ISPs offering 6Mbps downstream and 1.5 upstream speeds. (Until quite recently, the FCC’s own criterion for “high-speed” Internet was 4Mbps or more.) This simply does not comport with any reasonable structural concept of monopoly.

The current flap over “blocking and interfering with traffic on the Internet” is the residue of disputes between Netflix and ISPs over charges for transmission of the former’s streaming services. In general, there is movement toward higher charges for data transmission than for voice transmission. But the huge volumes of traffic generated by Netflix cause congestion, and the free-market method for handling congestion is a higher price, or the functional equivalent. That is what economists have recommended for dealing with road congestion during rush hours and congested demand for air-conditioning and heating services at peak times of day and during peak seasons. Redirecting demand to the off-peak is not a monopoly response; it is an efficient market response. Competitive bar and restaurant owners do it with their pricing methods; competitive movie theater owners also do it (or used to).

Similar logic applies to other forms of hypothetically objectionable behavior by ISPs. The prioritization of traffic, creation of “fast” and “slow” lanes, blocking of content – these and other behaviors are neither inherently good nor bad. They are subject to the constraints of competition. If they are beneficial on net balance, they will be vindicated by the market. That is why we have markets. If a government had to vet every action by every business for moral worthiness in advance, it would paralyze life as we know it. The only sensible course is to allow free markets and competition to police the activities of competitors.

Just as there is nothing wrong or untoward with price differentials based on usage, there is nothing virtuous about government-enforced pricing equality. Forcing unequals to be treated equally is not meritorious. NN proponents insist that the public has to be “protected” from that kind of treatment. But this is exactly what PUCs did for decades when they subsidized residential consumers inefficiently by soaking business and long-distance users with higher rates. Back then, the regulatory mantra wasn’t “net neutrality,” it was “universal service.” Ironically, regulators never succeeded in achieving rates of household telephone subscription that exceeded the rate of household television service. Consumers actually needed – but didn’t get – protection from the public-utility monopoly imposed upon them. Today, consumers don’t need protection because there is no monopoly, nor is there any prospect of one absent regulatory intervention. The only remaining vestige of monopoly is that remaining from the grants of local cable-TV monopoly given by municipal governments. Compensating for past mistakes by local government is no excuse for making a bigger mistake by granting monopoly power to FCC regulators.

Forbearance? 

The late, great economist Frank Knight once remarked that he had heard do-gooders utter the equivalent words to “I want power to do good” so many times for so long that he automatically filtered out the last three words, leaving only “I want power.” Federal-government regulators want the maximum amount of power with the minimum number of restrictions, leaving them the maximum amount of flexibility in the exercise of their power. To get that, they have learned to write excuses into their mandates. In the case of NN and Internet regulation, the operative excuse is “forbearance.”

Forbearance is the writing on the hand with which they will wave away all the objections raised in this essay. The word appears in the original Title II regulations. It means that regulators aren’t required to enforce the regulations if they don’t want to; they can “forebear.” “Hey, don’t worry – be happy. We won’t do the bad stuff, just the good stuff – you know, the ‘neutrality’ stuff, the ‘equality’ stuff.” Chairman Wheeler is encouraging NN proponents to fill the empty vessel of Internet regulation with their own individual wish-fulfillment fantasies of what they dream a “public-utility” should be, not what the ugly historical reality tells us public-utility regulation actually was. For example, he has implied that forbearance will cut out things like rate-of-return regulation.

This just begs the questions raised by the issue of “regulating the Internet like a public utility.” The very elements that Wheeler proposes to forbear constitute part and parcel of public-utility regulation as we have known it. If these are forborne, we have no basis for knowing what to expect from the concept of Internet public-utility regulation at all. If they are not, after all, forborne – then we are back to square one, with the utterly dismal prospect of replaying 20th-century public-utility regulation in all its cynical inefficiency.

Forbearance is a good idea, all right – so good that we should apply it to the whole concept of Internet regulation by the federal government. We should forbear completely.

DRI-161 for week of 11-30-14: The Enemy Within: The Move to Strangle Welfare-State Reform In Its Crib

An Access Advertising EconBrief: 

The Enemy Within: The Move to Strangle Welfare-State Reform In Its Crib

The resurgence of the Republican Party after the overwhelming victory of Barack Obama and the Democrats in the 2008 elections was led by the Tea Party. This grassroots political movement began as a popular uprising and only gradually acquired formal organizational trappings. As yet, its ideological roots are so thin and shallow that they provide no support for the movement.

This contrasts sharply with the conservative movement, in which the order of development was reversed. Ideology came first, with roots implanted firmly by opposition to the New Deal and a foreign policy led by Sen. Robert Taft. The intellectual foundation laid by William F. Buckley, Jr. in National Review Magazine educated a generation of young Republicans and paved the way for the candidacy of Barry Goldwater in 1964. Goldwater’s landslide defeat nevertheless introduced Ronald Reagan to national politics. By the time Reagan became President in 1980, conservatism had become the dominant political paradigm.

Nowhere is a vacuum more abhorrent than in political ideology. Today’s victorious Republicans may purport to search for a mode of governance, but what they are really doing is belatedly deciding what they stand for. (The hapless domestic and foreign policies of the Obama administration gave them the luxury of winning the elections merely by signaling their lack of congruence with President Obama et al.) They enjoy a surfeit of advice from all quarters.

Nowhere is this advice more pointed than in its economic dimension.

 

Should Republicans “Take ‘Yes’ For an Answer?”

 

Although Buckley died in 2006, National Review still retains some of the intellectual momentum he generated. Its “Roving Correspondent,” Kevin Williamson, devoted a recent essay to an advisory for the Republican Party on post-victory strategy. Williamson sees the solid victory in the 2014 mid-term elections as “a chance to meet voters where they are.” To do that, Republicans need to “take ‘yes’ for an answer.”

Exactly how should we interpret these glib formulations? Williamson insists that Republicans should not treat electoral good fortune as the opportunity to create change. Instead, the Party should reverse the normal order of precedence and cater to popular disposition – “meet the voters where they are” instead of persuading the voters of the desirability or necessity of change. Don’t continue the campaign, Williamson pleads. The votes have already been counted; just “take ‘yes’ for an answer” and get on with the business of crafting a governing compromise that everybody can live with.

So much for the revolutionary stance of the Tea Party; the EPA won’t have to test BostonHarbor for caffeine contamination.

The reader’s instinctive reaction to Williamson’s essay is to flip the magazine over and re-check the cover. Can this really be National Review, legendary incubator of conservative thought, renowned for taking no prisoners in the ideological wars? We have just suffered six years under the lash of a Democrat regime whose marching order was “elections have consequences.” Now the flagship of American conservatism is preaching a gospel of preemptive surrender?

Williamson’s mood is apparently the product of disillusionment. The birth of NR, he reminds his readers, was a reaction to Eisenhower Republicanism. Instead of rolling back the welfare state installed by Roosevelt and Truman, Ike accepted it – thereby setting the tone for Republican policy thereafter. The magazine fulminated, but to no avail. Goldwaterism produced Reagan… “a self-described New Deal Democrat,” pouts Williamson, “who famously proclaimed that he hadn’t left eh Democratic Party but the party had left him.”

Reagan revisionism is part of a new NR realpolitik, it seems. “At the end of the Reagan years, the Soviet Union was dead on its feet, the United States was a resurgent force in the world… and spending and deficits both were up, thanks to the White House’s inability or unwillingness to put a leash on Tip O’Neill and congressional Democrats. The public sector was larger and more arrogant, there were more rather than fewer bureaucrats and bureaucracies, and nobody had made so much as a head fake in the direction of reforming such New Deal legacies as Social Security or even Great Society boondoggles such as Medicaid.”

The author’s psychological defeatism apparently so overwhelmed him that he lost touch with reality. The Soviet Union is “dead on its feet” but the singular responsibility of President Ronald Reagan for this fact is unmentioned. (One cannot help wondering whether this is an oversight or a deliberate omission.) But Reagan is held liable for the actions of the Democrat Speaker of the House and Congressional Democrats! Has anybody blamed Barack Obama for not “putting a leash on House Republicans” to achieve more of his agenda? Has Williamson published his Canine Theory of Congressional Fiscal Restraint in a peer-reviewed journal of political science?

One might have thought that winning the Cold War, taming hyperinflation and reviving moribund economic growth (also left unmentioned by Williamson) constituted sufficient labor unto a Presidential tenure. Various authors, ranging from Paul Craig Roberts to David Stockman, have chronicled the internecine warfare attending the Reagan administration’s efforts to cut the federal budget. Apparently Williamson has forgotten, if he ever knew, that Reagan enjoyed the reputation of a ferocious budget-cutter while in office. This dovetailed with his famous declaration that “government isn’t the solution – it’s the problem.” If, three decades after the fact, Reagan’s efforts seem puny, this may be because we hold him responsible for failing to effect a counterrevolution to match the permanency of FDR’s New Deal. One would think, though, that the only President since FDR to actually reduce the size of the Federal Register deserved better at Williamson’s hands.

Obviously, Williamson paints a false portrait of the Reagan years to justify the counsel of despair he gives today. “We did not undo the New Deal in the 1980s. We are not going to undo the New Deal before 2017 either… the fact remains that the American people are not as conservative as conservatives would like them to be, nor are they always conservative in the way conservatives would like them to be.” It seems that there is a “disconnect between the numbers of Americans who describe themselves as ‘conservative’ or ‘liberal’ and the policy preferences those Americans express.” Americans think of themselves as conservative but favor liberal policies. So, Williamson concludes, the only sensible thing to do is humor them.

“Americans …are, by and large, conservative in the same sense that Ronald Reagan was, not in the sense that Robert Taft was, or… Barry Goldwater was. They intuit that the federal government is overly large and intrusive, they resent the slackers and idlers who exploit that situation, and they worry that our long-term finances are upside down, but they do not wish to repeal the New Deal.”

“Example: A majority of voters believe that something must be done to rectify Social Security’s finances, and a plurality of voters believe that a combination of benefit cuts and tax increases should be adopted to achieve that… [but] strong majorities … of 56 percent… oppose Social Security benefit cuts and Social Security tax increases, according to Gallup. No doubt many of these voters think of themselves as conservatives… it is likely that the great majority of self-described conservatives would support continuing current Social Security policies indefinitely – if they believed it fiscally possible. The current Left-Right divide on Social Security is not a question of what we ought to do, but of what we can do.” Williamson cites Robert Taft’s eventual concession on Social Security as an example of the Right bending its principles to his form of pragmatism. After all, “populist measures are, to the surprise of nobody except scholars of political science, popular, hence the support among a majority of registered Republicans for raising the minimum wage.”

Instead of fighting among themselves on principle, Williamson contends, Republicans should be scanning the polls to find out where their base stands – and adjusting their stance accordingly. They should be meeting the voters where the voters are rather than persuading voters to see the light of sweet reason. They should take “yes” for an answer when they hear it from the networks on election night.

Rebutting Williamson’s “Populism”

 

No full-blooded Tea Party member will swallow Kevin Williamson’s argument, despite the author’s insistence that he is really enunciating their position. They didn’t overcome the twin obstacles of the Democrat Party and the Republican establishment only to be lectured on their extremism in the pages of National Review, for crying out loud. But we must go beyond visceral rejection of Williamson’s moral and psychological defeatism. Straightforward analysis indicts it.

Since the venue is National Review, it is fitting to recall Bill Buckley’s distinction between politics and economics: “The politician says: ‘What do you want? The economist says: What do you want the most?'” For many decades, voters have been offered big government as if it were a consumer product with zero price. That is the context in which to contemplate the poll responses that Williamson treats as commandments graven in stone. In the beginning, there was the word. And conservatives believed the word. But when the world around them changed and God neither smote the unbeliever nor struck down the evil Antichrist, conservatives eventually shrugged and went with the flow. After a while they began singing the same hymns to Baal as the liberals. They couldn’t very well go to jail for non-participation in the Social Security system and they discovered that the government checks always cashed – so why not go along? It was the only way they could get their money out.

In due course, conservatives found out along with the rest of society that they had been lied to and flimflammed by the pay-as-you-go status of Social Security. It was not a system of insurance, after all; the word “social” in the terms “social insurance” and “Social Security” should be taken to mean “not,” just as it does in terms like “social justice,” “social democracy” and “social responsibility.” By then, though, everybody was so thoroughly habituated to the system that it would have required something close to a revolution to change it. Something like what the colonists originally did when they revolted against the British and dumped tea in Boston harbor, for example.

When Williamson implies that conservatives are entirely comfortable with Social Security today, he is being disingenuous. (That either means “lacking in candor” or “naïve;” he is either lying to us or he is plain stupid.) In fact, conservatives (and just about everybody else) below the age of 50 no longer expect even to receive Social Security benefits – they expect the system to go bankrupt long before they collect. They are not comfortable with the system but resigned to it; there is a world of difference between the two. And considering that Williamson himself just published an article on “Generation Vexed” and its growing dissatisfaction with the Obama regime in the previous issue of NR, he cannot claim indifference to their electoral attitudes in this context.

But this attitude of resignation is wildly optimistic compared to the fiscal reality facing America and the rest of Western industrial society today. The welfare state is collapsing around our ears. Central bankers are in extremis; they are reduced to printing money to finance operations. The Eurozone staggers from crisis to crisis. Japan is now working on its third “lost decade.” Demography is a disaster; birth rates will not bail us out. Worse – they are falling like leaden raindrops, reducing the number of workers paying in per welfare-benefit recipient. The crisis is not in the far-off future but today – if the U.S. had to finance upcoming deficits at normal rates of interest rather than the “zero interest rates” of the last five years, the interest charges alone would eat up most of the federal budget. And the entitlement programs that Williamson views as sacred are now eating up most of that budget.

Williamson acts as if Social Security finance were a Starbucks menu. He treats longstanding conservative doctrine on Social Security as if it were excerpted from fundamentalist Scripture out of Inherit the Wind. But he is no Clarence Drummond; Social Security is exactly the Ponzi scheme that conservatives have always fulminated against. In fact, it is worse, because the Day of Judgment is arriving even sooner than prophesied.

True, it isn’t just Social Security – it’s also Medicare and Medicaid and the welfare system. (Welfare reform didn’t come close to reforming the whole system, just one of the six components of it.) The point is that we have passed the elective stage and have now entered the stage of imminent collapse. In that stage, monetary chaos and an uncertain fate for democracy await.

And what is Williamson’s reaction? When Americans protest, “I can be overdrawn; I still have checks,” Williamson nods, “Right you are.” But we’re not just overdrawn – we’re completely bankrupt.

Under these conditions, what are our choices? Suppose we remain in Obamaville. That will result in collapse. Suppose we go Williamson’s route, a route of picking and choosing a few pieces of low-hanging fruitful reform. That will also result in collapse.

We have nothing to lose and everything to gain by telling voters the truth and opting for revolutionary reform. If they reject us, we will be hung for offering a full-bodied sheep – limited government, free markets and freedom – rather than a bleating lamb of meekly pandering populism.

Popunomics

 

Williamson isn’t just selectively bad on economics – he has renounced economic logic entirely in favor of populist emotion. Take the minimum wage – Williamson’s shining example of popular Populism. The minimum wage is one of three or four most heavily researched measures in economics, having attracted empirical studies consistently since the late 1940s. Until the notorious Card-Krueger study in 1993, these found that the minimum wage adversely affected employment of low-skilled labor. These findings jibed with a priori theory, which predicted that a minimum wage would produce a surplus of labor (unemployment), increase the scope for discrimination by buyers of labor against sellers of labor, reduce the quality of labor and/or jobs, encourage businesses to offer fewer benefits and more part-time jobs and encourage businesses to substitute machinery and high-skilled labor for low-skilled labor. All these effects have been observed in conjunction with the minimum wage since its imposition. Card and Krueger offered no rebuttal to the eloquent testimony of the research record and were notably silent on the theory underpinning their own research result, which purported to find an increase in comparative employment in one state after an increase in the minimum wage. Both the validity of their data and the econometric soundness of their results were later challenged.

Having carefully chosen one of the most economically untenable of all Populist positions on which to “meet voters where they are,” Williamson next ups the ante. From the debased coin of the minimum wage, he turns to the fool’s gold of restrictionist anti-immigrationism. The late Richard Nadler painstakingly showed – and in NR to boot, in 2009’s “Great Immigration Shoot-Out” – that restrictionists were big and consistent electoral losers in Republican primaries and general elections. But Williamson is back at the same old stand, hawking “stronger border controls… mandatory use of E-verify… and like measures” because “voters are solidly on the conservatives’ side on this issue.”

Oh really? Just in time – net immigration has been roughly zero for the last few years. Market forces, not government quotas, control international migration; the quotas merely serve to criminalize violators. Immigration benefits America

on net balance, regardless of its legal dimension. Along with free trade and opposition to the minimum wage, place support of free international migration among the issues upon which economists strongly agree.

Wait a minute – Williamson has gone from supporting brain-dead economics because it is generally popular (the minimum wage) to supporting it because it is popular with NR’s constituency. Just as Buckley had to rescue the Right from the anti-Semitism of the American Mercury and the conspiratorial John Birch Society, we are now faced with the task of rehabilitating the right wing from the crank nativism and restrictionism that has asserted squatter’s rights at National Review. Calling Williamson’s version of expedience Populism gives ideology a bad name. The 19th-century Populism of Pitchfork Ben Tillman, et al, featured cheap money and fashionably bad economics but it was more consistent than Williamson’s proposal.

Borrowing the argot of the digital generation, Williamson is expounding not Populism but rather PLR – the “path of least resistance.” Put your finger to the wind and sense what we can get the voters to sign off on. See how many fundamental principles and how much government money we’ll have to sacrifice to win the next election. Williamson purports to be lecturing us on why Republicans fail – because they are too ideologically scrupulous, insisting on free markets, free trade, open borders, flexible prices, deregulation. But the encroachment of big government and the welfare state proceeded mostly unabated throughout the 20th century despite periods of Republican ascendancy. How could this have happened? Because Republicans were really heeding Williamson’s doctrine all along; PLR ruled, not ideological constancy. Goldwater never led the Republican Party, even when he won the nomination. Reagan was detested by the Party establishment and his philosophy was ditched the minute Air Force One lifted off the runway to return him to California. PLR was always the de facto rule of thumb – and forefinger, ring finger and all other digits. How else could a Party ostensibly supporting limited government have countenanced the transition to unlimited government?

Williamson treats the rise of the Tea Party as America’s version of China’s Cultural Revolution. Whew! We must cease all this senseless bloodletting and wild-eyed revolutionary fervor; return to our senses and settle for what we can get rather than striving for Utopia. Back to normalcy, back to pragmatism and compromise and half-a-loaf … well, maybe a quarter-loaf… or even a slice… hell, maybe even a few crumbs, just so its bread.

It is fitting that Keynesian economics has come home to roost in this time of Quantitative Easing and central-banking hegemony and liquidity everywhere with not a loan to drink. “In the long run, we are all dead” was Keynes’ most famous quip. Well, we can’t live in the short run forever. The procession of short runs eventually produces a long run. And the long run is here.

It’s time to pay up. The voters have given Republicans a gift – the chance to tell the truth and turn the ship around before we reach the falls. PLR is no longer sufficient. It’s time – no, it’s long past time to start doing all the things that Williamson says Republicans can’t do and mustn’t do.

The Anti-Economics Party of the Party of Sound Economics?

 

“The American public is in many ways conservative, but in many ways it is not, and its conservatism often is not the conservatism of Milton Friedman or Phil Gramm but that of somebody who fears the national debt and dreads bureaucracy but rather likes his Social Security check.” The Republican Party’s glory days of the post-World War II period came during the Great Moderation ushered in by the Reagan Presidency, beginning in late 1980 and continuing into the present millennium. This success and victory in the Cold War were the only departures from PLR. This period of prosperity was driven by an economic policy whose positive features were disinflation, sound money, low taxes and low inflation. This is a combination that Keynesian economics finds contradictory and now repudiates utterly. Williamson repudiates it, too, hence his explicit rejection of Milton Friedman and Phil Gramm as exponents of conservatism. (Once again, his use of Friedman, a libertarian rather than a conservative, is disingenuous.) He is still living in the past, the days when we could have our conservatism and our Social Security checks, too. Sorry, we have bigger problems now than how to buy votes from our own voter base to win the next election.

For years, Republicans have been able to win occasional elections the easy way, by adopting PLR. Those days are over. From now on, the Republicans will have to earn their money as a party of limited government by actually practicing the principles they profess. That is the bad news. But the good news is that they cannot lose by doing this. The very economics that Kevin Williamson looks down on tells us that.

Economics defines “cost” as the alternative foregone. If telling the truth will cause you to lose the election, you may well decide to lie; the cost of truth-telling will seem too high. But if winning the election and losing the election are reduced to equivalence by the consequences of economic collapse, then telling the truth suddenly becomes costly no longer. Now avoiding collapse becomes the only matter of consequence and the election outcome fades into insignificance.

Ironically, that is not only sound economics; it is also supremely pragmatic.

DRI-241 for week of 11-9-14: The Birth of Public-Utility Regulation

An Access Advertising EconBrief:

The Birth of Public-Utility Regulation

Today’s news heralds the wish of President Obama that the Federal Communications Commission (FCC) pass strict rules ensuring that internet providers provide equal treatment to all customers. This is widely interpreted (as, for example, by The Wall Street Journal front-page article of 11/11/2014) as saying that “the Federal Communications Commission [would] declare broadband Internet service a public utility.”

More specifically, the Journal’s unsigned editorial of the same day explains that the President wants the FCC to apply the common-carrier provisions of Title II of the Communications Act of 1934. Its “century-old telephone regulations [were] designed for public utilities.” In fact, the wording was copied from the original federal regulatory legislation, the Interstate Commerce Act of 1887; the word “railroad” stricken and “telephone” was added to “telegraph.”

In other words, Mr. Obama wants to resurrect enabling regulatory legislation that is a century and a quarter old and apply it to the Internet.

We might be pardoned for assuming that the original legislation has been a rip-roaring success. After all, the Internet has revolutionized our lives and the conduct of business around the world. The Internet has become a way of life for young and old, from tribesmen in central Africa to dissidents from totalitarian regimes to practically everybody in developed economies. If we’re now going to entrust its fate to the tender mercies of Washington bureaucrats, the regulatory schema should presumably be both tried and true.

Public-utility regulation has been tried, that’s for sure. Was it true? And how did it come to be tried in the first place?

 

Natural Monopoly: The Party Line on Public-Utility Regulation

 

Public-utility regulation is a subset of the economic field known as industrial organization. Textbooks designed for courses in the subject commonly devote one or more chapters to utility regulation. Those texts rehearse the theory underlying regulation, which is the theory of natural monopoly. According to that theory, the reason we have (or had) regulated public utilities in areas like gas, electricity, telegraphs, telephones and water is that free competition cannot long persist. Regulated public utilities are greatly preferable to the alternative of a single unregulated monopoly provider in each of these fields.

The concept of natural monopoly rests on the principle of decreasing long-run average cost. In turn, this is based on the idea of economies of scale. Consider the production of various economic goods. All other things equal, we might suppose that as all inputs into the production process increase proportionately, the total monetary cost of production for each one might do so as well. Often it does – but not always. Sometimes total cost increases more-than-proportionately, usually because the industry to which the good belongs uses so much of a particular input that expansion bids up the input’s price, thereby increasing total cost more-than-proportionately.

The rarest case is the opposite one, in which total cost increases less-than-proportionately with the increase in output. Although at first thought this seems paradoxical, there are technical factors that occasionally operate to bring it about. One of these is the engineering principle known as the two-thirds rule. In certain applications, such as the thru-put in a pipeline or the contents of containers used by ocean-going freight vessels, the volume varies as the two-thirds power of the surface area of the surrounding enclosure. In other words, when the pipe grows larger and larger, the amount that can be transmitted through the pipe increases more-than proportionately. When the container is made larger, the amount of freight the container can hold increases more than proportionately. The economic implication of this technical law is far-reaching, since the production cost is a function of the size of the pipe or the container (surface area) while the amount of output is a function of the thru-put of the pipe or amount of freight (volume). In other words, this exactly describes the condition called “economies of scale,” in which output increases more-than-proportionately when all inputs are increased equally. Since average cost is the ratio of total cost to output, the fact that the denominator in the ratio increases more than the numerator causes the ratio to fall, thus producing decreasing average total cost.

Why does decreasing average cost create this condition of natural monopoly? Think of unit price as “average revenue.” Decreasing average cost allows a seller to lower price continuously as the scale of output increases. This is important because it suggests that the seller who achieves the largest scale of output – that is, grows faster than competitors – could undersell all others while still charging a viable price. The textbooks go on to claim that after driving all competitors from the field, the successful seller would then achieve an insurmountable monopoly and raise its price to the profit-maximizing point, dialing its output back to the level commensurate with consumer demand at that higher price. Rather than subjecting consumers to the agony of this pure monopoly outcome, better to compromise by settling on an intermediate price and output that allows the regulated monopolist a price just high enough to attract the financial capital it needs to build, expand and maintain its large infrastructure. That is the raison d’etre of public-utility regulation, which is accomplished in the U.S. by an administrative law process involving hearings and testimony before a commission consisting of political appointees. Various interest groups – consumers, the utility company, the commission itself – are legally represented in the hearings.

Why is the regulated price and output termed a “compromise?” The Public Utility Commission (PUC) forces the company to charge a price equal to its average cost, incorporating a rate of profit sufficient to attract investor capital. This regulatory result is intermediate between the outcomes under pure monopoly and pure competition. A profit-maximizing monopoly firm will always maximize profit by producing the rate of output at which marginal revenue is equal to marginal cost. The monopolist’s marginal revenue is less than its average revenue (price) because every change in price affects inframarginal units, either positively or negatively, and the monopolist is all too aware of its singular status and the large number of inframarginal units affected by its pricing decisions. Under pure competition, each firm treats price as a parameter and neglects the tiny effect its supply decisions have on market price; hence price and marginal revenue are effectively equal. Thus, each competitive firm will produce a rate of output at which price equals marginal cost, and the total output resulting from each of these individual firm decisions is larger – and the resulting market price is lower – than would be the case if a single monopoly firm were deciding on price and output for the whole market. The PUC does not attempt to duplicate this pure competitive price because it assumes that, under decreasing average cost, marginal cost is less than average cost and a price less than average cost would not cover all the utility firm’s costs. Rather than subsidize these losses out of public funds (as is commonly done outside of the U.S. and Canada

), the PUC allows a higher price sufficient to cover all costs including the opportunity cost of attracting financial capital.

How well does this theoretical picture of natural monopoly fit industrial reality? Many public-utility industries possess at least some technical features in common with it. Electric and telephone transmission lines, natural-gas pipelines and water pipe all obey the two-thirds rule. This much of the natural monopoly doctrine has a scientific basis. On the other hand, power generation (as opposed to transmission or transport) does not usually exhibit economies of scale. There are plenty of industries that are not regulated public utilities despite showing clear scale economies – ocean-going cargo vessels are one obvious case. This is enough to provoke immediate suspicion of the natural-monopoly doctrine as a comprehensive explanation of public-utility regulation. Suffice it to say that scale economies seldom dominate the production functions even of public-utility goods.

The Myth of the Birth of Public-Utility Regulation – and the Reality

 

In his classic article, (“Hornswoggled! How Ma Bell and Chicago Ed Conned Our Grandparents and Stuck Us With the Bill,” Reason Magazine, February 1986, pp. 29-33), author Marvin N. Olasky recounts the birth of public-utility regulation. When “angry consumers and other critics call for an end to [public-utility] monopolies, choruses of utility PR people and government regulators recite the same old story – once upon a time there was competition among utilities, but ‘the public’ got fed up and demanded regulation… Free enterprise in utilities lost in a fair fight.”

As Olasky reveals, “it makes a good story, but it’s not true.” It helps to superimpose the logic of natural monopoly theory on the scenario spun by the “fair fight” myth. If natural-monopoly logic held good, how would we expect the utility-competition scenario to deteriorate?

Well, the textbooks tell us that the condition of natural monopoly (decreasing long-run average total cost) allows one firm to undersell all others by growing faster. Then it drives rivals out of business, becomes a pure monopoly and gouges consumers with high prices and reduced output. So that’s what we would expect to find as our “fair-fight” scenario: dog-eat-dog competition resulting in the big dog devouring all rivals, then rounding on consumers, whose outraged howls produce the dog-catching regulators who kennel up the company as a regulated public utility. The problem with this scenario is that it never happened. It is nowhere to be found in the history books or contemporary accounts.

Oops.

Well, somebody must have said something about life before utility regulation. After all, it was only about a century ago, not buried in prehistory. If events didn’t unfold according to textbook theory, how did public-utility regulation happen?

Actually, conventional references to the pre-regulatory past are surprisingly sparse. More to the point, they are contradictory. Mostly, they can be grouped under the heading of “wasteful competition.” This is a very different story than the one told by the natural monopoly theory. It maintains that competitive utility provision was a prodigal fiasco; numerous firms all vying for the same market by laying cable and pipe and building transmission lines. All this superfluous activity and expenditure drove costs – and, presumably, prices – through the roof. Eventually, a fed-up public put an end to all this competitive nonsense by demanding relief from the government. This is the scenario commonly cited by the utility PR people and regulators, who care little about theory and even less about logical consistency. All they want is an explanation that will play in Peoria, meeting whatever transitory necessity confronts them at the moment.

Fragmentary support for this explanation exists in the form of references to multiply suppliers of utility services in various markets. In New York City, for example, there were six different electricity franchises granted by one single 1887 City Council resolution. But specific references to competitive chaos are hard to come by, which we wouldn’t expect if things were as bad as they are portrayed.

Could such a situation have arisen and persisted for the 20-40 years that filled the gap between the development of commercial electricity and telephony and the ascendance of public-utility regulation in the decade of the 1920s? No, the thought of competitive firms chasing their tails up the cost curve and losing money for decades is implausible on its face. Anyway, we have gradually pieced together the true picture.

The Reality of Pre-Regulatory Utility Competition

 

Marvin Olasky pinpoints 1905 as a watershed year in the sage of public utilities in America. That year a merger took place between two of the nation’s largest electric companies, Chicago Edison and Commonwealth Electric. Olasky cites a 1938 monograph by economist Burton Behling, which declared that prior to 1905 the market for municipal electricity “was one of full and free competition.” Market structure bore a superficial resemblance to cable television today in that municipalities assigned franchise rights for service to corporate applicants, the significant difference being that “the common policy was to grant franchises to all who applied” and met minimum requirements. Olasky describes the resulting environment as follows: “Low prices and innovative developments resulted, along with some bankruptcies and occasional disruption of service.”

That qualification “some bankruptcies and occasional disruption of service” raises no red flags to economists; it is the tradeoff they expect to encounter for the benefits provided by low prices and innovation. But it is integral to the story we are telling here. The anecdotal tales of dislocation are the source of the historical scare stories told by later generations of economic historians, utility propagandists and left-wing opportunists. They also provided contemporaneous proponents of public-utility regulation with ammunition for their promotional salvos.

Who roamed the utility landscape during the competitive years? In 1902, America Bell Co. had about 1.3 million subscribers, while the independent companies who competed with it had over 2 million subscribers altogether. By 1905, Bell’s industry leadership was threatened sufficiently to inspire publication of a book entitled How the Bell Lost its Grip. In Toledo, OH, an independent company, Home Telephone Co., began competing with Bell in 1901. It charged rates half those of Bell. By 1906, it had 10, 000 subscribers compared to 6,700 for the local Bell Co. In the states of Nebraska and Iowa, independent company subscribers outnumbered those of Bell by 260,000 to 80,000. Numerous cities held referenda on the issue of granting competitive franchises for telephone service. Competition usually won out. In Portland, OR, the vote was 12,213 to 560 in favor of granting the competitive franchise. In Omaha, NE, the independent franchise won by 7,653 to 3,625. A national survey polled 1,400 businessmen on the issue; 1,245 said that competition had or could produce better phone service in their community. 982 said that competition had forced their Bell company to improve its service.

Obviously, one option open to the Bell (and Edison electric) companies was to cut prices to meet competition. But because Bell and Edison were normally the biggest company in a city or region, with the most subscribers, this price cut was much more costly to them than it was to a smaller independent because the big company had so many inframarginal customers. Consequently, these leading companies looked around for alternative ways of dealing with pesky competitors. The great American rule of thumb in business is: If you can’t beat ’em, join’em; if you can’t beat ’em or join ’em, bar ’em.

The Deadly Duo: Theodore Vail and Samuel Insull

 

Theodore Vail was a leading America business executive of the 19th century. He was President of American Bell from 1880 to 1886, and then later rejoined the Bell system when he became an AT&T board member in 1902. Vail commissioned a city-by-city study of Bell’s competitive position. It persuaded him that Bell’s business strategy needed overhauling. Bell’s corporate position had been that monopoly was the only technically feasible arrangement because it enabled telephone users in different parts of a city and even different cities to converse. As a company insider conversant with the latest advances, Vail knew that this excuse was wearing thin because system interconnections were even then becoming possible. Competition was eating into Bell’s market share already, and with interconnection on the horizon Vail knew that Bell’s supremacy would vanish unless it was revitalized.

The idea Vail hit upon was based upon the strategy employed by the railroads about fifteen years earlier. In order to win public acceptance for the special government favors they had received, the roads commissioned puff pieces from free-lance writers and bribed newspaper and magazine editors to print them. Vail expanded this technique into what later came to be called “third-party” editorial services; he employed companies for the sole purpose of producing editorial matter glorifying the Bells. One firm earned over $100,000 from the Bell companies while simultaneously earning $84,000 per year to place some 13,000 favorable articles annually about electric utilities. (These usually appeared as what we would now call “advertorials” – unsigned editorials containing citing no source.) The companies did not formally acknowledge their link with utilities, although it was exposed in investigative works such as 1931’s The Public Pays by Ernest Gruening.

Vail combined this approach with another original tactic borrowed from the railroads – the pre-emptive embrace of government regulation. Political scientist Gabriel Kolko provided documentation for his thesis that the original venture in federal-government regulation, the Interstate Commerce Commission Act of 1887, was sponsored by the railroads themselves as a means of cartelizing the industry and suppressing the troublesome competitive forces that had bankrupted one railroad after another by producing price wars and persistent low rates for freight. The public uproar over differential rates for long hauls and short hauls gave both railroads and regulators the necessary excuse to claim that competition had failed and only regulation could provide “just and reasonable rates.” Not surprisingly, the regulatory solution was to impose fairness and equality by requiring railroads to raise the rates for long hauls to the level of short-haul rates, so that all shippers now paid equal high rates per-mile.

Vail was desperate to suppress competition from independent phone companies, but knew that he would then face the danger of lawsuits under the embryonic Sherman Antitrust Act, which contained a key section forbidding monopolization. The only kind of competition Vail approved of was “that kind which is rather ‘participation’ than ‘competition,’ and operates under agreement as to prices or territory.” That is, Vail explicitly endorsed cartelization over competition. Unfortunately, the Sherman Act also contained a section outlawing price collusion. Buying off the public was clearly not enough; Vail would have to stave off the federal government as well. So he sent AT&T lobbyists to Washington, where they successfully achieved passage of legislation placing interstate telephone and telegraph communications under the aegis of the ICC.

Vail feared competition, not government. He was confident that regulation could be molded and shaped to the benefit of the Bells. He knew that the general public and particularly his fellow businessmen would take a while to warm up to regulation. “Some corporations have as yet not quite got on to the new order of things,” he mused. By the time Vail died in 1920, that new order had largely been established thanks to the work of Vail’s contemporary, Samuel Insull.

Insull emigrated from England in 1881 to become Thomas Edison’s secretary. He rose rapidly to become Edison’s strategic planner and right-hand man. At Edison’s side, Insull saw firsthand the disruptive effects of innovation on markets when competition was allowed to function. Insull made a mental note not to let himself become the disruptee. With Edison’s blessing, Insull took the reins of Chicago Edison in 1892. His tenure gave him an education in the field of politics to complement the one Edison had given him in technology. In 1905, he merged Chicago Edison with Commonwealth Electric to create the nation’s leading municipal power monopoly.

Like Vail, Insull recognized the threat posed by marketplace competition. Like Vail, Insull saw government as an ally and a tool to suppress his competitors. Insull’s embrace of government was even warmer than Vail’s because he perceived its vital role to be placating and anesthetizing the public. As Olasky put it, “Insull argued that utility monopoly… could best be secured by the establishment of government commissions, which would present the appearance of popular control.”

The commission idea would be sold to the public as a democratic means of establishing fair utility rates. Sure, these rates might be lower than the highest rates utility owners could get on their own, but they would certainly be higher than those prevailing with competition. And the regulated rates would be stable, a sure thing, not the crap shoot offered by the competitive market. In a 1978 article in the prestigious Journal of Law and Economics, economic historian Gregg Jarrell documents that the first states to implement utility regulation saw rising prices and profits and falling utility output, while states that retained competitive utility markets had lower utility prices. Jarrell’s conclusion: “State regulation of electric utilities was primarily a pro-producer policy.”

Over the years, this trend continued, even though utility competition died off almost to the vanishing point. Yet it remained true that those few jurisdictions that allowed utility competition – usually phone, sometimes electric – benefitted from lower rates. This attracted virtually no public attention.

Insull realized that the popularity of competition was just as big an obstacle as its reality in the marketplace. So he slanted his public-relations to heighten the public’s fear of socialism and promote utility regulation as the alternative to a government-owned, socialized power system. Insull foresaw that politicians and regulators would need to use the utility company as a whipping boy by pretending to discipline it severely and accusing it of cupidity and greed. This would allow government to assume the posture of a stern guardian of the public welfare and champion of the consumer – all the while catering to the utility’s welfare behind closed doors. Generations of economists became accustomed to seeing this charade performed at PUC hearings. Their cynicism was tempered by the fact that these same economists were earning handsome incomes by specializing as consultants to one of the several interested parties at those hearings. Over the years, this iron quadrangle of interested parties – regulators, lawyers, economists and “consumer advocates” – became the staunchest and most reliable defender of the public-utility regulation process. Despite the fact that these people were in the best position to appreciate the endless waste and hypocrisy, their self-interest blinded them to it.

Insull enthusiastically adopted the promotional methods pioneered by the railroads and imitated by Theodore Vail. One of his third-party firms, the Illinois Committee on Public Utility Information, was led by Insull subordinate Bernard J. Mullaney. The Committee distributed 5 million pieces of pro-utility literature in the state in 1920 and 1921. Mullaney carefully cultivated the favors of editors by feeding them news and information of all kinds in order to earn a key quid pro quo – publication of his press releases. This favoritism went as far as providing the editors with free long-distance telephone service as an in-kind bribe. Not to be overlooked, of course, is that most traditional of all shady relationships in the newspaper business – buying ads in exchange for preferential treatment in the paper. Electric companies, like the Bells, were prodigious advertisers and took lavish advantage of it. In eventual hearings held by the Federal Trade Commission and the Federal Communications Commission, testimony and exhibits revealed that Bell executives had newspaper editors throughout the West and Midwest in their pockets.

Over the years, as public-utility regulation became a respected institution, the need for big-ticket PR support waned. But utilities never stopped cultivating political support. The Bell companies in particular bought legislators by the gross, challenging teachers’ unions as the leading political force in statehouses across the nation. When the challenge of telecommunications deregulation loomed, the Bells were able to stall it off and postpone its benefits to U.S. consumers for a decade longer than those enjoyed abroad.

Profit regulation left utilities with no profit motive to innovate or cut costs. This caused costs to inflate like a hot-air balloon. Sam Insull realized that he could make a healthy profit by guaranteeing his market, killing off his competition and writing his profit in stone through regulation. Then he could ratchet up real income by “gold-plating the rate base” – increasing salaries and other costs and forcing the ratepayers to pay for them. Ironically, he ended up going broke despite owning a big portfolio of utilities. He borrowed huge sums of money to buy them and expand their operations. When the Depression hit, he found that he couldn’t raise rates to service the debt he had run up. He was indicted, left the country, returned to win acquittal on criminal charges but died broke from a heart attack – just one more celebrated riches-to-rags Depression-era tale.

The lack of motivation made utilities a byword for inefficiency. Bell Labs invented the transistor, but AT&T was one of the last companies to use it because it still had vacuum tubes on hand and had no profit motivation to switch and no competitive motivation to serve its customers. An AT&T company made the first cell phone call in 1946, but the technology withered on the vine for 40 years because the utility system had no profit motivation to deploy it. Touch-tone dialing was invented in 1941 but not rolled out until the 1970s. Bell Labs developed early high-speed computer modems but couldn’t test high-speed data transmission because regulators hadn’t approved tariffs (prices) for data transmission. The list goes on and on; in fact, the entire telecommunications revolution began by accident when a regulator became so fed up with AT&T’s inefficiency that he changed one regulation in the 1970s and allowed one company called MCI to compete with the Bells. (We owe Andy Kessler, longtime AT&T employee and current hedge-fund manager, for this litany of innovative ineptitude.)

What is Net Neutrality All About?

 

Today, the call for “net neutrality” by politicians like President Obama is a political pose, just as the call for public-utility regulation was a century ago. Robert Litan of the
Brookings Institution has pointed out the irony that slapping a Title II common-carrier classification on broadband Internet providers would not even prevent them from practicing the paid prioritization of buyers that the President complained of in his speech! Indeed, for most of the 20th century, public utilities practiced price discrimination among different classes of buyers in order to redistribute income from business users to household users.

The Internet as we know it today is the result of an unimpeded succession of competitive innovations over the last three decades; i.e., the very “open and free Internet” that the New York Times claims President Obama will now bestow upon us. Net neutrality would bring all this to a screeching halt by imposing regulation on most of the Web and taxes on consumers. Today, the biggest chunk of phone bills goes to pay for a charge for “universal service,” a redistributive tax ostensibly intended to make sure everybody had phone service. Yet before the proliferation of cell phones, the percentage of the U.S. population owning televisions – which were unregulated and benefitted from no “universal service” tax – was several percentage points higher than the percentage owning and using telephones. In reality, the universal service tax was used to perpetuate the regulatory process itself.

In summary, then, the balance sheet on public utilities shows they were plotted by would-be monopolists to stymie competition and enlist government and regulators as co-conspirators. The conspiracy stuck consumers with high prices, reduced output, mediocre service, high excise taxes and – worst of all – stagnant innovation for decade after decade. All this is balanced against the dubious benefit of stability – the sort of stability the U.S. economy has shown in the last five years.

A similar future awaits us if we treat the Internet’s imagined ills with the regulatory nostrum called net neutrality.

DRI-284 for week of 8-10-14: All Sides Go Off Half-Cocked in the Ferguson, MO Shooting

An Access Advertising EconBrief:

All Sides Go Off Half-Cocked in the Ferguson, MO Shooting

By now most of America must wonder secretly whether the door to race relations is marked “Abandon all hope, ye who enter here.” Blacks – mostly teenagers and young adults, except for those caught in the crossfire – are shot dead every day throughout the country by other blacks in private quarrels, drug deals gone bad and various attempted crimes. Murder is the leading cause of death for young black males in America. We are inured to this. But the relative exception of a black youth killed by a white man causes all hell to break loose – purely on the basis of the racial identities of the principals.

The latest chilling proof of this racial theorem comes from Ferguson, MO, the St. Louis suburb where a policeman shot and killed an unarmed 18-year-old black man on Monday. The fact that the shooter is a policeman reinforces the need for careful investigation and unflinching analysis of the issues involved. The constant intrusion of racial identity is a mountainous obstacle to this process.

The Two Sides to the Story, As Originally Told

The shooting occurred on Saturday afternoon, August 9, 2014, in Ferguson, MO, where 14,000 of the 21,000 inhabitants are black and 50 of 53 assigned St. Louis County Police officers are white. The two sides of the story are summarized in an Associated Press story carrying the byline of Jim Suhr and carried on MSN News 08/13/2014. “Police have said the shooting happened after an [then-unnamed] officer encountered 18-year-old Michael Brown and another man on the street. They say one of the men pushed the officer into his squad car, then physically assaulted him in the vehicle and struggled with the officer over the officer’s weapon. At least one shot was fired inside the car. The struggle then spilled onto the street, where Brown was shot multiple times. In their initial news conference about the shooting, police didn’t specify whether Brown was the person who scuffled with the officer in the car and have refused to clarify their account.”

“Jackson said Wednesday that the officer involved sustained swelling facial injuries.”

“Dorian Johnson, who says he was with Brown when the shooting happened, has told a much different story. He has told media outlets that the officer ordered them out of the street, then tried to open his door so close to the men that it ‘ricocheted’ back, apparently upsetting the officer. Johnson says the officer grabbed his friend’s neck, then tried to pull him into the car before brandishing his weapon and firing. He says Brown started to run and the officer pursued him, firing multiple times. Johnson and another witness both say Brown was on the street with his hands raised when the officer fired at him repeatedly.”

The Reaction by Local Blacks: Protests and Violence

When a white citizen is shot by police under questionable circumstances – an occurrence that is happening with disturbing frequency – the incident is not ignored. But the consequent public alarm is subdued and contained within prescribed channels. Newspapers editorialize. Public figures express concern. Private citizens protest by writing or proclaiming their discontent.

The stylized reaction to a white-on-black incident like the one in Ferguson is quite different. Ever since the civil-rights era that began in the 1950s, these incidents are treated as presumptive civil-rights violations; that is, they are treated as crimes committed because the victim was black. Black “leaders” bemoan the continuing victim status of blacks, viewing the incident as more proof of same – the latest in an ongoing, presumably never-ending, saga of brutalization of blacks by whites. “Some civil-rights leaders have drawn comparisons between Brown’s death and that of 17-year-old Trayvon Martin.”

Rank-and-file blacks gather and march in protest, holding placards and chanting slogans tailored to the occasion. “Some protestors… raised their arms above their heads as they faced the police… The most popular chant has been ‘Hands up! Don’t shoot!'”

Most striking of all is the contrast struck by headlines like “Protests Turn Violent in St. Louis Suburb.” There is no non-black analogue to behavior like this: “Protests in the St. Louis suburb turned violent Wednesday night, with people lobbing Molotov cocktails at police, who responded with smoke bombs and tear gas to disperse the crowd.” This is a repetition of behavior begun in the 1960s, when massive riots set the urban ghettos of Harlem, Philadelphia and Detroit afire.

Joseph Epstein Weighs In

The critic and essayist Joseph Epstein belongs on the short list of the most trenchant thinkers and writers in the English language. His pellucid prose has illumined subjects ranging from American education to gossip political correctness to Fred Astaire. The utter intractability of race in America is demonstrated irrefutably by the fact that the subject reduced Epstein to feeble pastiche.

In his Wall Street Journal op-ed “What’s Missing in Ferguson, MO.”(The Wall Street Journal, Wednesday, August 13, 2014), Epstein notes the stylized character of the episode: “…the inconsolable mother, the testimony of the dead teenager’s friends to his innocence, the aunts and cousins chiming in, the police chief’s promise of a thorough investigation… The same lawyer who represented the [Trayvon] Martin family, it was announced, is going to take this case.”

But according to Epstein, the big problem is that it isn’t stylized enough. “Missing… was the calming voice of a national civil-rights leader of the kind that was so impressive during the 1950s and ’60s. In those days there was Martin Luther King Jr…. Roy Wilkins… Whitney Young… Bayard Rustin…. – all solid, serious men, each impressive in different ways, who through dignified forbearance and strategic action, brought down a body of unequivocally immoral laws aimed at America’s black population.”

But they are long dead. “None has been replaced by men of anywhere near the same caliber. In their place today there is only Jesse Jackson and Al Sharpton…One of the small accomplishments of President Obama has been to keep both of these men from becoming associated with the White House.” Today, the overriding problem facing blacks is that “no black leader has come forth to set out a program for progress for the substantial part of the black population that has remained for generations in the slough of poverty, crime and despair.”

Wait just a minute here. What about President Obama? He is, after all, a black man himself. That was ostensibly the great, momentous breakthrough of his election – the elevation of a black man to the Presidency of the United States. This was supposed to break the racial logjam once and for all. If a black man occupying the Presidency couldn’t lead the black underclass to the Promised Land, who could?

No, according to Epstein, it turns out that “President Obama, as leader of all the people, is not well positioned for the job of leading the black population that finds itself mired in despond.” Oh. Why not? “Someone is needed who commands the respect of his or her people, and the admiration of that vast – I would argue preponderate [sic] – number of middle-class whites who understand that progress for blacks means progress for the entire country.”

To be sure, Epstein appreciates the surrealism of the status quo. “In Chicago, where I live, much of the murder and crime… is black-on-black, and cannot be chalked up to racism, except secondarily by blaming that old hobgoblin, ‘the system.’ People march with signs reading ‘Stop the Killing,’ but everyone knows that the marching and the signs and the sweet sentiments of local clergy aren’t likely to change anything. Better education… a longer school day… more and better jobs… get the guns off the street… the absence of [black] fathers – … the old dead analyses, the pretty panaceas, are paraded. Yet nothing new is up for discussion… when Bill Cosby, Thomas Sowell or Shelby Steele… have dared to speak up about the pathologies at work… these black figures are castigated.”

The Dead Hand of “Civil Rights Movement” Thinking

When no less an eminence than Joseph Epstein sinks under the waves of cliché and outmoded rhetoric, it is a sign of rhetorical emergency: we need to burn away the deadwood of habitual thinking.

Epstein is caught in a time warp, still living out the decline and fall of Jim Crow. But that system is long gone, the men who destroyed it and those who desperately sought to preserve it alike. The Kings and Youngs and Wilkins’ and Rustins are gone just as the Pattons and Rommels and Ridgeways and MacArthurs and Montgomerys are gone. Leaders suit themselves to their times. Epstein is lamenting the fact that the generals of the last war are not around to fight this one.

Reflexively, Epstein hearkens back to the old days because they were days of triumph and progress. He is thinking about the Civil Rights Movement in exactly the same way that the political left thinks about World War II. What glorious days, when the federal government controlled every aspect of our lives and we had such a wonderful feeling of solidarity! Let’s recreate that feeling in peacetime! But those feelings were unique to wartime, when everybody subordinates their personal goals to the one common goal of winning the war. In peacetime, there is no such unitary goal because we all have our personal goals to fulfill. We may be willing to subordinate those goals temporarily to win a war but nobody wants to live that way perpetually. And the mechanisms of big government – unwieldy agencies, price and wage controls, tight security controls, etc. – may suffice to win a war against other big governments but cannot achieve prosperity and freedom in a normal peacetime environment.

In the days of Civil Rights, blacks were a collective, a clan, a tribe. This made practical, logistical sense because the Jim Crow laws treated blacks as a unit. It was a successful strategic move to close ranks in solidarity and choose leaders to speak for all. In effect, blacks were forming a political cartel to counter the political setbacks they had been dealt. That is to say, they were bargaining with government as a unit and consenting to be assigned rights as a collective (a “minority”) rather than as free individuals. In social science terms, they were what F. A. Hayek called a “social whole,” whose constituent individual parts were obliterated and amalgamated into the opaque unitary aggregate. This dangerous strategy has since come back to haunt them by obscuring the reality of black individualism.

Consider Epstein’s position. Indian tribes once sent their chief – one who earned respect as an elder, religious leader or military captain, what anthropologists called a “big man” – to Washington for meetings with the Great White Father. Now, Epstein wants to restore the Civil Rights days when black leaders analogously spoke out for their tribal flock. Traditionally, the fate of individuals in aboriginal societies is governed largely by the wishes of the “big man” or leader, not by their own independent actions. This would be unthinkable for (say) whites; when was the last time you heard a call for a George Washington, Henry Ford or Bill Gates to lead the white underclass out of its malaise?

In fact, this kind of thinking was already anachronistic in Epstein’s Golden Age, the heyday of Civil Rights. Many blacks recognized the trap they were headed towards, but took the path of least resistance because it seemed the shortest route to killing off Jim Crow. Now we can see the pitiful result of this sort of collective thinking.

An 18-year-old black male is killed by a police officer under highly suspicious circumstances. Is the focus on criminal justice, on the veracity of the police account, on the evidence of a crime? Is the inherent danger of a monopoly bureaucracy investigating itself and exercising military powers over its constituency highlighted? Not at all.

Instead, the same old racial demons are summoned from the closet using the same ritual incantations. Local blacks quickly turn a candlelight protest vigil into a violent riot. Uh oh – it looks like the natives are getting restless; too much firewater at the vigil, probably. Joseph Epstein bemoans the lack of a chieftain who can speak for them. No, wait – the Great Black Father in Washington has come forward to chastise the violent and exalt the meek and the humble. His lieutenant Nixon has sent a black chief to comfort his brothers. (On Thursday, Missouri Governor Jay Nixon sent Missouri Highway Patrol Captain Ron Johnson, a black man, heading a delegation of troopers to take over security duties in Ferguson.) The natives are mollified; the savage breast is soothed. “All the police did was look at us and shoot tear gas. Now we’re being treated with respect,” a native exults happily. “Now it’s up to us to ride that feeling,” another concludes. “The scene [after the Missouri Highway Patrol took over] was almost festive, with people celebrating and honking horns.” The black chief intones majestically: “We’re here to serve and protect… not to instill fear.” All is peaceful again in the village.

Is this the response Joseph Epstein was calling for? No, this is the phony-baloney, feel-good pretense that he decried, the same methods he recognized from his hometown of Chicago and now being deployed there by Obama confidant Rahm Emmanuel. The restless natives got the attention they sought. Meanwhile, lost in the festive party atmosphere was the case of Michael Brown, which wasn’t nearly as important as the rioters’ egos that needed stroking.

But the Highway Patrol will go home and the St. Louis County Police will be back in charge and the Michael Brown case will have to be resolved. Some six days after the event, the police finally got around to revealing pertinent details of the case; namely, that Michael Brown was suspected of robbing a convenience store of $48.99 worth of boxed cigars earlier that day in a “strong-arm robbery.” Six-year veteran policeman Darren Wilson, now finally identified by authorities, was one of several officers dispatched to the scene.

Of course, the blacks in Ferguson, MO, and throughout America aren’t Indian tribesmen or rebellious children – they are nominally free American individuals with natural rights protected by the U.S. Constitution. But if they expect to be treated with respect 365 days a year they will have to stop acting like juvenile delinquents, stop delegating the protection of their rights to self-serving politicians and hustlers and start asserting the individuality they possess.

The irony of this particular case is that it affords them just that opportunity. But it demands that they shed what Epstein calls “the too-comfortable robes of victimhood.” And they will have to step out from behind the shield of the collective. The Michael Brown case is not important because “blacks” are affronted. It is important because Michael Brown was an individual American just like the whites who get shot down by police every year. If Dorian Johnson is telling the truth, Brown’s individual rights were violated just as surely whether he was black, white, yellow or chartreuse.

Policing in America Today – and the Michael Brown Case

For at least two decades, policing in America has followed two clearly discernible trends. The first of these is the deployment of paramilitary equipment, techniques and thinking. The second is a philosophy is placing the police officer’s well-being above all other considerations. Both of these trends place the welfare of police bureaucrats, employees and officers above that of their constituents in the public.

To an economist, this is a striking datum. Owners or managers of competitive firms cannot place their welfare above that of their customers; if they do, the firm will go bankrupt and cease to exist, depriving the owners of an asset (wealth) and real income and the managers of a job and real income. So what allows a police force (more specifically, the Chief of Police and his lieutenants) to do what a competitive firm cannot do? Answer: The police have a monopoly on the use of force to enforce the law. In the words of a well-known lawyer, the response to the generic question “Can the police do that?” is always “Sure they can. They have guns.”

All bureaucracies tend to be inefficient, even corrupt. But corporate bureaucracies must respond to the public and they must earn profits. So they cannot afford to ignore consumer demand. The only factor to which government bureaucracies respond is variations in their budget, which are functions of political rather than economic variables.

All of these truths are on display in this case. The police have chosen to release only a limited, self-serving account of the incident. Their version of the facts is dubious to say the least, although it could conceivably be correct. Their suppression of rioting protestors employed large, tank-like vehicles carrying officers armed with military gear, weapons and tear gas. Dorian Johnson’s account of the incident is redolent of the modern police philosophy of “self-protection first;” at the first hint of trouble, the officer’s focus is on downing anybody who might conceivable offer resistance, armed or not, dangerous or not.

What does all this have to do with the racial identities of the principals? Absolutely nothing. Oh, it’s barely possible that officer Wilson might have harbored some racial animosity toward Brown or blacks in general. But it’s really quite irrelevant because white-on-black, white-on-white and black-on-white police incidents have cropped up from sea to shining sea in recent years. Indeed, this is an issue that should unite the races rather than dividing them since police are not reluctant to dispatch whites (or Hispanics or Asians, for that matter). While some observers claim the apparent increase in frequency of these cases is only because of the prevalence of cell phones and video cameras, this is also irrelevant; the fact that we may be noticing more abuses now would not be a reason to decry the new technology. As always, the pertinent question is whether or not an abuse of power took place. And those interested in the answer to that question, which should be every American, will have to contend with the unpromising prospect of a police department – a monopoly bureaucracy – investigating itself.

That is the very real national problem festering in Ferguson, MO – not a civil-rights problem, but a civil-wrongs problem.

The Battle Lines

Traditionally, ever since the left-wing counterculture demonized police as “pigs” in the 1960s, the right wing has reflexively supported the police and opposed those who criticized them. Indeed, some of this opposition to the police has been politically tendentious. But the right wing’s general stance is wrongheaded for two powerful reasons.

First, support for law enforcement itself has become progressively less equated to support for the Rule of Law. The number and scope of laws has become so large and excessive that support for the Rule of Law would actually require opposition to the existing body of statutory law.

Second, the monopoly status of the police has enabled them to become so abusive that they now threaten everybody, not merely the politically powerless. Considering the general decrease in crime rates driven by demographic factors, it is an open question whether most people are more threatened by criminals or by abusive police.

Even a bastion of neo-conservatism like The Wall Street Journal is becoming restive at the rampant exercise of monopoly power by police. Consider these excerpts from the unsigned editorial, “The Ferguson Exception,” on Friday, August 15, 2014: “One irony of Ferguson is that liberals have discovered an exercise of government power that they don’t support. Plenary police powers are vast, and law enforcement holds a public trust to use them in proportion to the threats. The Ferguson police must prevent rioting and looting and protect their own safety, though it is reasonable to wonder when law enforcement became a paramilitary operation [emphasis added]. The sniper rifles, black armored convoys and waves of tear gas deployed across Ferguson neighborhoods are jarring in a free society…Police contracts also build in bureaucratic privileges that would never be extended to other suspects. The Ferguson police department has refused to… supply basic information about the circumstances and status of the investigation [that], if it hasn’t been botched already, might help cool passions… how is anyone supposed to draw a conclusion one way or the other without any knowledge of what happened that afternoon?”

The Tunnel… and the Crack of Light at the End

The pair of editorial reactions in The Wall Street Journal typifies the alternatives open to those caught in the toils of America’s racial strife. We can play the same loop over and over again in such august company as Joseph Epstein. Or we can dunk ourselves in ice water, wake up and smell the coffee – and find ourselves rubbing shoulders with the Journal editors.

DRI-270 for week of 2-9-14: Can We Make Economic Sense of First Wives’ ‘Joining Forces’ Initiative?

An Access Advertising EconBrief:

Can We Make Economic Sense of First Wives’ ‘Joining Forces’ Initiative?

In 2011, the wives of President Obama and Vice-President Biden, Michelle Obama and Dr. Jill Biden, announced formation of a public-service initiative called “Joining Forces.” The action is ostensibly intended to “honor and support our veterans, troops and military families.” What sort of “honor” and “support” is provided? A fair idea can be gleaned from the op-ed appearing under Ms. Obama’s byline in the Monday, February 10, 2014,

Wall Street Journal. It is entitled “Construction Companies Step Up to Hire Veterans.”

It contains the sort of prose that adult Americans have been bombarded with since birth. Still, inquiring economists want to know: What sense can we make of this sort of appeal?

Why Should Construction Companies Hire Veterans?

Ms. Obama uses the lead paragraph of her op-ed to announce an announcement. On publication day, “more than 100 construction companies – many of whom are direct competitors – are coming together to announce that they plan to hire more than 100,000 veterans within the next five years. They made this commitment not just because it’s the patriotic thing to do, and not just because they want to repay our veterans for their service to our country, but because these companies know that it’s the smart thing to do for their businesses.”

“As one construction-industry executive put it, ‘Veterans are invaluable to the construction industry. Men and women who serve in the military often have the traits that are so critical to our success: agility, discipline, integrity and the drive to get the job done right.” Ms. Obama records her approval of this “sentiment” and reiterates the guiding challenge of Joining Forces: “Hire as many of these American heroes as you can.”

Joining Forces originated in 2011. “Since then,” Ms. Obama reports, “we have been overwhelmed by the response… The CEOs we have spoken to have been consistently impressed with their hires…veterans are some of the highest-skilled, hardest-working employees they’ve ever had… resilient, adept at building and leading teams, comfortable with diversity, and able to handle uncertainty.” This is attributable to veterans’ “training and experience,” including “some of the most advanced information, medical and communications technologies in the world.” To bolster her argument, she offers an anecdotal case of an Air Force manpower specialist whose service job was estimating the troop strength and specialties needed for missions. Like many veterans whose “qualifications aren’t always obvious from their resumes,” he would have been “easy to overlook” if not for the Disney Company’s human-resources specialists, who are “trained…to translate military experience into civilian qualifications.” They realized that his military background ideally qualified him to plan meals by specifying exact kinds and quantities of ingredients.

Ms. Obama earnestly implores us to consider the multitude of possible employment conversions. Military medics would make such good paramedics and EMTs. Tank crew members would make dandy truck drivers. The military employs “engineers, welders [and] technicians.” Small wonder, then, that “American businesses have hired nearly 400,000 veterans and military spouses” since Joining Forces opened up.

Why Do Construction Company Managers – or Employers

Generally – Need Advice on Whom to Hire?

The first question that occurs to the inquiring economist is: Why do construction company managers need advice on whom to hire? Indeed, why would any employer need that sort of advice?

Running a business can get complicated. But few decisions are as fundamental as qualifications for new hires. If owners and managers don’t know what they’re looking for in a job applicant, how can they ever hope to succeed?

It is true that we recently underwent a financial crisis, the trigger of which was a housing bubble. Undoubtedly many unwise decisions were made in housing sale and finance, and quite a few in housing construction. But nobody has suggested that the crisis was caused by construction companies hiring the wrong people.

In her op-ed, Ms. Obama didn’t actually

say that employers are boobs who are incapable of hiring the right candidates without the help of the federal government – more specifically, without the help of the wives of the President and Vice-President of the U.S. (Of course, her actions tacitly encourage this belief on the political Left, where it has always flourished.) In fact, what she actually said was that “CEOs …have been consistently impressed with their hires.” She even quoted “one construction industry executive” to the effect that “veterans are invaluable to the construction industry. Men and women who serve in the military often have the traits that are so critical to our success.” (The executive cannot be speaking from experience gained from working with Joining Forces, since that partnership is only now being announced.) If construction-industry executives

already knew

that veterans are “invaluable” – a plausible conjecture for reasons adduced above – why was the intervention of Joining Forces needed?

The clincher comes from Ms. Obama herself, referring to the commitment made by the consortium of construction companies. “They made this commitment not just because it’s the patriotic thing to do…but because these companies know that it’s the smart thing to do for their businesses.” If they

already knew that it was in their interest, in

advance

of this agreement, why was jawboning by Joining Forces required?

In her op-ed, Ms. Obama offers no hint as to why the employers she is urging need advice on hiring. She actually vitiates her own argument by providing persuasive evidence that they do

not

need her gratuitous advice.

If Employers Did Need Advice on Hiring, Why Would They Seek it from the First Wives?

When people need advice, they generally seek out experts. The hiring decisions of business owners and managers affect their livelihoods and the wealth of investors – all the more reason to obtain qualified opinions when in doubt. Why would a manager base hiring decisions on advice offered informally by two people whose fame and expertise lie outside the industry – and who have no experience in management or personnel?

Taking the advice of a lawyer and an English professor on hiring because their husbands happen to be the President and Vice-President would be tantamount to acting on the basis of a celebrity endorsement. We might heed a celebrity endorser on a question of taste – a choice of beer, say, or candy bar – but not on a matter demanding specialized or expert knowledge.

In her op-ed, Ms. Obama makes one reference to “current research,” but cites no original research attributable to her, Ms. Biden or Joining Forces. In other words, her initiative adds nothing not already available to employers, who already have the strongest possible incentive to seek out and act upon pertinent information about employment candidates.

It is clear that the First Wives would ordinarily not be people whom executives, managers and business owners would solicit for advice on hiring.

Is Ms. Obama Asking for Charity, Demanding an Entitlement or Offering Advice on Efficient Hiring?

Ms. Obama’s plea for hiring of veterans is a mixture of mutually exclusive messages. In the opening paragraph of her op-ed, she declares that construction companies made the commitment to hire over 100,000 veterans in the next five years “because it’s the patriotic thing to do…because they want to repay our veterans for their service to our country [and] because it’s the smart thing to do for their businesses.” Each of these motives is distinct from, and inconsistent with, the others.

In a free-market economy, the purpose of business is to produce as many goods and services as efficiently as possible. This requires hiring workers solely on the basis of their productivity. While business owners are not barred from having ulterior motives and acting upon them, they will suffer a penalty for indulging any prejudices or whims not consonant with the goal of maximum efficiency and profit. And when businesses depart from the straight and narrow, consumers suffer as well.

If the veteran is indeed the best employee for the job, everybody – the veteran, the company and consumers – wins if the vet is hired. But in that case, the intercession of Ms. Obama, Dr. Biden and Joining Forces is utterly superfluous. If the vet is not the best candidate, then the efforts of some outside agency might well be decisive. But that is hardly a victory for truth, justice and the American way. How is patriotism served by making the company and consumers worse off? For that matter, what is patriotic about sticking a veteran in a job in which he or she is inferior to somebody else?

The notion of “repay[ing] our veterans for their service to their country” is at best an anachronism, a throwback to the days before the all-volunteer military. The draft was viewed – erroneously – as a means of assembling a fighting force without having to pay the full economic costs that would be demanded by willing workers. In that context, it might have made a semblance of sense to provide extra compensation to surviving soldiers after demobilization. But today’s fighting force is composed of volunteers. They are professionals who are paid for their work and equipped with physical, mental and emotional skills that pay dividends after their service ends. It is patronizing and insulting as well as flagrantly inaccurate to treat them as naïve conscripts who need looking after. They are not “our boys.” They are men – and women. Apart from medical treatment for injuries suffered on duty, the only further payment they require is respect.

Why is it Desirable for Construction Companies to Collude in Hiring Veterans?

Ms. Obama went to great pains to announce that over 100 construction companies were “coming together” to “plan” their hiring of veterans. To alleviate potential ambiguity on the point, she noted that “many of [them] are direct competitors.” The term economists and lawyers use to characterize collective hiring decisions made by direct competitors is “collusion.” It is presumptively illegal, on the theory that it allows firms to set wages lower than would be the case were the companies to compete independently in the same labor market. Collusion allows the firms to replicate, or at least approach, the outcome attained by a single

monopsony buyer of labor – just as collusion by a cartel of sellers in a market for output strives to replicate the

monopoly

result attained by a single seller.

When owners of major-league baseball teams were adjudged guilty of collusion in bargaining with players, they were subject to legal penalties. Why is it wrong for baseball-team owners to collude in hiring players but praiseworthy for construction companies to collude in hiring veterans? Does the approval of Madams Obama and Biden sanctify the practice?

It seems axiomatic that when two people whose primary basis for association is political cooperate to achieve an outcome, their motives are presumed to be political. A political motivation does not sanctify collusion – just the opposite, in fact. A political motivation suggests that the collusion will benefit one political interest or party at the expense of the other or others. Moreover, it also suggests that the gains of the gainers will be less than the losses felt by the losers. That is one way of defining the difference between economic change and political change.

Will Madams Obama and Biden personally supervise the hiring to prevent the monopsony outcome described above? Ms. Obama made no mention of it. There is no reason to expect that, since we have no reason to think that either Ms Obama or Ms. Biden have advanced training in economic theory and no reason to think they could effectively supervise the hiring of thousands of people even if they did. It is competition that precludes the possibility of monopoly, not minute scrutiny of each economic transaction by government authorities.

How Do We Explain the History of Joining Forces?

We have cast overwhelming doubt on the public rationale behind Joining Forces, the initiative promoted by the First Wives. What, then, is its likely purpose? The late Milton Friedman likened the actions of politicians to those of the lead duck in a flying V-formation. Periodically, the leader glances back, only to discover that the formation has deserted him and is flying off in a different direction. The leader must scramble to find the formation and resume his place at the head. The point is that this form of leadership is purely ceremonial; the formation leads and the apparent leader is really following.

It was clear even in 2011 that the Obama administration’s economic stimulus package had failed to stimulate. The Federal Reserve had embarked on an unprecedented program of monetary expansion that was being sold as stimulus but was really designed to prop up the financial system. The Obama administration needed something it could point to as a success and claim credit for.

Presidential spouses since Mamie Eisenhower have been publicly active. Mostly their activities have been innocuous; i.e., non-political. The most conspicuous exception was Hillary Clinton’s leadership of her husband’s health-care program – a choice that turned out to be notably unsuccessful. This time, Mrs. Obama’s involvement was shrewdly chosen.

Politically, her support for veterans was designed to appeal to both friend and foe. It would satisfy Democrats who had become accustomed to a party line of supporting soldiers but not war and whose nostrils quivered at the scent of a victimized interest group. The President

was thought to be particularly unpopular with the military community and pro-military Republicans, so Ms. Obama’s stand couldn’t help but improve matters there.

Economically, Ms. Obama would be betting on a sure thing. The President’s wind-down of wars in Iraq and Afghanistan, coupled with Defense Department budget cuts, would gradually feed veterans into the civilian work force. Mrs. Obama’s strategy would portray them as if they were draftees coping with a painful readjustment amidst civilian indifference or even hostility,

a la the World War II vets in the movie

The Best Years of Our Life or the Vietnam vets of

Coming Home

.

Of course, nothing could be further from the truth than this pretense. The volunteer military has been working well for decades. In order to attract recruits, the military has had to offer not only wages and salaries sufficient to compensate soldiers for the opportunity costs of service, but also training in the skills and technological savvy necessary to run a modern military. To employers starved for job applicants with just those skills and training and the emotional maturity gained from military service, skilled vets are like raw meat to hungry lions. And even unskilled vets offer physically trained bodies coupled with mental self-discipline – two more attributes that are highly attractive to sectors like the construction industry.

What about the publicity given to returning vets suffering from forms of emotional trauma such as delayed stress? Could this have given rise to a bias adversely affecting the employment prospects of all returning veterans? Could Joining Forces play a role in overcoming this bias?

We will never know because Ms. Obama’s op-ed says nothing on the subject. We cannot very well grant Joining Forces the credit for overcoming a bias that may or may not exist and that the initiative has ignored. It is easy to understand why the First Wives might skirt the issue. They have no expertise in this area either and do not want to introduce an issue that can only detract from their otherwise favorable publicity.

So what role have the First Wives and Joining Forces played in the absorption of vets into the civilian work force? None whatsoever. They are the leader ducks scrambling to get in front of the formation. They are desperate to take credit for veterans’ inevitable success. No wonder, since this has been the only bona-fide economic success that the Obama administration has rubbed up against in recent years.

Why Has Business Cooperated in this Sham Initiative?

Ms. Obama’s op-ed makes it clear that businesses throughout the country have cooperated with the First Wives in professing solidarity with their initiative and making sympathetic noises toward veterans in general.

Our analysis shows that Joining Forces is a sham. Its motives are purely political. In economic terms, it is superfluous. The internal logic behind the project is so contradictory that the more contemplation it receives, the more ludicrous is becomes.

Why, then, have businesses been so cooperative with the First Wives? The obvious answers would seem to be: fear and prudence. Businesses have watched the conduct of the Obama administration. They have seen auto-company shareholders expropriated for the benefit of unionized employees. They have seen one regulatory agency after another launch assaults on industries in the form of new rules, regulations and policies. They have observed an entire Presidential campaign built around attacks on business success and a candidate who epitomized it. They saw the President’s approval rating remain consistently high throughout, suggesting that his actions resonated with a majority of the general public – not just the proverbial 47% that are supposedly dependent on government. Thus, they have every reason to fear the wrath of this administration and to avoid displeasing it if possible.

In this case, business leaders almost certainly reason that playing along with the sham of Joining Forces is a form of cheap insurance. They can make effusive public statements supporting the goals of the First Wives – talk is the cheapest form of political payoff. And they don’t even have to lie – at least not much. They can sign declarations of support and even make public “plans,” “announcements” and “commitments” – none of which contractually obligate them to anything and which the public will have forgotten about within days. The Obama administration has no intention of later holding their feet to the fire and checking to see if they follow through on that “commitment” to hire 100,000 veterans. (Follow-through would have everything to lose and nothing to gain, since the administration only cares about

seeming to cause veterans to be hired, not about actually

doing

it.) Businesses will certainly hire veterans, who constitute an attractive employment option. No economic archaeologist is going to later paw through the data to calculate whether veteran hires reached the promised total. As political blackmail goes, this is probably the cheapest form of protection these businesses will ever pay.

What’s the Harm?

Readers might wonder where the harm lies in allowing the First Wives their little deception. They aren’t altering the course of economic activity much by their actions. Perhaps this forestalls them from pursuing some more destructive pastime.

Willful deception practiced by government cannot be beneficial. Its effects will harm us both directly and indirectly. Waste and misdirection of resources are bad enough. But the misleading impression of an omniscient and confident government compensating for the ham-handed, ineffectual efforts of a short-sighted private sector establishes a precedent for future interventions. Each new intervention sets the stage for the one that follows. The success of a protection racket like this one emboldens and empowers politicians to attempt bigger and more expensive scams.

There is no conceivable rationale or defense for Joining Forces, the job-placement initiative for veterans begun by Madams Obama and Biden. Its economic benefits are entirely illusory. Its aims are purely political. It is big-government bunkum at its most cynical and demagogic. And this conclusion derives not from political animus, but rather from the straightforward logical implications of Ms. Obama’s own words.

DRI-267 for week of 10-27-13: ObamaCare and the Point of No Return

An Access Advertising EconBrief:

ObamaCare and the Point of No Return

The rollout of ObamaCare – long-awaited by its friends, long-dreaded by its foes – took place last week. In this case, the term “rollout” is apropos, since the program is not exactly up on its feet. Tuesday, Oct. 22, 2013 marked the debut of HealthCare.gov, the ObamaCare website, where prospective customers of the program’s health-insurance exchanges go to apply for coverage. By comparison, Facebook’s IPO was a rip-roaring success.

A diary of highlights seems like the best way to do justice to this fiasco. We are indebted to the Heritage Foundation for the chronology and many of the specific details that follow.

Tuesday, Oct. 22, 2013: This is ribbon-cutting day for the website, through which ObamaCare’s state health-insurance exchangesexpect to do most of their business. One of the most fundamental reforms sought by free-market economists is the geographic market integration of health care in the U.S. Historically, each state has its own state laws and regulatory apparatus governing insurance. This hamstrings competition. It requires companies to deal with 50 different bureaucracies in order to compete nationally and limits consumers solely to companies offering policies in their state. But ObamaCare is dedicated to the proposition that health care of, by and for government shall not perish from the earth, so it not only perpetuates but complicates this setup by interposing the artificial creation of a health-care exchange for each state, operating under a federal aegis.

Only 36 of those state exchanges open for business on time today, however. Last-minute rehearsals have warned of impending chaos, and frantic responses have produced lateness. Sure enough, as the day wears on 47 states eventually report applicant complaints of “frequent error messages.” Despite massive volume on the ObamaCare site, there is almost no evidence of actual completed applications.

Wednesday, Oct. 23, 2013: The Los Angeles Times revises yesterday’s report of 5 million “hits” on HealthCare.gov from applicants in California downward just a wee bit, to 645,000. But there is still no definitive word on actual completed applications, leading some observers to wonder whether there are any.

Thursday, Oct. 24, 2013: The scarcity of actual purchasers of health insurance on the ObamaCare exchanges leads a Washington Post reporter to compare them in print to unicorns.  More serious, though, are the growing reports of thousands of policy cancellations suffered by Americans across the nation. The culprit is ObamaCare itself; victims’ current coverage doesn’t meet new ObamaCare guidelines on matters such as openness to pre-existing conditions. Ordinarily, a significant pre-existing health condition would preclude coverage or rate a high premium. In other words, writing policies that ignore pre-existing conditions is not insurance in the true, classical sense; insurance substitutes cost for risk and the former must be an increasing function of the latter in order for the process to make any sense. ObamaCare is not really about insurance, despite its protestations to the contrary.

Friday, Oct. 25, 2013: CNBC estimates that only 1% of website applicants can proceed fully to completion and obtain a policy online because the system cannot generate sufficient valid information to process the others. A few states – notably Kentucky – have reported thousands of successful policies issued, but the vast bulk of these now appear to be Medicaid enrollees rather than health-insurance policyholders. Meanwhile, the Department of Health and Human Services (HHS) announces that its website will be offline for repairs and upgrading.

Saturday, Oct. 26, 2013: In an interview with Fox News, Treasury Secretary Jack Lew refuses to cite a figure for completed applications on the HealthCare.gov website. Among those few that have successfully braved the process, premiums seem dramatically higher than those previously paid. One example was a current policyholder whose monthly premium of $228 ballooned to $1,208 on the new ObamaCare health-care exchange policy.

Monday, Oct.28, 2013: Dissatisfaction with the process of website enrollment is now so general that application via filling out paper forms has become the method of choice. It is highly ironic that well into the 21st century, a political administration touting its technological progressivity has fallen back on the tools of the 19th century to advance its signature legislative achievement.

Official Reaction

This diary of the reception to ObamaCare conveys the impression of a public that is more than sullen in its initial reaction to the program – it is downright mutinous. It was hardly surprising, then, that President Obama chose to respond to public complaints by holding a press conference in the White House Rose Garden a few days after rollout.

Mr. Obama’s attitude can best be described as “What’s the problem?” His tone combined the unique Obama blend of hauteur and familiarity. The Affordable Care Act, he insisted, was “not just a website.” If people were having trouble accessing the website or completing the application process or making contact with an insurance company to discuss an actual plan – why, then, they could just call the government on the phone and “talk to somebody directly and they can walk you through the application process.” (How many of the President’s listeners hearkened back at this point to their previous soul-satisfying experiences on the phone with, let’s say, the IRS?) This would take about 25 minutes for an individual, Mr. Obama assured his viewers, and about 45 minutes for a family. He gave out a 1-800 number for his viewers to call. Reviews of the President’s performance noted his striking resemblance to infomercial pitchmen.

Sean Hannity was so inspired by the President’s call to action that he resolved to heed it. He called the toll-free number on-air during his AM-radio show. He spoke with a call-center employee who admitted that “we’re having a lot of glitches in the system.” She read the script that she had been given to use in dealing with disgruntled callers. Hannity thanked her and complimented her on her courtesy and honesty. She was fired the next day. Hannity declared he would compensate her for one year’s lost salary and vowed to set up a fund for callers who wanted to contribute in her behalf.

Health and Human Services Secretary Kathleen Sebelius was next up on the firing line. Cabinet officials were touring eight cities and selected regional sites to promote the program and at Sebelius’s first stop at a community center in Austin, TX, she held a press conference to respond to public outrage with the glitches in the program.

On October 26, 2013, the Fox News website sported the headline: “Sebelius Suggests Republicans to Blame for ObamaCare Website Woes.” Had the Republican Party chosen the IT contractor responsible for setting up HealthCare.gov‘s website?

No. “Sebelius suggest[ed] that Republican efforts to delay and defund the law contributed to HealthCare.gov‘s glitch-ridden debut.” Really. How? Sebelius “conceded that there wasn’t enough testing done on the website, but added that her department had little flexibility to postpone the launch against the backdrop of Washington’s unforgiving politics. ‘In an ideal world, there would have been a lot more testing, but we did not have the luxury of that. And the law said the go-time was Oct. 1. And frankly, a political atmosphere where the majority party, at least in the House, was determined to stop this any way they possibly could…was not an ideal atmosphere.”

It takes the listener a minute or so to catch breath in the face of such effrontery. The Obama Administration had three years in which to prepare for launch of the program. True, there were numerous changes to the law and to administrative procedures, but these were all made by the administration itself for policy reasons. The Democrat Party, not the Republican Party, is the majority party. The Republican Party – no, make that the Tea Party wing of the Republican Party – proposed a debt-limit settlement in which the individual mandate for insurance-policy ownership would be delayed. It was rejected by the Obama Administration. Ms. Sebelius is blaming the Republican Party for the fact that Democrats were rushed when the Republicans in fact offered the Democrats a delay that the Democrats refused.

Were Ms. Sebelius a high-level executive in charge of rolling out a new product, her performance to date would result in her dismissal. But when queried about the possibility of stepping down, she responded “The majority of people calling for me to resign, I would say, are people I don’t work for and who did not want this program to work in the first place.” Parsing this statement yields some very uncomfortable conclusions. Ms. Sebelius’s employer is not President Obama or his administration; it is the American people. Anybody calling for her resignation is also an American. But clearly she does not see it that way. Obviously, the people calling for her resignation are Republicans. And she does not see herself as working for Republicans. The question is: Who is she working for?

Two possibilities stand out. Possibility number one is that she is working for the Democrat Party. In other words, she sees the executive branch as a spoils system belonging to the political party in power. Her allegiance is owed to the source of her employment; namely, her party. Possibility number two is that she sees her allegiance as owed to President Obama, her nominal boss. This might be referred to as the corporatist (as opposed to corporate) view of government, in which government plays the role of corporation and there are no shareholders.

Neither one of these possible conceptions is compatible with republican democracy, in which ultimate authority resides with the voters. In this case, the voters are expressing vocal dissatisfaction and Ms. Sebelius is telling them to take a hike. In a free-market corporation, Ms. Sebelius would be the one unfolding her walking papers and map.

Whose Back is Against the Wall?

It is tempting to conclude that ObamaCare is the Waterloo that the right wing has been predicting and planning for President Obama ever since Election Day, 2008. And this does have a certain superficial plausibility. ObamaCare is this Administration’s signature policy achievement – indeed, practically its only one. There is no doubt that the Administration looks bad, even by the relaxed standards of performance it set during the last five years.

Unfortunately, this view of President Obama with his back against the wall, despairing and fearful, contemplating resignation or impeachment, simply won’t survive close scrutiny. It is shattered by a sober review of Barack Obama’s past utterances on the subject of health care.

As a dedicated man of the Left, Barack Obama’s progressive vision of health care in America follows one guiding star: the single-payer system. That single payer is the federal government. Barack Obama and the progressive Left are irrevocably wedded to the concept of government ownership and control of health care, a la Great Britain’s National Health Care system. In speeches and interviews going back to the beginning of his career, Obama has pledged allegiance to this flag and to the collective for which it stands, one organic unity under government, indivisible, with totalitarianism and social justice for all.

The fact that ObamaCare is now collapsing around our ears may be temporarily uncomfortable for the Obama Administration, but it is in no way incompatible with this overarching goal. Just the opposite, in fact. In order to get from where we are now to a health-care system completely owned and operated by the federal government, our private system of doctors, hospitals and insurance companies must be either subjugated, occupied or destroyed, respectively. That process has now started in earnest.

Oh, the Administration would rather that private medicine went gentle into that good night. It would have preferred killing private health insurance via euthanasia rather than brutal murder, for example. But the end is what matters, not the means.

Certainly the Administration would have preferred to maintain its hypnotic grip on the loyalty of the mainstream news media. Instead, the members of the broadcast corps are reacting to ObamaCare’s meltdown as they did upon first learning that they were not the product of immaculate conception. But this is merely a temporary dislocation, not a permanent loss. What will the news media do when the uproar dies down – change party affiliation?

For anybody still unconvinced about the long-run direction events will take, the Wednesday, October 30, 2013 lead editorial in The Wall Street Journal is the clincher.

“Americans are Losing Their Coverage by Political Design”

“For all of the Affordable Care Act’s technical problems,” the editors observe, “at least one part is working on schedule. The law is systematically dismantling the private insurance market, as its architects intended from the start.”

It took a little foresight to see this back when the law was up for passage. The original legislation included a passage insisting that it should not “be construed to require than an individual terminate coverage that existed as of March 23, 2010.” This “Preservation of Right to Maintain Existing Coverage” was the fig leaf shielding President Obama’s now-infamous declaration that “if you like your existing policy, you can keep it.” Yeah, right.

Beginning in June, 2010, HHS started generating new regulations that chipped away at this “promise.” Every change in policy, no matter how minor, became an excuse for terminating existing coverage at renewal time. This explains the fact that some 2 million Americans have received cancellation notices from their current insurers. Of course, the Obama Administration has adopted the unified stance that these cancellations are the “fault” of the insurance companies – which is a little like blaming your broken back on your neighbor because he jumped out of the way when you fell off your roof instead of standing under you to cushion your fall. Stray callers to AM radio can be heard maintaining that at least half of these cancellations will be reinstated with new policies at lower cost in the ObamaCare exchanges. If only those hot-headed Tea Partiers would stop dumping boxes of tea and behaving like pirates! Alas, a Rube Goldberg imitation of a market cannot replace the genuine article – with apologies to Mr. Goldberg, whose roundabout contraptions actually worked.

ObamaCare creates 10 types of legally defined medical benefits. They include general categories like hospitalization and prescription drugs. No policy that fails to meet the exact standards defined within the law can survive the ObamaCare review. It is widely estimated that about 80% of all individual plans, which cover 7% of the U.S. population under age 65, will fall victim to the ObamaCare scythe.

The law is replete with Orwellian rhetoric of progressive liberalism. HHS defines its purpose as the “offer [of] a small number of meaningful choices.” Uh…what about allowing individuals to gauge the tradeoff between price and quality of care that best suits their own preferences, incomes and particular medical circumstances? No, that would have “allowed extremely wide variation across plans in the benefits offered “and thus “would not have assured consumers that they would have coverage for basic benefits.” This is doublespeak for “we are restricting your range of choice for your own good, dummy.”

Liberals typically respond with a mixture of outrage and indignation when exposed as totalitarians. It is certainly true that they are not eradicating freedom of choice merely for the pure fun of it. They must create a fictitious product called “insurance” to serve a comparatively small population of people who cannot be served by true insurance – people with pre-existing conditions that make them uninsurable or ratable at very high premiums or coverage exclusions. The exorbitant costs of serving this market through government require that the tail wag the dog – that the large number of young, healthy people pay ridiculously high premiums for a product they don’t want or need in order to balance the books on this absurd enterprise. (Formerly, governments simply borrowed the money to pay for such pay-as-you-go boondoggles, but the financial price tag on this modus operandi is now threatening to bring down European welfare states around the ears of their citizens – so this expedient is no longer viable.) In order to justify enrolling everybody and his brother-in-law in coverage, government has to standardize coverage by including just about every conceivable benefit and excluding practically nothing. After all, we’re forcing people to sign up so we can’t very well turn around and deny them coverage for something the way a real, live insurance company would, can we?

It is well known that the bulk of all medical costs arise from treating the elderly. In a rational system, this would be no problem because people would save for their own old age and generate the real resources necessary to fund it. But the wrong turn in our system began in World War II, when the tax-free status of employer-provided health benefits encouraged the substitution of job-related health insurance for the wage increases that were proscribed by wartime government wage and price controls. The gradual dominance of third-party payment for health care meant that demand went through the roof, dragging health-care prices upward with it.

Now Generation X finds itself stuck with the mother of all tabs by the President whom it elected. The Gen X’ers are paying Social Security taxes to support their feckless parents and grandparents, who sat still for a Ponzi scheme and now want their children to make good. To add injury to injury, the kids are also stuck with gigantic prices for involuntary “insurance” they don’t want and can’t afford to support their elders, the uninsurables – and the incredibly costly government machinery to administer it all.

It’s just as the old-time leftist revolutionaries used to say: you can’t make an omelette without breaking eggs. Across the nation, we have heard the sound of eggs cracking for the last week.

The Point of No Return

The “point of no return” is a familiar principle in international aviation. It is the point beyond which is it closer to the final destination than to the point of origination, or the point beyond which it makes no sense to turn back. This is particularly applicable to trans-oceanic travel, where engine trouble or some other unexpected problem might make the fastest possible landing necessary.

In our case, the Obama Administration has kept this concept firmly in mind. By embroiling as many Americans as deeply as possible in the tentacles of government, President Obama intends to create a state of affairs in which – no matter how bad the current operation of ObamaCare may be – it will seem preferable to most Americans to go forward to a completely government-run system rather than “turn back the clock” to a free-market system.

A free-market system works because competition works. On the supply side of the market, eliminating state regulation of insurance would enable companies to expand across state borders and compete with each other. But this involves relying upon companies to serve consumers. And companies are the entities that just got through issuing all those cancellation notices. For millions of Americans today, the only disciplinary mechanism affecting companies is something called “government regulation” that forces them to do “the right thing” by bludgeoning them into submission. That is what regulatory agencies are doing right now – beating up on Wall Street firms and banks for causing the financial crisis of 2008 and ensuing Great Recession. The fact that this never seems to prevent the next crisis doesn’t seem to penetrate the public consciousness, for the only antidote for the failure of government regulation is more and stronger government regulation.

On the demand side of a free market, consumers scrutinize the products and services available at alternative prices and choose the ones they prefer the most. But consumers are not used to buying their own health care and vaguely feel that the idea is both dishonest and unfair. “Health care should be a right, not a privilege,” is the rallying cry of the left wing – as if proclaiming this state of affairs is tantamount to executing it. No such thing as a guaranteed right to goods and services can exist, since giving one person a political right to goods is the same thing as denying the right to others. In the financial sense, somebody must pay for the goods provided. In the real sense, virtually all goods are produced using resources that have alternative uses, so producing more of some goods always means producing fewer other goods.

This is not what the “health-care-should-be-a-right-not-a-privilege” proclaimers are talking about. Their idea is that we will give everybody more of this one thing – health care – and have everything else remain the same as it is now. That is a fantasy. But this fantasy is the prevailing mental state throughout much of the nation. One widely quoted comment by a bitterly disappointed victim of policy cancellation is revealing: “I was all for ObamaCare until I found out I was going to have to pay for it.” On right-wing talk radio, this remark is considered proof of public disillusion with President Obama. But note: The victim did not say: “I was all for ObamaCare until I found out what I was going to have to pay for it.” The distinction is vital. Today, a free lunch is considered only fitting and proper in health care. And the only free lunch to be had is the pseudo-free lunch offered by a government-run, single-payer system.

As it stands now, few if any Americans can recall what it was like to pay for their own health care. Few have experienced a true free market in medicine and health care. Thus, they will be taking the word of economists on faith that it would be preferable to a government-run system like the one in Great Britain. It is a tribute to the power of ideas that a commentator like Rush Limbaugh can make repeated references to individuals paying for their own care without generating a commercially fatal outpouring of outrage from his audience.

Grim as this depiction may seem, it accurately describes the dilemma we face.

DRI-312 for week of 9-29-13: Suppose They Gave a Government Shutdown and Nobody Cared?

An Access Advertising EconBrief:

Suppose They Gave a Government Shutdown and Nobody Cared?

Midnight on Tuesday, Oct. 1, 2013 is the deadline for the shutdown of the federal government. That is the start of the new federal fiscal year. The U.S. Constitution specifies that Congress must authorize spending by the executive branch. Strange as it seems to a country by now inured to executive and regulatory high-handedness, the government cannot legally initiate operations by writing checks on its own hook. Fiscal delinquency, delay and deceit have long been the hallmarks of Congressional action, so it seems only fitting that Congress has failed to agree on the spending authorizations for departments that would get the federal government up and running in the New Year. And this year’s calendar offers a special treat, since the Oct. 17 deadline for default looms on the horizon as the next bureaucratic drop-dead date for civilization as we know it.

Amid the breathless media countdown to Armageddon, a sober pause for introspection is in order. How big an emergency is the federal-government shutdown, really? What underlying significance does a government shutdown have? How did we reach this position? Has the underlying economic significance of our situation been correctly conveyed by commentators and news media?

OMG! The Federal Government is About to Shut Down! Oh, Wait, Time for Vacation…

The attitude of Congressional representatives toward the prospect of government shutdown might best be compared to that of college students facing final exams. The exam schedule is announced at the beginning of the semester; indeed, it is printed in the course catalog distributed at registration. The course syllabus carefully explains the importance of the final to the student’s grade. The student knows the format of the exam, its location and exact time of day.

So, having had nearly four months to prepare and all the advance warning anybody could ask for, students are well versed, confident and unruffled in the waning days of the semester, right? On the night before the exam, they spend a short time reviewing basic ideas before retiring to get a good night’s sleep, to arise refreshed and eager to meet their task on final-exam day, don’t they? And they pass the exam with flying colors?

No, students generally seek out any excuse to avoid studying the material – and excuses emerge in profusion. As time passes and the semester ages, the knowledge of their approaching fate weighs on students’ minds, producing a buildup of anxiety and kinetic energy in their bodies. This demands an outlet, and late semester is a popular time for beer busts and other recreational modes of escape. The waning days before the final exam are spent in frantic efforts to complete course work and accomplish several months’ worth of study in a few days. The culmination of this crash program arrives on execution eve, when the students cram as many isolated facts as possible into their brain cells, relying on short-term memory to pinch-hit for solid comprehension. The surprising success rate of this modus operandi is owed less to its inherent effectiveness than to the grade inflation that has overwhelmed higher education in recent decades.

Anybody who expected their Congressional representative to behave in a more mature, sensible fashion than a college underclassman has been bitterly disillusioned by experience. Consider this latest example of budget brinkmanship.

The end of the fiscal year is not a national secret. Congress has known all year it was coming. The issues dividing the two major parties were well-known from the first day; ObamaCare has been a dinosaur-sized-bone of contention since its proposal and passage in 2010 and shocking reaffirmation by the Supreme Court in 2011. There was ample time to resolve differences or remove the legislation as a political roadblock to process.

As the year wound down, it became increasingly clear that opponents were eyeball to eyeball, each waiting for the others to blink. Now it was August, with only two months left in which to stave out a shutdown. When the going get tough, the tough… go on vacation – which was exactly what Congress did, for five weeks.

For the last week, leaders like Senate Majority Leader Harry Reid (D-Nevada) and Republican Ted Cruz have suddenly come alive with frantic last-ditch efforts. Each side has crafted and passed proposals (in the Democrat-controlled Senate and the Republican House) that the other side has torpedoed. At this writing, we are down to the last-minute cramming… but it should not escape notice that Sen. Reid was not too appalled by the prospect of shutdown to leave town the weekend after superintending the defeat of Rep. Cruz’s proposal in the Senate.

A few of the more cynical commentators have observed that we have been down this road before without careening off the highway and down a mountainside into oblivion. One set of talking points refers to this as our third experience with actual shutdown, but this is far from true. In fact, the federal government has survived 19 previous shutdowns – 17 since 1977 alone, according to the Congressional Research Service. Most have lasted a few days; the most recent (and famous) one in 1996 lasted for 21 days. So much for the artificially contrived atmosphere of urgency surrounding this one, which has been another production of political theater brought to you by your national news media.

Is There a Point to the Shutdown? If So, What is It?

It should be obvious that the hype surrounding the shutdown is phony. Even if we make allowances for the timing coincidence of the fiscal-year dividing line and debt-ceiling deadline, the attention paid to the shutdown is out of all proportion to its real effects on American well-being. But even though the shutdown may be relatively innocuous in its effects, that does not make it a good idea. What does it accomplish – ostensibly or actually?

It goes without saying that detractors of the Tea Party and the Republican Congressional leadership foresee nothing good coming of the shutdown. Since these are the people who got America into the mess that now plagues it – or stood by while that happened – we can disregard their opinions.

If there is an overriding goal of those who drove the events leading to the shutdown, it is opposition to ObamaCare. This opposition has taken the form of attempts to “defund” it; that is, to deny the Obama Administration the money necessary to implement the program. Were this successful, the program would remain on the books de jure as law, but would be repealed de facto by the lack of funds to run it. The most direct means taken to achieve this end is by passing a spending authorization bill containing a rider that defunds the Affordable Care Act. The problem with this measure is that the President will never sign this bill; ObamaCare is the signature legislation of his presidency.

Plan B of the defunders has been to replace that defunding rider with one that delays implementation of ObamaCare provisions for individual citizens by one year. This is directly analogous to the delay instituted by the Obama administration itself for businesses; in effect, it simply gives private individuals the same one-year reprieve given to employers by the President himself. This measure not only has the virtue of symmetry but also of fairness and logistical convenience. It is not clear why the bill should be delayed for businesses and not for everybody else. The state exchanges that would enable individuals to acquire health insurance are not up and running anyway in several states, so this would give the system more time to iron out the kinks. And this delay is entirely legal, being instituted by the Congress and submitted for Presidential signature; the business delay was a flagrantly illegal action imposed by Presidential fiat.

But President Obama is not about to agree to this compromise measure, either. He knows that the longer ObamaCare is postponed, the longer opposition will have to build and the longer its defects will have to become manifest. Once in place, a national system this massive and bureaucratic will be almost impossible to dislodge if only due to the inertia that will set in. The President only delayed applying its business provisions out of direst necessity; everybody was so unprepared that imposition would have led to complete fiasco. So Obama wants to get half of ObamaCare going while the going is good – or at least feasible.

Republic Speaker of the House John Boehner is already confronted by panic in the ranks. Republican representatives have hardly faced the first unfriendly fire from the news media – accusing them of irresponsibly jeopardizing the welfare of the nation for their own petty political purposes – before bolting for cover. Boehner’s queries as he gives them the flat of his sword are: What is this all about if not standing on principle against the President’s program? If we can’t work for the repeal of a terrible law as soundly unpopular as ObamaCare, when will we ever oppose the President? If now isn’t the time to stand firm against policies that are spending the country into the ground and destroying the heritage of our children, when will a better time come around? Over 30 years ago, President Ronald Reagan asked: If not now, when? Well, we didn’t do it then. If we don’t reform the budget now, when?

And those are indeed the relevant questions. Most Republicans oppose ObamaCare, all right; they have enough political courage to stand up against a law when the polls proclaim it heavily unpopular. But ObamaCare is merely the tip of the spending iceberg; the entitlement programs lie jutting beneath the surface waiting to scuttle the most unsinkable of reformers. There is no sign of Republicans boarding icebreakers, kissing wives and children goodbye and signing on for the duration of the voyage to clear the sea lanes of entitlements.

And Now for Some Opinion Completely Different

Holman Jenkins of The Wall Street Journal is a commentator not noted for his sunny optimism. Nevertheless, his take on the federal-budget stalemate is decidedly more upbeat than others commonly bruited. “What if, 10 years ago, Greece had made itself a laughingstock, sacrificed its credibility, brought shame on itself – all phrases used against Washington this week – by shutting down its government because certain legislators saw ideological and electoral rewards to be gained from making a fuss over unsustainable spending? Greek TV hosts would have shouted ‘Athens is broken!'”

Instead, as Jenkins knows only too well, Greece went sleepily on its corrupt, lazy, insouciant way, only to collapse in a heap nearly a decade later. Meanwhile, Americans today “all shake a fist at Washington, denouncing its irresponsibility because politicians are ‘playing politics’ with the debt ceiling and government shutdown.” But “then again, politics is how we govern ourselves. It’s better than despotism not because each moment is a model of stately order and reason, because America is a diverse, fractious society. The only way it works is by the endless grinding out of political compromises amid shrieking and making threats and turning blue.”

Jenkins anticipates the typical facile rejoinder. “The usual suspects at this point will be stamping their feet and insisting the U.S. isn’t Greece, as if this is an insight. No country can borrow and spend infinite amounts of money, and no political system is immune to the incentive to keep trying anyway. Herein lies the real point that applies as much to Washington as to Athens.”

“It would be nice if today’s fight were genuinely about the future. Oh, wait, that’s exactly what the ObamaCare fight is about. By trying to stop a brand new entitlement before it gets started, in a country already palpably and indisputably committed to more entitlement spending than it wants to pay for, those radical House Republicans aren’t trying to chop current spending amid a sluggish recovery (however much one begins to doubt that pump-priming from Washington is the solution the economy needs). Those terrible House Republicans aren’t trying to force colleagues to commit painful votes to take away established goodies from established voting blocs – votes that neither Republicans nor Democrats have the slightest yearning to cast.”

“Those disgraceful House Republicans have made the fight exactly about the long term. Where’s the grudging approval from our Keynesian friends who constantly say immediate spending must be protected and reform saved for the long term?” Again, Jenkins knows full well that Keynesian economics is no longer a putatively consistent set of theoretical propositions; it is now a policy admonition in search of a theory and for sale to any political sponsor willing to fork over lucrative, visible jobs to Keynesian economists.

“Not only will there by more such shutdowns,” Jenkins predicts. “What passes for progress each time will be tiny – until it’s not. The 2011 sequester, which caused critics to engage in choruses of disapproval and the S&P to downgrade U.S. debt, set us on a path to today’s modestly smaller current deficits. This week’s peculiar fight may be resolved by a near-meaningless repeal of ObamaCare’s self-defeating medical-device tax – a teensy if desirable adjustment, having no bearing on the deficit tsunami that begins when the baby boomers start demanding their benefits.”

Jenkins’s peroration combines elements of Churchill and Pericles. “We are at the beginning of the beginning. Yet the birth pangs of entitlement reform that will one day inspire the world (as we did with tax reform in ’80s) may be what we’re witnessing.” Hence the title of the column: “Behind the Noise, Entitlement Reform.”

Too Little, Too Late

Holman Jenkins’s vision is seductive, but unconvincing. Its visceral appeal lies in its pragmatism and its familiarity. Pragmatism is the great American virtue. We have grown up learning to accept and adapt to incremental change. Surely the changes necessary to cope with the downsizing of the welfare state will be just one more set of adjustments – painful but bearable. How many times have we heard Cassandras prophesy doom? How many times has it appeared? This is apparently the comforting set of rationalizations that insulates us from the truth of our situation.

Unfortunately, there is no reason to believe that a long series of small changes will be both timely and sufficient to our purpose. Not only has the Obama Administration’s fiscal policies shifted the velocity of fiscal decline to warp speed, but its monetary policies have changed our major problem from financial crisis to monetary collapse. Financial crisis is something that both individual countries and world systems recover from. Monetary collapse can lead to the destruction of a nation’s economy and the end of the civil order. We not only have to change our ways, we must reverse course by 180 degrees. And do it quickly.

It seems that Jenkins envisions entitlement reform from the austere perspective of an actuary contemplating the future of a program like Social Security. Tut-tut, the actuary admonishes, this program will be bankrupt in another 20 years or so. Well, in 20 years, a solid plurality of Wall Street Journal readers will be dead or near death. Quite a few will be financially independent of the program. Most of the rest view 20 years hence as imperceptibly distant – ample time to recover from the financial improvidence of youth.

But the real crisis on our trip planner is not actuarial. Social Security affects it long before it actually becomes insolvent because its unfunded status will be factored into the calculations of bond traders, credit-rating agencies and interest-rate setters. We may or may not be at Jenkins’s “beginning of the beginning,” but we are certainly not standing in the starting blocks in terms of debt. Government at every level is in hock up to its hairline. The private sector has been making a valiant effort to deleverage – and for its pains has caught hell from Keynesian economists who lecture us about the evils of saving in the middle of a recession. (Just prior to the Great Recession, the same people were decrying our “consumption binge” and running public-service ads begging us to save more.) American banks have trillions loitering in excess reserves, just spoiling for the chance to torch the value of the dollar at home and abroad. Foreign holders of dollars and dollar-denominated assets are dying for a convenient chance to unload them. Business forecasters need binoculars to view the upside potential of U.S. interest rates. And when interest rates skyrocket, interest payments on the federal debt will crowd out practically everything else on the docket, making the budget wars of today look like Sunday-school theology debates. The endpoint of this process is monetary collapse, when the U.S. dollar is abandoned as a medium of exchange, unit of account and store of value.

Oh, and just in case the foregoing doesn’t fill you with a sense of dread, there’s the little matter of international “currency war” to ponder. During the Great Depression, many nations used monetary expansion to deliberately trash the value of their own currencies. Their aim was to make their goods look cheap to foreigners, thereby hiking their number and value of their exports and increasing employment in their export industries. Since their depreciated domestic currency would also buy fewer imports, this would supposedly encourage the citizenry to buy fewer goods from abroad, thereby increasing domestic employment in import-competing industries. This game plan is well-known to economic historians as the “beggar thy neighbor” strategy. Its inherent flaw is that it can work if, and only if, only one nation employs it. When all or most nations do it simultaneously, the effects cancel each other out in the currency market and the only result is that international trade evaporates – which is roughly what did happen during the Depression. Since international trade is a good thing which makes practically everybody better off, its virtual elimination was a disaster for everybody. And guess what? The rest of the world, watching Ben Bernanke and the Fed at work creating money like there’s no tomorrow, may well suspect the U.S. of trying just this tactic. Whether they’re right or wrong is beside the point, since it is their belief that will determine whether they retaliate by starting a trade war that mimics the devastation of the 1930s.

It is barely possible that Congress might embark on a program of haphazard, gradual deficit reduction a la Jenkins. But a thoroughgoing reform of the process is not in the cards. Thus, the danger is not a collapse caused by a government shutdown. The danger is a collapse caused by the failure to shut the government down. It is government at all levels that has turned itself into a machine for spending citizens’ money to benefit employees without providing substantial benefits to the citizens. Since there is virtually no competition for government services, there is little or no way to gauge whether any government good or service is worth what we have to pay to get it. So government just keeps rolling along, like Old Man River, carrying us all along with the flow.

The mass delusion afflicting America is cognitive dissonance. Most of us agree with Jenkins that no government can increase spending indefinitely. Yet we do not admit that this requires our government to actually cut spending for the purposes that (we believe) benefit us – or, at least, we do not admit this necessity in our lifetime. The same people who normally consider government to be intrusive, inept and unproductive magically reverse their position 180 degrees and assume that government is efficient and productive when pursuing their pet project, benefitting them and saving the world from their latest hobgoblin. This is the politico-economic equivalent of William Saroyan’s lament that everybody had to die but he had always assumed that an exception would be made in his case.

The dissonance is actually three-sided. We fail to recognize not only its quantitative dimension but also its qualitative side – government’s utter failure to solve problems and produce things of value. Thus, the real entrenched constituency for big government is not its ostensible beneficiaries – the poor, downtrodden, minorities and such. It is the bureaucrats and their minions, who collect paychecks but whose real net contribution to the social product is negative.

Until this dissonance is dispelled, it is idle to blame politicians for acting true to form.