Convergences

Ronald Coase's Anniversary lectures at George Mason

Yesterday I attended "Coase's Federal Communications Commission at 50," at George Mason Law School, a discussion featuring FCC Commissioner Robert McDowell, Tom Hazlett, Jeff Eisenach, Evan Kwerel and John Williams. On the whole, a cheering event, for it was a strong reminder that truth will out, and advances can be made in government in spite of its being perpetually beseiged by opportunists.

Fifty years ago economist Ronald Coase wrote an article in which he challenged the conventional wisdsom that the electromagnetic spectrum used by wireless devices such as broadcasting had to be centrally planned by government. He argued that instead there could be property rights in spectrum, and it could be sold in the market. This would be a much less costly way of making sure services reached consumers. At the time this idea was considered absurd. But gradually as the FCC became overwhelmed by the problems with central planning for spectrum, they became willing to experiment with spectrum markets. John Williams, formerly an engineer within the FCC, quietly toiled away within the agency on the engineering end of this problem since 1965 (the year I was born); economist Evan Kwerel likewise for the economic end (not for quite so long). The experiments were successful--overwhelmingly so--and progress continues to be made today. Slowly.

But what does the future hold? Commissioner Rob McDowell pointed out that recent auctions show some backsliding on the part of the Commission. In the recent sale of spectrum for 700 Megaherz wireless services, the FCC insisted on describing services that the winners would have to provide, instead of granting flexibility. Commissioner McDowell suggested that the future is likely to prove this move was a mistake.  Economist Tom Hazlett pointed to the Commissions' slowness in recognizing that the spectrum now being used by televsion broadcasters is mostly wasted; to move more valuable services out to consumers more quickly, broadcasters should be free to sell their rights to other types of providers. Evan Kwerel cheerful identified those holding up more rapid progress--opportunists, who wish the government to hand out spectrum so long as it goes to their favorites; "taxation through regulation" forces within the public sector, who wish to hang on to it for government uses; "technology romantics" who see technology as being able to solve economic problems without property rights; and anti-capitalists, who fear private companies' power in the market--to such an extent that they are willing to forgo trillions of dollars in economic growth that would benefit consumers. Jeff Eisenach is concerned about current political trends, which look to government as the solution to all ills; if the "public option" is best for health care, why not for communications? (Indeed, one might ask, why not for food, clothing, shelter, transport?) .

What grounds for optimism are there? First, that Coase's ideas were tried and did, slowly, take hold, in spite of the mockery to which he was subjected when they were first pronounced. Second, the government-run systems are likely to collapse of their own weight. Third, and most importantly, the power of consumer demand. Businesses feel it; the FCC feels it; legislators feel it--it has become overwhelming, and it is driving change. Slowly. 

Having observed the policy process for twelve years now, I am beginning to feel that the power and importance of consumer demand *to policy* (as opposed to business matters like sales) has been greatly underestimated and overlooked. It is undeniably shaping spectrum policy. It is certainly shaping copyright policy. It is shaping privacy policy, another area I have observed for some years. It strikes me that it would be worth making a more systematic study of consumer demand and policy. Both the right and the left seem to leave it out as a force to be reckoned with. Daniel Spulber's recent work on consumer coordination is a good start.

Sketch shows Jeff Eisenach top left, Commissioner McDowell top right, and Evan Kwerel, lower down.

Rhett Butler Comes to Washington . .

. . . is the title of a new article over at The American. It starts with some references to Prof. Luigi Zingales' fine "Capitalism After the Crisis" in the new journal National Affairs, in which he riffs on the distinction between "pro-business" and "pro-market," and goes on to discuss the increasingly destructive nature of Washington influence peddling.

Some excerpts:

Since business is business, companies can adopt the philosophy of Rhett Butler in “Gone with the Wind,” that as much money can be made from a civilization’s destruction as from its rise. Furthermore, while it might be thought to raise some problems of personal ethics, management can take the next step and say they owe it to the shareholders to help that destruction along if that is where the opportunities are.

However, it is unlikely that the increasingly mutinous middle class will understand such fine points of corporate and Washington ethics, or forgive a business culture that promotes destruction and stagnation.

  And:

[W]hile one cannot escape one’s time, and if destruction is at hand it is reasonable to go into the salvage business, it would be wiser for businesses to band together to defend free market culture and make their money from our civilization’s rise instead.

Yes - I know that Rhett was not actually a scoundrel. Parse his words carefully, and you note that he himself would not destroy, even if he would profit from destruction caused by others. Rhett was continually a builder and an admirer of builders, with a contempt for the vaporous upper classes of the Old South.

Health Care Markets

As noted earlier, Princeton economist Uwe Reinhardt bemoans the confusion and opacity surrounding health pricing.

Someone is doing something about that. The Surgery Center of Oklahoma has a public schedule of prices for common procedures. Furthermore, it has heard the term "competition."

It is no secret to anyone that the pricing of surgical services is at the top of the list of problems in our dysfunctional healthcare system. Bureaucracy at the insurance and hospital levels, cost shifting and the absence of free market principles are among the culprits for what has caused surgical care in the United States to be cost prohibitive. As more and more patients find themselves paying more and more out of pocket, it is clear that something must change. We believe that a very different approach is necessary, one involving transparent and direct pricing.

Gee, Congress better act quickly, because if this approach catches on it might not be necessary to enact a health care takeover bill that channels vast sums to favored interest groups, and then where would our politicians be?

Speaking of Innovation . . .

The OSTP Strategy for Innovation is one approach: grand plans; deadlines; quotas; let no trough go unfilled; government micromanagement.

In a fascinating article in City Journal, George Gilder describes a different route: how Israel's tech industry was in a decade transformed from a stagnant socialist backwater into a leader in invention:

Israel ha[s] achieved an economic miracle . . . . As late as the mid-1980s, Israel was a basket case, with inflation rates spiking from 400 percent to nearly 1,000 percent by early 1985. As recently as 1990, Israel was a relatively insignificant technology force, aside from a few military and agricultural initiatives. Yet in little more than a decade, the country has become an engine of global technology progress.

How?  Read the article, or the longer version in Gilder's new book The Israel Test. Government policies were important, but not in the sense that the transition was micromanaged. It could occur only because policies that were blocking the creative genius of the society were reversed, largely through the efforts of Netanyahu abetted by U.S. Treasury Secretary John Snow.

It is a great story, and it has profound political implications. Who knew that:

Between 1967, when Israel took over the West Bank and Gaza Strip, and 1987, when the first intifada erupted, those two territories were one of the fastest-growing economies on earth. GDP surged 30 percent a year for a decade, the Arab population nearly tripled, six new universities were launched, and Arab longevity jumped from 43 years to 74.

The article concludes:

[T]rue peace—and the promise of a decent life—lies waiting to be picked up by those Palestinians and Israelis who are willing, and now increasingly able, to invest in creation over destruction.

Innovation Strategy

On Monday, the Office of Science and Technology Policy released a white paper on A Strategy for Innovation: Driving Towards Sustainable Growth and Quality of Jobs. While some of its thoughts are decent enough, much of it illustrates why "government" and "innovation" are rarely compatible.

Sometimes things work out, usually when a government program such as DARPA is run by dedicated people who manage to stay below the political and interest group radar. But once "innovation" is outed, the results become fit for the Onion. Thus the strategy contains pork for every major interest group -- education, already lavishly funded with steadily worsening results, will get even more. Infrastructure of all kinds is part of the agenda -- roads, bridges, rail. Clean energy. Rural broadband - everyone must have 21st century connections. The government will train entrepreneurs (!!)

Three seems to be regarded as a lucky number. The strategy has three parts; the President wants to invest at least three percent of GNP in R&D; three key science agencies will have their budgets doubled; take three years to double the nation's supply of renewable energy; and so on. If there is any rationale for any of the goals or figures, it goes unstated.

There are no costs, no benefits, no trade-offs, no limits. Nothing about fossil fuels, which must remain the backbone of energy for decades, and of course nothing about nuclear energy! It is a wish list, not a strategy. It would be difficult to dream up a more effective way to stifle national innovation than to commandeer our resources to promote arbitrary plans which must be implemented by multiple bureaucracies.

Back in the real world: At a health care event a couple of months ago Billy Tauzin, head of Phrma, mentioned to former Majority Leader Dick Gephardt that data must be submitted to the FDA via truckloads of paper rather than in digital form, and that this is both wasteful and slow. Gephardt's response was that Congress is the agency that would have to fix this by allocating the resources, and Congress is very busy and much put upon by people asking for things, so one should really be sympathetic to its problems. He did not seem aware that his answer was ludicrous -- it was in essence that Congress should be allowed to be a bottleneck for everything because it has arrogated to itself control of everything, and that we should all shut up.

Tauzin noted that other nations all love pharmaceutical companies and keep asking "how can we build such as industry?" but even that rather broad hint was not enough to divert Gephardt from his Congress-centrism.

The OSTP strategy document envisions a leading government role in health IT. LOL!  I propose that before being allowed to write a grand strategy on innovation, OSTP should be required to make a list of areas in which the government is acting as a drag on innovation -- and fix them.  It can start with the FDA data issue. Then perhaps it can progress to more ambitious activities.

The funny thing is, the OSTP people are smart; they know all these problems as well as I do. But the dynamic of government has forced them to produce a distinctly weird document that no one of them would ever sign his or her name to as a serious intellectual product.

To repeat myself, we are increasingly government of the special interest, by the special interest, and for the special interest, and it simply cannot continue for much longer.

It's a Dog's Life (You Wish!)

Classical Values points out that a dog can get better and cheaper care than a person. He muses:

While I realize technology has added many tools to the medical arsenal since the 1940s, the same tools have been added to the veterinary arsenal, so that can't be all there is to it. I have not seen any vet bills from the 1940s, but I am sure that a cursory examination would reveal that the rate of increase has risen in a normal manner that we would expect, while the rate of increase for human medical care has skyrocketed.

A presentation by Dr. Arthur Robinson explains at least some of the difference:

My youngest son Matthew has a dog named Rusty. When Matthew takes Rusty to the veterinarian, the vet can take a blood sample from Rusty, put it in a computer peripheral beside his PC, which costs $1,000, get the analysis in a few minutes, diagnose Rusty, and go on about his business. It measures the same couple of dozen things that would be measured if you went to a physician. Some veterinarians, in fact, send their samples to the local hospital and put them through the same medical devices used for humans.

In any case, the veterinarian can do this for Rusty, but he can’t do this for Matthew. If he measured Matthew’s sample, that would be unlawful. And, if a physician had this device in his office, he also couldn’t use it. That also would be unlawful. The only people allowed to use these devices are working in approved commercial clinical laboratories, and most of those laboratories would not measure a sample if Matthew asked them to do it. But, there is an out. Matthew can measure his own sample. If he does it himself, it is lawful.

Robinson thinks:

Something needs to be done in medicine and the entrepreneurs and technologists of the Telecosm are the exact people to do it.  It involves moving diagnostic medicine into the hands of the consumers—taking the diagnostic and technological tools of medicine and making computer peripherals out of them, as well as making on-person monitors and turning the Internet into an interpretive tool, so that the consumers of medicine can evaluate the product that they receive and medicine itself could be turned into a therapeutic industry competing on the basis of quality and price.

An audio of his whole presentation is here.

The Special Interest State

A very acute comment from Tom Smith on The Right Coast:

[M}aybe Tea Partiers are motivated by economic self-interest. They are not part of any favored client group of government. On the contrary as non-minorities, they have to rely mainly on economic production to make their way in the world, assuming they are non-union members. So their interest is really in economic growth, which means low taxes and less regulation. Therein lies their hope of getting ahead. Their behavior makes more sense if you view them as reasonably intelligent, rational actors. In general, I think viewing people as rational leads to a lot more sociological insight than imputing to people one doesn't know whatever funky unconscious motives occur to one's own imagination.

It is odd to think of those who must, and are willing to, rely on private enterprise and economic growth as a special interest, but so be it.

Do Not Make Health Care Into a Zero-Sum Game

A WSJ column today by Brit Rupert Darwell makes a crucial point about "what might be termed the 'lump of health care' fallacy," in which "health-care resources are assumed to be fixed, [so] those resources should be prioritized for those who can benefit most from medical treatment." In contrast:

[I]n a market-based system triggering one person's contractual rights to health care does not invalidate someone else's health policy. Instead, increased demand for health care incentivizes new drugs, new therapies and better ways of delivering health care. Government-administered systems are so slow and clumsy that they turn the lump of health-care fallacy into a reality.

Exactly. Government health care makes us all into political pleaders rather than customers. The health care budget is set irrespective of demand by the public as consumers, and various disease-related interest groups then lobby to get bigger shares of this politically-determined pie.

One likely outcome -- suppression of innovation. New treatments are usually expensive because they lack a broad base over which to spread the costs, and research is certainly expensive, so innovation looks bad from the stand-point of short-term, static cost-benefit analysis.

There is a bit of karmic justice here. Seniors (a group of which I am a reluctant member) have asserted that they have a "right" to have their health care subsidized by the rest of society, so they voluntarily gave up their autonomy as customers in favor of their electoral clout. It's a good scam, but eventually the burden becomes too great and there is indeed a backlash against us greedy geezers.

The moral: it is better to be a customer rather than a supplicant.

Speaking of Net Neutrality . . .

I. L Sharfman, Railway Regulation (1913), pp. 23-25:

            RAILWAY DISCRIMINATION AND THE PUBLIC WELFARE

The danger as well as the injustice of discriminatory practices cannot be overemphasized. If our industrial life is to reach its natural and most efficient economic development, there must be freedom of enterprise and fairness of treatment for all persons, all sections, and all undertakings. In a sense, transportation is a fundamental industry underlying all others, for it is essential to the conduct of all business and goes far towards determining the direction and conditions of industrial activity. The item of transportation, whatever it may be, is one of the elements in all costs, and the outcome of competition between different producers may be largely affected by any divergence in railway rates which must be paid by each of two or more competitors. It follows clearly, then, that the railway officials who make transportation rates exercise a tremendous power.

By the soundness of their adjustment of rates and by the degree of fairness with which established rates are observed, the railways may profoundly affect—or, even absolutely determine—the prosperity of individuals, of industries, of cities and towns, or of entire sections of the country.

By discriminating between competing shippers, they may destroy the business of one and build up that of another, making one man rich and another poor.

By stimulating or discouraging a particular class of traffic, they may increase or diminish the importance of industries and the extent of production in particular lines of commerce, thus shaping the direction of industrial activity.

By discriminating among cities and towns, they may cause one to grow and another to decay, and thus determine the commercial importance of business centers.

By modifying their rate schedules in special instances, they may determine the location of industries, guide the movements of population, and affect the prosperity and welfare of extensive localities.

By these unfair practices the railways also have it within their power to build up industrial monopoly; and the most powerful of the trusts against which the people are now struggling made their first advances towards control of the market through the agency of special favors in the form of railway discriminations.

On Order: George Gilder

Or, rather, already bought via Kindle: The Israel Test.  For 20 years, ever since Microcosm (and some would go back earlier, to Wealth & Poverty) Gilder has been a provocative and prescient commenter on the tech scene. For a preview of this new work, see his piece in The American last Monday: "Capitalism, Jewish Achievement, and the Israel Test."

Sample:

In a dangerous world, faced with an array of perils, the Israel test asks whether the world can suppress envy and recognize its dependence on the outstanding performance of relatively few men and women. The world does not subsist on zero-sum legal niceties. It subsists on hard and possibly reversible accomplishments in technology, pharmacology, science, engineering, and enterprise. It thrives not on reallocating land and resources but on releasing human creativity in a way that exploits land and resources most productively. The survival of humanity depends on recognizing excellence wherever it appears and nurturing it until it prevails. It relies on a vanguard of visionary creators on the frontiers of knowledge and truth. It depends on passing the Israel test.

Israel is the pivot, the axis, the litmus, the trial. Are you for civilization or barbarism, life or death, wealth or envy? Are you an exponent of excellence and accomplishment or of a leveling creed of frenzy and hatred?

Accord, as the legal profs say, from V. D. Hanson, writing from Venice:

Venice . . . was malarial, without natural harbors or any readily identifiable deep ports or surrounding cliffs. It is instead a conglomeration of over 100 islands in the swamps of an Adriatic lagoon. Yet between 1200 and 1600, Venice was in many ways the preeminent city of the world. People—not oil, coal, timber, or farmland—matter most.