Finally (?): Healthcare Reform

What are the problems with our universal healthcare system (no one is denied the care they need “Health-care-plan-B”) that Congress is trying to fix? At the broadest level America’s health care costs much more than it should for the results it delivers and the distribution of its financing is neither efficient nor equitable. Six years ago Democrats made the mistake of sneaking through the Affordable Care Act without significant debate. This year Republicans committed the same error but failed to pass a law. This provides congress (thank you Senator McCain) with the opportunity to fashion a healthcare reform law the proper way (open committee hearings, etc.).

A new attempt to reform the system would no longer be restrained by the limitations of a budget law that limited what earlier attempts were able to do. In particular a new law should address the factors that drive up the cost of medical care in the U.S. These include relaxing legal limitations on who can provide what services and how they may be performed, requiring that the cost of services be transparent and requiring stronger incentives for customers (patients) to care about cost when choosing medical treatments. “Heath-care-reform-fatigue

How medical services are paid for influences the incentives of both suppliers of these services as well as the users to seek and provide the most cost effective options. Medical services are paid for by patients (because they are uninsured, or pay deductibles or copays), insurance premiums, or taxpayers. Each provides its own set of incentives for choosing what is delivered. When patients pay for the services they have a financial incentive to choose the option with the highest benefit-cost ratio. When third parties pay for medical services, (insurance companies or government) they must impose choices that patients, in consultation with their doctors, would otherwise make.

Some commentators have complained that third party payers, whether a single payer (government) system or many insurance companies, introduce rationing. However, all scarce goods and services are necessarily rationed. The relevant issue is how they are rationed, whether on the basis of the preferences of patients or the judgment of the third party payer of what is reasonable.

To the extent that medical costs are paid for by taxpayers, the incidence of such financing depends on and is determined by the structure of the government systems of taxation. In the U.S. these are currently unfair and inefficient and in bad need of reform quite independently of the issues of healthcare delivery. Medical insurance financing is complicated by the ill advised post World War II tax incentive for employers to provide and help pay for medical insurance. This practice establishes insurance pools (the firms employees) that generally mix the number of healthy and sick policyholders in a representative way. The very purpose of insurance is for the healthy to share the costs of the sick and thus reduce the financial burden of medical surprises. Most Americans with health insurance buy it through their employers’ plans.

The most serious problem with the existing American health insurance system is for those not receiving insurance from an employer (or those changing employers and needing to establish new insurance policies). These people must use the so-called private market for which the Affordable Care Act established the insurance exchanges. The cost of insurance purchased in this private market depends on the mix of healthy and sick people that sign up. Employer provided plans are essentially mandatory for a firm’s employees (and enjoy a tax subsidy) and thus result in a well mixed (sick and healthy) risk pool. Private market plans were made mandatory by the ACA but with a penalty for remaining uninsured that was so low that large numbers of young healthy people choose not to join. Thus private market plans were increasingly populated by the sick (and those expecting that they were likely to become sick). This undermines the cost sharing the insurance exists to provide and thus drives up the premium cost. The simple cure for this problem is to make healthcare insurance mandatory as originally proposed by the Heritage Foundation.

Mandatory healthcare insurance should cover every health service for which society believes financial assistance should be given. It undermines the purpose of insurance to allow policy holders to pick and choose which services will be covered. Premiums might very with age, lifestyle choices that effect health (such as smoking or obesity) and the choice of the level of deductions and copays but policy holders should not be able to opt out of services society intends to provide and finance one way or another even if they never expect to need them. The issue of preexisting conditions would not arise when insurance is mandatory and policies are not linked to individual employers. “Health-care-in-America”

The individual policyholders’ choices of the level of deductions and copays (but not the scope of services covered) would determine the division of financing between patients and third party payers. In addition, government (the voting public) would choose the extent to which the cost of medical services would be taken over by taxpayers as a result of government financial assistance to the poor. A further policy option is whether the cost of catastrophic health care needs would be lifted from insurance premiums and paid for by taxpayers via a reinsurance plan. But the cost of medical services that must be paid over all (by patients, insurance premiums, or tax payers) can be greatly reduced by taking those measures that will lower the cost of these services in the first place.

Hopefully this time around congress will entertain open public discussion of all of these issues so that the public will understand the purposes and tradeoffs of the policies ultimately adopted.

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The Balance of Trade

President Trump has regularly called for bilateral trade balances with our trading partners. Though he prudently gave up his campaign promise to declare China a currency manipulator on his first day in office because of China’s large trade surpluses with the U.S., he more recently criticized Germany’s even larger surplus. The Trump administration’s objectives in renegotiating the North American Free Trade Agreement (NAFTA) published July 17th also call for reducing U.S. bilateral trade deficits with Mexico and Canada. Economists recognize these objectives as nonsensical, but it might be worthwhile to spell out to the broader public (if not to Trump’s protectionist White House wing) why that is so.

Let’s start with the U.S. trade balance with the rest of the world. As we pay for what we import with what we export, we would generally expect a balance between imports and exports over time, just as we expect a rough balance between our income and expenditures over time. But uniquely in the case of the U.S., we need to have a deficit (imports exceeding exports) paid for with U.S. dollars, because the rest of the world holds and uses our dollars to finance many international transactions. The dollar is the world’s primary international reserve currency and our trade deficit is the primary means by which we supply them to the rest of the world.

This is an over simplification, however, because dollars are also supplied to the rest of the world via our capital account, i.e. Americans investing abroad. At the end of 2016 Americans had invested about $24 trillion USD equivalent. However, the rest of the world had invested over $32 trillion USD in the U.S. Roughly $5 trillion of this net investment in the U.S. of $8 trillion represented official foreign exchange reserves held by foreign governments in U.S. dollars out of total foreign exchange reserves of about $8 trillion.

Something also needs to be said about the relationship between foreign holdings of dollars and changes in those holdings. Any increase in the demand for foreign exchange reserves by foreign governments, something that tends to happen naturally as economies grow, must be met by the balance of payments deficits of the countries supplying those reserves. Thus the U.S. trade deficit last year (2016) of about $500 billion USD more or less reflects the addition to the dollar reserves of foreign governments.

So the use of the U.S. dollar in foreign exchange reserves implies that the U.S. will have, and need to have, a balance of trade deficit of a similar amount. But let’s simplify and assume that U.S. trade with the rest of the world is balanced (zero trade balance as well as zero current and capital account balances), perhaps because the U.S. dollar is replaced in international reserves by the SDR as I have long recommended. See my: Real SDR Currency Board What about the trade balance with Mexico and Canada? Should we want and expect each bilateral trade relationship to be balanced?

The error of such thinking can be easily illustrated with a simple, hypothetical example. Assume that within NAFTA the U.S.’s comparative advantage is in manufacturing all the pieces that make up an automobile and growing wheat, Mexico’s comparative advantage is using its “cheap” labor to assemble those pieces into cars, and Canada’s is growing and milling lumber. Assume that that is all they do that crosses their borders. The U.S. sells its car parts to Mexico, which puts them together and sells the cars to the U.S. and Canada. The value of the parts sold to Mexico is less than the value of the cars (which incorporates the parts from the U.S.) Mexico sells to the U.S. so that on net the U.S. has a trade deficit with Mexico. The U.S. sells wheat to Canadians buying a lesser value of lumber in return and Canada sells its lumber to the U.S. and to Mexico buying a few cars but of less value. Looking at bilateral trade balances, Mexico has a surplus vs. the U.S. and a deficit vs. Canada. Canada has a surplus vs. Mexico just sufficient to cover its deficit vs. the U.S. These bilateral deficits and surpluses are not a problem because the U.S. has a trade balance vs. Mexico and Canada combined and indeed with all of the rest of the world. The same is true for Mexico and Canada. What really matters is whether the value of a country’s exports to the rest of the world match and thus pay for the value of its imports from the rest of the world. As someone noted, no one worries that you have a large trade deficit with the grocery store as long as your total spending everywhere is covered by your income (the sale of your labor to your employer).

Being the eternal optimist, I trust that there are enough people in the Trump administration that understand that seeking bilateral trade balances with each and every country would be a terrible mistake to keep him from trying to do so.

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Paid Family Leave

The view that if something is good or beneficial the government should provide or mandate it is one of the attitudes dividing those who favor limited government from those favoring a more expansive and generous government. The following provides one example.

Ivanka Trump and others make a convincing case for generous paid family leave, Paid-family-leave-is-a-good-national-policy. Stephen A. Schwarzman, Founder, Chairman and CEO Blackstone, explained that Blackstone extended its paid maternity leave from 12 weeks to 16 weeks because it improved Blackstone’s bottom line – Paid-maternity-leave-is-worth-every-penny. But for all of the many reasons that big government should be resisted in general (inappropriate incentives for government bureaucrats and the public, special interest capture of policy—i.e. crony capitalism and other forms of corruption, limitations of individual freedom, inefficiency, etc.), there is not a good case for the government to get involve in mandating or subsidizing paid family leave.

Generous paid family leave programs provided by employers are smart business. Companies that offer them will have a competitive edge and thus free market firms will increasingly adopt them. Employers will be free experiment with what works best (for employees’ and companies’ bottom lines), which may well evolve over time as markets and technology change. Governments’ rarely enjoy such flexibility and are often captured by voters best able to influence government to protect their special interests, and that is never the poor. Those who are unemployed don’t need paid leave as they are already receiving unemployment compensation or welfare support for staying at home.

Maternity or family leave has facilitated bringing women into the labor force and thus increased family and national incomes. Given the importance of education to worker productivity and thus individual and national incomes, the state has also undertaken to finance (and unfortunately in most cases also to supply) education for all children from Kindergarten to 12th grade. While upper income families can easily afford to pay for this education for their children, lower income families generally cannot. Thus public financing of such education helps give all children a more equal start in live and also facilitates two worker families. A gap in such assistance exists for preschool children (age 0-5). Financial assistance should also be considered for day care or nursery schools for such children.

In most cases where a policy or practice is good for the general public, it will be adopted by free market participants and better fulfill its purpose than is possible or likely by government.

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Heath Care Reform Fatigue

On average, Americans spend about twice as much on medical care as do Europeans and with poorer results. About half of that cost is paid for by government. If we could get the cost of medical care down to European levels either the government (i.e., tax payers) could stop paying for any of it with no change in the cost to patients, or patients could stop paying anything with no change in the cost to government. Of course it wouldn’t work like that and is much more complicated but it does focus the mind about the issues concerned.

Both the Affordable Care Act of Obama and the current drafts of its replacement by the Republicans are limited to what can be considered budget authorizations so that they can be passed with simple majorities. In June 2015, when the Supreme Court rejected challenges to the constitutionality of parts of the ACA (the insurance mandate), Chief Justice Roberts complained that: “Congress wrote key parts of the Act behind closed doors. . . . Congress passed much of the Act using a complicated budgetary procedure known as ‘reconciliation,’ which limited opportunities for debate and amendment, and bypassed the Senate’s normal 60-vote filibuster requirement. . . . As a result, the Act does not reflect the type of care and deliberation that one might expect of such significant legislation.” Now the Republicans are doing the same thing. Once again George Will is right on target: Why-repeal-and-replace-will-become-tweak-and-move-on/2017/06/27/

This means that the most important elements of health care reform in America—reducing supply side costs—must await other legislation. However, limited market forces are already eating away slowly at the American Medical Association’s (the doctors’ union) self protective strangle hold on the delivery of medical services. The information technology now exists to dramatically improve the quality of service while lowering its cost. Nurse practitioners have already taken over some routine functions previously preserved for MDs. With a growing shortage of doctors, more restrictive practices are likely to be relaxed such as phone consultations, etc.

The focus of the ACA and the current Republic efforts to “repeal and replace” it, has been how best to finance these costs for those financially unable to pay them. The two overriding challenges for this effort should be to adequately target those who need such assistance and in the process to avoid undermining to the extent possible the incentives for both doctors and their patients to provide and to seek the most cost effective care.

There are many small and large details in ACA and proposed Republican replacements that could be changed to improve targeting of financial assistance and the incentives for seeking and delivery cost effective care. See my earlier discussion: A-mistitled-tax-proposal. The largest issues are how best to remove the unfair tax treatment of employer provided health insurance vs. the “private” market and how to insure that the risk pools in the private insurance market include both healthy and sick premium payers.

The point of insurance is to pool the cost of the risk of bad things happening, like breaking a leg or getting sick. Thus the lucky (healthy) share the costs of the unlucky (sick or injured). The group as a whole must pay the total medical costs of all members of the group. It follows that health insurance should be mandatory for every one in a properly defined group. The risk pool of employer provided health insurance consists of the company’s employees, and premiums are set on the basis of the average medical costs of that group. There is no such predefined risk pool for those who buy insurance in the “private” market. The logic of insurance suggests that everyone within each age group should be required to buy insurance at a cost to each that reflects the total medical costs of the full group. The-individual-health-insurance-mandate.

The simplest, cleanest, and most comprehensive way to insure that those unable to pay for whatever medical care they need can do so is to require that all people in their group buy insurance so that those who later don’t need it finance those who do. I have earlier advocated that this approach be integrated as part of a guaranteed minimum income (GMI). A GMI would provide the basis for eliminating most government welfare programs from Social Security and food stamps, to disability and unemployment insurance. But first a brief word about minimum wage laws.

Charles Lane has proposed a sensible approach to balancing the political attraction for legal minimum wages with the economic case against them. He proposes that the issue be removed from the political arena by legislating an automatically adjusting formula for a legal minimum wage that closely matches actual historical wage experience so as to minimize the harm to low skilled and inexperienced (teenagers) workers that would be hurt by higher minimum wages. Forget the $15 minimum wage–here’s what a sensible compromise would look like/2017/06/28

A legal minimum wage does not help the unemployed. A Guaranteed Minimum Income would. It should be paid to every man, woman, and child but the amount might vary with age (but not with income). It could be administered by the Social Security Administration, which it would replace. Saving-social-security. Fixed shares of the GMI would be placed in an individual health insurance account, a pension account, and an education account (school tuition or college fund). The amount deposited to the health savings account would be required to be used to purchase general health insurance and would be sufficient to do so.

The GMI would be paid for from general tax revenue. Clearly our existing, hole riddled income tax laws (both personal and business) are a mess and need to be cleaned up. As I have argued earlier the fairest, least distorting and easiest to administer tax is a consumption tax. I should replace all income taxes, wage taxes and existing sales taxes with one uniform Value Added Tax (VAT). My-political-platform-for-the-nation-2017.

Let’s try for better health care that costs less for both patients and tax payers.

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A mistitled tax proposal

The Wall Street Journal used the following headline to an article exploring a healthcare reform issue: “GOP Senators Weigh Taxing Employer-Health Plans”. The article itself is a well-balanced presentation of the issue but the article headline gives a very different impression.  WSJ article

The issue is that employment benefits that are part of a worker’s remuneration, such as health insurance, are excluded from a worker’s taxable income while a self-employed worker who buys their own health insurance (the private market) cannot deduct it’s cost from their taxable income. Both Democrats and Republicans recognize that this is unfair to those who do not receive employer provided health insurance. They differ over how to eliminate this unfair treatment—whether to include the value of health insurance in taxable income for both or to exclude it, as is done with employer provided coverage, for both. No one is proposing taxing health insurance as the article’s title suggests. The following headlines would give a rather different impression for the same proposal: “GOP Senators weigh equal treatment of health plans between employer and self-employed provided plans” or even, “GOP Senators weigh including value of health insurance in taxable income for everyone.”

As I have noted before we must find ways to reduce the cost of health care in America (it costs twice as much as care in Europe with poorer results) while insuring that everyone has reasonable access to it. But how we allocate its cost and structure the payments of those costs determine the incentives faced by the medical care industry that have played a major role in inflating those costs. https://wcoats.wordpress.com/2017/03/15/health-care-in-america/

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What should we do with Confederate Heroes?

If you are a Yankee, the recent steps in New Orleans to remove public statues of Robert E. Lee and other Confederate heroes seem appropriate and obvious. The defeat of Lee and the Southern secessionists fighting the Northern states to preserve slavery represented an important victory for American values. But if we repudiate Lee and his confederate friends how should we approach the slave owning first President, George Washington, or the third President, Thomas Jefferson, who owned slaves as well, or the racist 28th President, Woodrow Wilson, who was quoted defending the KKK. It is a serious and important, but not simple, issue.

You could say that I was the equivalent of a Yankee when I was working in Kazakhstan and Kyrgyzstan in 1992-3. In fact, I was indeed a Yankee (“a person who lives in, or is from, the US”). I visited both newly independent, former Soviet Republics six times during those two years with my IMF team of central banking experts. The excited and somewhat bewildered people of these countries were debating what they should do with the many, and sometimes gigantic, statues of Joseph Stalin and Lenin (Vladimir Ilyich Ulyanov). They knew that they would have to live with the Socialist Realist statues and art of the USSR, not to mention the architecture of public buildings, for a longer time, just as we continue to endure the horrible architecture of the 1960s. But could they, should they, have to continue looking at Stalin, the second most deadly ruler in human history. Stalin was responsible for the deaths of 40 million people (mostly Russians), ahead of the 30 million deaths under Hitler’s leadership of Germany, but behind the 60 million (mostly Chinese) who died from torture or starvation under the rule of Mao Zedong.

Between my first visit to Kazakhstan and Kyrgyzstan (we visited them back to back and were flown in and out in private jets) in April 1992 and my second visit in July-August any remaining portraits of Stalin in public buildings had been removed, as were the smaller public statues. And plans were underway to remove the large ones. The removal of Stalin was a relatively easy call. Lenin was a more difficult issue, rather like George Washington if Washington had gone out of favor. Lenin was the founding leader of the Soviet Union (the Chairman of the Council of Ministers) and of the Russian Soviet Federative Socialist Republic that preceded it. He was the political theorist who transformed Marxism into the government structures and policies that we knew as the Union of Soviet Socialist Republics (USSR). Kazakhstan and Kyrgyzstan were two of those republics. Lenin continued to be respected if not revered in 1992. My personal interpreter, Steve Lang, photographed as many Lenin statues as he could, suspecting that they would not be around long. Virtually every village had at least one.

As you can see in the picture below a huge portrait of Lenin (about 20 feet tall) still hung in the background of the main auditorium in the National Bank of Kyrgyzstan during our first visit there in April 1992. In the picture we were meeting with the staff of the NBK to report on our recommendations and work plan. I am presenting the Governor of the NBK, Kemelbek Nanayev, with my Adam Smith tie (the image of Smith’s head appears throughout the tie) and Governor Nanayev was reciprocating by giving me his own tie. Our Russian interpreter from Moscow was looking on and so was Lenin. When we returned three and a half months later, the Lenin portrait had been removed.

TieExchange

But Lenin did not disappear as quickly in some other places. He remained on the wall of the Chief Accountant of the National Bank of Kazakhstan, Ms. Abdulina, for some time. Ms. Abdulina was, I would guess, in her early 60s and was very bright and forward looking. After explaining to her the new accounting needs as the NBK issued its own currency and undertook its own monetary policy, she moved quickly to set up a team of young accountants (they were all women) to receive her training in producing a daily balance sheet to reflect bank deposits with the NBK and more broadly what we call reserve money (the monetary liabilities of the central bank). She said that it would be a waste of time trying to retrain the older more senior ones. I liked and respected her very much, but she would not remove Lenin from her office wall. In fact, she never did. On my final visit with the IMF in March 1994 (I have been back many times since under other auspices), Ms. Abdulina had been moved into a new, larger office. Lenin was not displayed on her new office wall. She never had to deliberately remove him from her office wall but now her office was free of him—a very clever finesse.

Lenin was not as directly responsible for the death of millions as was Stalin, but is hardly a lovable character to those of us who grew up in the west. According to George Orwell, Charles Dickens’ “A Christmas Carol… was read to Lenin on his deathbed and according to his wife, he found its ‘bourgeois sentimentality’ completely intolerable.” Why Socialists Don’t Believe In Fun Dec. 1943. Nonetheless Soviet citizens had grown up seeing him as the great founder of their country and many could not let go of that easily.

The United States and especially, but not exclusively, its Southern States are now facing the same issue. Should earlier heroes, whose actions or values are now condemned, be removed from the public square?

New Orleans Mayor Mitch Landrieu defended his plan to remove Confederate monuments across the city in a speech earlier this month:

“These statues are not just stone and metal. They’re not just innocent remembrances of a benign history. These monuments celebrate a fictional, sanitized Confederacy — ignoring the death, ignoring the enslavement, ignoring the terror that it actually stood for….

“There is a difference between remembrance of history and reverence of it.  For America and New Orleans, it has been a long, winding road, marked by great tragedy and great triumph. But we cannot be afraid of our truth….

“Last year, President Barack Obama echoed these sentiments about the need to contextualize and remember all of our history…. Remember President Bush’s words, “A great nation does not hide its history. It faces its flaws and corrects them….”

We are removing these statues, “Because we are one nation, not two; indivisible with liberty and justice for all, not some.”

I was blown away by the Mayor’s wonderful speech and urge you to read all of it: New Orleans mayor Landrieu’s address on confederate monuments

Among the statues removed were those of Robert E. Lee and Jefferson Davis about which Mayor Landrieu said: “It is self-evident that these men did not fight for the United States of America, They fought against it. They may have been warriors, but in this cause they were not patriots.”

What should we and other countries do when past heroes cease to deserve or have our respect? They are, after all, part of our history. The first principle, as articulated by Obama, Bush W, and Mayor Landrieu, is that that history should be told and understood honestly. The second principle is that historical actors should be understood and judged in the context in which they acted.

George Washington and Thomas Jefferson were slave owners in a time in which that was accepted and common as horrible and unacceptable as we see it and know it today. They were otherwise men of great wisdom and courage who deserve our respect. Robert E. Lee inherited slaves but freed them before the Civil War was over. However, he led a war against his country and fought to preserve the institution of slavery. Many former Soviet Republics moved their statues of Lenin and Stalin to historical parks outside of the towns they had occupied where their history could be told honestly and in the context of their time. The statues of Robert E Lee, Jefferson Davis, and P.G.T. Beauregard will also be relocated away from the heart of New Orleans. I find this to be an appropriate resolution to the pain their presence brought to many of today’s residence of this fascinating city.

 

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Net Neutrality

The issue of net neutrality is almost as complicated as the Internet (the network of networks) itself. As with so many topics, the debate over how best to maximize the development of and benefits from the Internet (email, World Wide Web, and all of the rest) broadly divides between those who support prescriptive rules to guide and govern its operations and those who support a more permissive role for the government stepping in only to correct actual problems. To overstate it a bit, it divides the statists from the free marketers.

The history of what we now call the Internet is quite amazing. History of the Internet. Though governments provided the seed money that got it going (in the U.S. it was the Department of Defense’s ARPANET and later the National Science Foundation’s CSNET and in the U.K. it was the National Physical Laboratory), the U.S. gradually stepped back and allowed the unregulated development of commercial and private uses of the connectivity that was developing and allowed private Internet Service Providers (ISPs) to develop the gateways (access) for almost all users (both content providers and consumers) to the Internet. This policy was imbedded in the Telecommunications Act of 1996 signed by President Clinton. That legislation, affirmed that the policy of the United States was: “to preserve the vibrant and competitive free market that presently exists for the Internet . . . unfettered by Federal or State regulation.”

From the beginning of its break away from its narrow military and scientific uses, all involved in the Internet’s development were committed to it being free and open. The Federal Communications Commission (FCC) promulgated guidelines to preserve this principle in November 2011. “The FCC’s rules focus on four primary issues:

  • Transparency. Fixed and mobile broadband providers must disclose the network management practices, performance characteristics, and terms and conditions of their broadband services;
  • No blocking. Fixed broadband providers may not block lawful content, applications, services, or non-harmful devices; mobile broadband providers may not block lawful Web sites, or block applications that compete with their voice or video telephony services; and
  • No unreasonable discrimination. Fixed broadband providers may not unreasonably discriminate in transmitting lawful network traffic.
  • Reasonable network management. ISPs may engage in reasonable network management to maintain a high quality of service for broadband Internet access.” FCC Openness Principles

In this permissive environment the Internet flourished, developing in directions and ways no one could have imagined only a few decades earlier. “But two years ago, the federal government’s approach suddenly changed. The FCC, on a party- line vote, decided to impose a set of heavy-handed regulations upon the Internet. It decided to slap an old regulatory framework called “Title II”—originally designed in the 1930s for the Ma Bell telephone monopoly—upon thousands of Internet service providers, big and small. It decided to put the federal government at the center of the Internet.” Ajit Pai’s Newseum Internet Freedom Speech

What happened? Were the principles of an open Internet with fair access to all suddenly being violated or under threat in 2015? Is the proposed return to the status quo before 2015 really a threat to the principles of net neutrality?

Like all other economic activities, every aspect of the Internet costs money that someone has to pay. Those who built and maintain the Internet Backbone (NTT, Cogent, GTT, etc.), the facilities and networks of the ISPs (Verizon, AT&T, Comcast, etc.), and the content providers (Netflix, Facebook, Snapchat, HBO, etc.) did so to make money (or at the very least to cover their costs). We all know about content and service providers who thought first about how to attract users and only later how to get them to pay (e.g., Facebook and Amazon). They gradually developed their business models over time and some worked and others didn’t. What worked best (most cost efficient use of Internet resources, etc.) was not and could not have been foreseen in the beginning of the Internet’s development. Had the regulations imposed in 2015 been imposed two decades earlier, it is very unlikely we would be enjoying the Web we have today. Freezing or constraining the business models of the key players with very prescriptive regulations is neither necessary nor wise. As Mike Montgomery put it in The Hill: “The digital world moves at the speed of light. To slow that growth to the speed of bureaucracy would have serious negative effects on the burgeoning tech industry which is creating jobs faster than almost any other industry out there.” (see the link below)

Markets function best when profits are maximized by providing the best service at the lowest cost. In such cases, which is the general case, incentives are aligned, i.e. what best serves the supplier/producer also best serves the general public/consumers. Two forces operate to insure that the Internet is open to all. The first was a broad public consensus that the Internet should be open to all on fair terms (no discrimination against—filtering out or blocking—any one or any idea or point of view). The second is that discriminating in any way blocks some customers and thus reduced profits. The incentives for ISPs to provide fair access to all aligned with the public’s expectations of and desires to have fair access.

Ideology enters the discussion when people disagree over the meaning of fairness. Some people think that some classes of users (the poor, IT startups, etc.) should have the cost of their use of the Internet paid by someone else (tax payers, cross subsidies from larger, established users/suppliers, etc.). ISPs, the gateways to the Internet, have no profit incentive to provide such subsidies. Fairness for most economists is when each user pays the marginal cost of their use (plus a small profit margin).

The primary legitimate concern with respect to the net neutrality I want to see is that industry consolidation has reduced the number of ISPs to the point that over half of the country has only one (i.e. no) choice. The only competition in some areas comes from your cell phone plan. Thus there is a legitimate concern with the possibility that an ISP might charge different prices for fundamentally the same service and that those ISPs that are beginning to produce their own content might favor it over competitors’ content with faster lanes or worse.

There were indeed a few problems during the long era of light touch regulation prior to 2015. Verizon’s dispute with Netflix over download speeds and AT&T’s blocking Facetime video but not Skype on iPhones (not even an Internet issue), for example. This occurred before and were resolved before the 2015 FCC regulations on the basis of existing legislation. Excessive concentration and abuses of market power can be and have been dealt with via existing anti trust laws and state and individual civil suits.

The United States has generally allowed markets to develop fairly freely, only applying regulations to deal with real problems when they occur. I represented the IMF as an observer at a G10 Deputies Working Group on E-money meeting at the BIS in Basel Switzerland in December of 1996. The G10 Deputies are the Finance Ministers and Central Bank Governors of the ten largest economies in the world. The meeting was chaired by a young Tim Geithner, then the Deputy Assistant Secretary for International Monetary and Fiscal Policy in the U.S. Treasury Department. The meeting was to determine the regulatory approach to the prospective emergence of Electronic Money, now referred to as Cyber money. We considered reports on developments to date and took the wise decision to stand back and watch how things developed before formulating regulatory advice.

More recently the Federal Reserve’s Faster Payments Task Force project and the Federal Reserve’s cautious approach to bitcoin and other digital currencies reflects a similar attitude. That attitude, to repeat, is that no one knows for sure the direction that the development of new technologies will take in the search for maximizing their benefits thus profits. Government can at best play a supportive role of providing a flexible legal and regulatory framework within which new products and services can be explored. If problems arise, the government can review with consumers and producers how best to deal with them. The approach to regulating bitcoin and other digital currencies is still evolving.

A counter example to the above enlightened approach is the U.S. approach to Anti Money Laundering and Combating the Financing of Terrorism (AML/CFT), which has imposed enormous regulatory costs on payments of all sorts with no discernable benefits.

Those who believe that private sector behavior and the development and use of technology can be carefully and successfully regulated by government suffer what I have called hubris in other contexts. See, for example: https://works.bepress.com/warren_coats/38/. Nonetheless, in the case of so called net neutrality greater certainty about the legal and regulatory environment in which the Internet must operate would help further its development and evolution, especially if the light touch regulation under which it has developed is restored. Congress should write net neutrality into law.

An excellent discussion of these issues can be heard in this podcast on the Future of Internet regulation with FCC chairman Ajit Pai

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