In Promoting Universal Broadband, Less Truly Is More

In Promoting Universal Broadband, Less Truly Is More

June 23, 2010

The right federal policy isn’t always hard to figure out. Take broadband. As broadband becomes an increasingly important factor in securing access to economic opportunities and public information, it’s obvious that the right public policy is to promote universal broadband service. Not only are most job openings today posted only online, so is most information about health care, government services, education, and most personal services. Perhaps more important, the ability to do most jobs depends increasingly on a person’s knowledge and capacity to perform well in workplaces dense with broadband and information technologies, which in turn people can greatly facilitate by using broadband as part of their daily lives.

So, it matters that last year, for example, only 46 percent of African-American and 48 percent of Hispanic households had broadband service, compared to two-thirds of white households.

It’s also not hard to figure out how to actually achieve universal broadband service by the end of the decade, the reasonable goal of President Obama and nearly everyone else. Start with what we know about how personal computers and dial-up Internet became so ubiquitous. The key lay in two singular forces: Scientific advances increased the usefulness of these technologies, and those advances and market competition helped drive down their prices. These same forces already have driven the spread of broadband, in less than a decade, from essentially zero to over 60 percent of all American households.

There’s always a hitch, of course, and this time it comes from recent technological advances which could sharply drive up broadband prices, especially the wild popularity of video applications which gobble up bandwidth at 100 to 1,000 times the rate of text applications such as email. Facing a quantum jump in demand for bandwidth, the Internet Service Providers (ISPs) find themselves with two choices: Increase their long-term investments in broadband infrastructure by huge amounts, which someone will have to pay for — $300 billion to $350 billion, by the FCC’s reckoning — or let Internet congestion slow down everything in their customers’ online lives. Since the second option isn’t acceptable to almost anyone, the new public policy question at the heart of the drive to achieve universal broadband has become; how do the ISPs pay for the additional investments without hiking broadband prices so much that digital divides becomes permanent?

This problem has been further complicated by outside efforts to convince the FCC and the Congress to set new rules directing how the ISPs charge for broadband. Such rules could effectively require that the additional costs be added to the flat monthly fees everyone now pays for broadband service. But a new study out this week shows that the outcome of the fight over such rules will likely determine whether we achieve universal broadband anytime soon or, in the alternative, find ourselves stuck with digital divides that leave millions of lower-income Americans offline for a long time. The study, issued Monday by the Georgetown University Center for Public Policy and Business — and written by Kevin Hassett and myself — simulates a number of ways to pay for the additional investments and measured the impact of each on the path to universal broadband.

First, we asked what happens if the additional costs are passed through in the monthly flat-fees that everyone currently pays. Since broadband is already a nearly “mature market,” with new users joining at a relatively slow pace, this approach would translate into monthly fees in the range of $70 per-month. While a number of factors affect whether people adopt broadband service, cost is the largest factor — and especially for lower-income people, who unsurprisingly are most sensitive to cost increases. So, we can expect that a pricing system which forces ISPs to pass along their additional investment costs in higher fees for everyone would push universal broadband far into the future — and that’s just what our simulations found. By 2020, 18 percent of African —American households, and 17 percent of Hispanic households would still be without broadband service. In fact, broadband fees would likely be so high that 15 percent of white households also would be offline at the end of the decade.

The alternative approach comes from another striking phenomenon seen here and around the world: A relatively small share of all Internet users — 10 to 20 percent, tops — account for the vast majority of the new pressures on bandwidth. These are people who watch scores of videos online every day, spend hours in multi-player online game worlds, or use broadband to watch HD television shows and movies. This fact can give shape to a new pricing strategy: Pass along most of the additional costs to those who consume vast amounts of bandwidth or the content providers transmitting extremely high bandwidth offerings. There is no reason why broadband should remain an “all-you-can-eat for one price” facility, especially if it means raising prices so much that millions of people have to give it up.

So, we simulated what would happen if broadband providers passed along 80 percent of their additional investment costs in higher prices to the 20 percent high-bandwidth users and their content providers, with only the remaining 20 percent of those costs to be borne by the rest of us. This approach puts the United States back on a rapid path to universal broadband: By 2019, all racial, ethnic and income groups should find themselves within one or two percentage points of universal adoption.

A word to the wise at the FCC: Do not consider any rules which, however inadvertently, might force the nation’s broadband providers to stick to their current, “one-price (or two) fits-all” pricing approach. When it comes to promoting universal broadband, it turns out that less truly is more.

The Importance of Blaming the Right People for the Wall Street and Gulf Disasters

June 16, 2010

This year’s notorious Supreme Court decision on campaign finance found that corporations have the full rights of individuals, at least in the area of campaign finance. While that ruling may have serious consequences for how we conduct elections, most of us already approach big companies as if they were people — and then, when those companies wreak havoc on the economy, no one can be found to hold accountable. Congress may pass new regulations, but that’s little consolation to the victims. Anyway, both the Wall Street meltdown and the Gulf spill unfolded not only because regulation was weak or lacking, but because enforcement was lax where regulations did exist. In both cases, then, we see signs of “regulatory capture,” with the SEC and the Minerals Management Service applying their existing regulations in ways which, at a minimum, permitted the persistent risks that eventually led to disaster. In the quest for accountability, there also will inevitably be lawsuits. But the companies may not survive to pay any judgments; and when they do, the costs fall to shareholders. The executives whose decisions brought on the crisis are left unaccountable — a moral hazard of the first degree — and the rest of us are left unsatisfied. In fact, very similar dynamics are at the heart of the Tea Party movement, only with unaccountable public officials in the place of unaccountable CEOs.

Some of the public’s outrage about both crises probably stems from people’s assumption that large companies do operate like people, at least in respecting broad social norms. So, we expect our bank to be concerned about our personal finances, a view implicitly encouraged by the sketchy form of the neoclassical economics that dominates public discourse. In an abstract world of the perfectly efficient market, that market constrains banks to offer us goods and services that serve our interest; in the real world, our banker’s retail job is simply to sell us his bank’s products based on how profitable they are to that bank. And even when we recognize the difference, we assume our bank won’t abuse our trust, because the law will prevent it and, anyway, educated people just don’t act that way.

Similarly, whether or not Gulf residents expected oil companies to share their concerns about their regional environment — and many certainly did have those expectations — the market was supposed to ensure that the risk of incurring $20 billion or more in liability costs would prevent reckless operations of deep-water rigs. For how this works in the real world, think of Toyota: Like Toyota, BP adopted a calculus in which cost-saving measures outweighed those risks; and in deep-water drilling, that often involves less stringent safety systems and standards. So, even as BP was fined much more often than its rivals for deep-water rig safety violations, BP shareholders enjoyed years of higher returns.

If we can’t depend on regulation or potential liability to stop reckless corporate decisions, it’s time to focus less on the corporate “person” and more on the actual people who make those reckless decisions. The laws of corporations have long shielded a company’s decision makers from personal liability for corporate decisions, based once again on the idealized view that market competition will reliably drive executives to make decisions based on their shareholders’ best interest. But economists have long recognized — it’s called the “agent-principal problem” — that the interests of executive decision makers (the agents) can diverge sharply from those of the shareholders (the principals). And how those executives are rewarded for their decisions can make that divergence very wide and deep if, as with both Wall Street and BP, they can earn huge bonuses for steps that boost short-term earnings even when the decisions that generate those earnings eventually bring down the company. While Paul Volcker and a few others have called for a ban on such compensation schemes, Congress has bowed to Wall Street protests, in a form of “legislative capture” as dangerous as its regulatory counterpart.

The result are nearly perfect conditions of moral hazard for America’s top executives, especially in critical areas like finance and energy, where their moral hazard can be most dangerous to the rest of us. Since moral hazard affects the top decision makers, perhaps more than their institutions more generally, the Wall Street and Gulf disasters suggest that it’s time to revise the limited personal liability provisions of the corporate form: The government should be able to sue executives personally for decisions that turn very bad for the rest of us — involving costs of, say, at least $25 billion — when those decisions entail risks that rise to a standard of negligence. This change could even be part of broader tort liability reform. But whether it is or not, it’s time to pierce the veil of the corporate “person” and get to the real people whose personal interests repeatedly lead them to embrace risks that end up harming tens of millions of others.

Memo to the President and other World Leaders: Resist a Simpleminded Push to Cut Budget Deficits Now

June 9, 2010

A dangerous and infectious economic idea is spreading around the world. Last week, the liberal majority in the House of Representatives rejected efforts to inject a little more stimulus into the economy; and across much of Europe and Asia, presidents, prime ministers, parliaments and congresses are calling for tighter budgets. Many economies face some genuine threats these days; and suddenly, one of the more prominent among them is the simplistic view of many public officials that their still weak economies now need a strong dose of fiscal discipline. What they ought to worry about are the odds of another economic downturn and a chance that we all may face a second financial crisis.

Here at home, we know from the most recent data that American businesses aren’t hiring new workers in any real numbers, nor are banks lending most classes of businesses much new capital. All this tells us that the 2009 stimulus, which has just about run its course, was not enough to restore healthy, self-sustaining growth. Yet, most politicians still don’t appreciate how damaging fiscal stringency can be for an economy that remains too weak to generate decent job creation or business investment. They may have to rediscover the lesson that FDR and his top advisers learned back in 1937, when federal belt tightening sent the barely-recovering U.S. economy back into deep recession.

In a strong economy, a big dose of additional deficit spending may well crowd out private investment, push the Fed to raise interest rates, and create significant long-term costs for taxpayers who will have to finance the additional debt forever. But it’s obvious that this economy is still very far from being strong. The Fed, for example, will never raise rates under current conditions — a mistake which, as Fed Chairman Bernanke has noted, was the lesson of 1930-1932. Under these conditions, additional spending for initiatives which also make sense in themselves can actually increase private investment and long-term growth, which in turn would substantially reduce the long-term financing costs of the additional debt.

The current political passion for tight budgets, already in full play in Germany and Britain, may have been triggered by the sovereign debt crisis unfolding in Greece and, perhaps soon, across much of southern Europe. Yet, the ultimate sources of most sovereign debt crises are weak productivity and flagging competitiveness. Add an irresponsible government willing to run unsupportable deficits and loose monetary policies, instead of taking the difficult steps required to address the underlying economic problems, and a sovereign debt default becomes a real possibility.

But the United States isn’t facing Greece’s dilemma, and neither are Germany or Britain. And the best policies to maintain the confidence of international investors even as our own national debt rises rapidly would be measures to further bolster our underlying productivity and competitiveness. That will be especially true if the European Union’s plan to address Greece’s sovereign debt problem fails — as it almost certainly will — and the ensuing chaos triggers new worldwide financial meltdown. At a minimum, the falling value of Greek bonds, along with those of Portugal, Spain, Hungary and Italy, will further slow our own recovery and growth, making premature deficit reduction even more damaging.

Still, while the stimulus helped temper the 2008-2009 recession and hastened its end, it was never enough to restore healthy growth to an economy twisted out of shape by a historic housing bubble and then cracked open by a systemic financial meltdown. So, the administration and Congress need to do now what should have been done in 2009 to address the forces that drove the crisis. For example, Americans won’t start consuming again at the levels needed to drive jobs and investment until they stop feeling poorer, and that will still require measures to bring housing foreclosures back to normal levels and stabilize housing prices. Moreover, so long as foreclosures remain abnormally high, our banking system’s holdings of mortgage-backed securities and their derivatives will continue to deteriorate — and the continuing losses will keep banks from restoring normal business lending. The administration’s program of subsidies for banks to refinance troubled mortgages didn’t work, so we need stronger medicine. Here’s one approach: Since the government now owns Fannie Mae and Freddie Mac, which continue to hold a decent share of the nation’s mortgages, Congress can direct them to help bring down foreclosures by renegotiating and refinancing the troubled ones in their portfolios.

Deficit anxieties also shouldn’t stop us from taking serious steps to help reboot job creation. The best course would be measures that can reduce the cost to businesses of creating those new jobs, so let’s cut in half the payroll taxes that employers pay on new employees. And since slow job creation was a serious problem for several years before the financial meltdown, there are good grounds for making this change permanent. But since the long-term trajectory of our deficits and national debt do matter, we should also take steps to pay for this change once the economy really recovers. And here’s the best way to do it: Offset the costs of lower payroll taxes for employers, two or three years from now, by phasing in a new carbon-based energy fee, which also happens to be the most effective way to reduce the greenhouse gas emissions driving climate change.

In the meantime, the administration also can lay the groundwork to restore long-term fiscal sanity by addressing the two big forces that created large U.S. deficits even before the world’s current problems. And there’s no mystery about what those forces are — sharply-rising health care costs and substantial cuts in the tax base. Their big political challenge is to leave the deficit alone until the economy regains its strength, while building some form of national consensus for both greater revenues and much stronger steps to contain health care costs.

Some Hard Truths about Globalization and Jobs

June 3, 2010

I find myself in Stockholm, an old capital city of a small economy animated by the drive of ingenious entrepreneurs and the extraordinary global success of more native companies than any other nation its size, from Ikea and Erikson to the Tetra Laval packaging giant and the Axel-Johnson conglomerate. Sweden’s economic drive and success are predicated on an acute understanding of the particular demands that globalization imposes on most business enterprises. So, Sweden seems an appropriate place to think about the special difficulties that American economic policymakers face. The United States has been economically dominant for so long that we too easily overlook how unforgiving global competitors and investors can be when our parochial politics produce simplistic fixes for complicated challenges.

Exhibit One is one of the final actions by the House of Representatives before its Memorial Day recess. The majority, convinced that they’ve found a new, economic wedge issue, passed legislation to strip our most successful global companies of a “tax break” which allegedly encourages them to “ship jobs overseas.” The provision in question lets U.S. multinationals defer paying the U.S. corporate tax on the profits of their foreign subsidiaries until those profits are formally transferred back to the U.S. parent company. The claim that this provision leads Microsoft, Google, Amgen or General Electric to ship jobs abroad is an appealing slogan, but it’s one with no real economic foundation in a global economy.

The slogan and the policy behind it depend on what is, at best, a nostalgic view of how companies actually operate in global markets. In the 1970s and 1980s, U.S. companies that went global did so by setting up production facilities in places with lower costs — wages, real estate, construction and so on — and then shipping the products produced there back home or to their major markets in Europe. That shift in production was a big factor in the hemorrhage of manufacturing jobs back in the 1970s and early 1980s. But the truth is, the globalization of the last 20 years has changed most of that.

First, our international advantages now come not from producing standard goods more cheaply in other places, but from developing and applying new ideas to the creation and production of countless goods and services. That’s why our globally competitive industries today are no longer automobiles and steel, but the companies that create and provide goods and services based on new intellectual property — from Internet content and infrastructure, and software and advanced IT hardware, to pharmaceuticals and biotech, business services and entertainment. Moreover, the critical, idea-based services that these industries rely on, along with the idea-based headquarter services that all global companies depend upon, remain firmly entrenched in the United States. That tells us what the rest of world knows all too well: In a global economy, America’s core economic advantage is simply that we perform these idea-based operations better than anyone else.

The result confounds the basic proposition that “tax deferral” costs American jobs. As a stream of recent research has demonstrated, increases in investment and jobs by the foreign subsidiaries of U.S. global companies no longer come out of investment and jobs at home. Instead, as those foreign subsidiaries expand, mainly to serve foreign markets, their demand for and use of those idea-based, headquarter services expands too. So, the data and the operations behind them now show that increases in jobs and investment by foreign subsidiaries are now accompanied by increases in investments and jobs by the parent companies back home. For all of these reasons, raising the tax burden on American companies with foreign operations would reduce investment and job creation not only in abroad, but here at home as well.

It’s true, of course, that American multinationals, especially in manufacturing, hemorrhaged jobs again over the last decade, in the face of globalization. But most of those jobs have been lost to domestic outsourcing, as companies increasingly turn to other U.S. firms for services such as maintenance, legal and accounting advice, and so on. The culprit here is the fast-rising financial burden of providing health care and pension benefits, especially in a competitive global economy that makes it much harder to pass along those costs in higher prices. Raising the tax burden on the foreign earnings of U.S. multinationals won’t begin to touch this daunting challenge.

The recent House action actually could be even more damaging than these developments suggest. The reason that our tax system has provided this tax “deferral,” for nearly as long as we’ve had a corporate income tax, is that America is nearly the only major country that taxes its businesses on their worldwide income, regardless of where it’s earned. Britain, Germany, Japan, China and nearly everyone else of economic consequence have “territorial” tax systems that tax international companies only on the profits they earn within each nation’s own borders. On top of our distinctive “worldwide” tax system, we also now find ourselves with nearly the highest corporate tax rate of any major economy. So, without deferral, America’s globally successful industries would face a much higher tax burden than their European or Asian rivals. And that would mean lower rates of return for U.S. companies, which in turn would lead to less investment, less innovation, and ultimately fewer U.S. jobs.

Ending deferral could not only cost tens of thousands of American jobs. It also could create an illusion that Congress has already done what it has to, in order to create more jobs. The slowdown in U.S. job creation has emerged as a very serious, new challenge over the last decade. But the way to address it has to begin with recognizing the real sources of the pressures on jobs in a global economy. The problem is not efforts by businesses to build a global presence, which after all is a fundamental part of global success. Rather, part of the real issue here lies in the American economy’s increasing and distinctive reliance on ideas rather than physical assets to create value. This historic development puts a big economic premium on people’s ability to operate effectively in workplaces and factories dense with the information technologies that create and manage ideas and information. The reasonable response to that, again, is not higher taxes on foreign-source earnings, but a new domestic program of grants to community colleges to provide free computer and Internet training to any adult who walks in and asks for it. The pressures on jobs and wages also now come, as suggested earlier, from the fast-rising costs for business of providing health care coverage. The answers to that lie in serious measures to contain the pace of medical cost increases. The President’s recent health care reforms contain a number of modest steps in this area, and the Congress would do American workers a genuine service by strengthening and expanding them.

After all that the American people have endured in the last two years, surely it’s time to resist the siren call of facile slogans and easy answers, and become truly serious about both jobs and globalization.