Category Archives: Regulation

Net Neutrality: Degradation For All

20 Tuesday Jun 2017

Posted by in Net neutrality, Regulation

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The FCC recently voted to reverse its earlier actions on so-called net neutrality, which would have treated internet service providers (ISPs) as “common carriers” and subjected them to detailed federal regulation of their services, pricing, and profits. Many believe net neutrality would ensure a sort of fairness and nondiscrimination on the internet, but it is actually a destructive regulatory regime under which certain firms are allowed to extract economic rents from the efforts of others. Warren Meyer has a nice take on this at Coyote Blog:

“Net Neutrality is one of those Orwellian words that mean exactly the opposite of what they sound like…. What [it] actually means is that certain people … want to tip the balance in this negotiation towards the content creators ….  Netflix, for example, takes a huge amount of bandwidth that costs ISP’s a lot of money to provide. But Netflix doesn’t want the ISP’s to be be able to charge for this extra bandwidth Netflix uses – Netflix wants to get all the benefit of taking up the lion’s share of ISP bandwidth investments without having to pay for it. Net Neutrality is corporate welfare for content creators.“

I made the same point almost three years ago in “The Non-Neutrality of Network Hogs“. Meyer emphasizes that in the net-neutrality fight, the primary tension is between content creators and ISPs (and transport providers), but it is like any other battle to capture the gains from a vertical supply chain. Think of suppliers of goods versus shippers, for example, or traditional publishers versus delivery services, or oil extraction versus refining. Ultimately, all of the various parties must cover their costs in order to survive, and obviously each would like to capture a larger share of the value from its stage of the production process. In a series of arms-length transactions, one might assume that their shares would correspond roughly to the value they add to the final product, but things are more complicated than that. Much depends on the competitive state of the market and on the cost structures faced by different parties.

While the ISPs are often said to exercise monopoly power, there are few if any local markets in which that is actually the case, even in rural areas. Almost everywhere in the U.S., local internet markets could be better described as oligopolistic: there are at least a couple of rival firms (and alternatives for consumers), even if the technologies are sometimes radically different, so some competition exists. The same is true of the internet backbone.

Obviously, content providers compete with one another in a large sense, but many popular forms of content are unique and consumers demand access to them through their ISPs. Therefore, some content providers exercise a degree of monopoly power. And they might also require a lot of bandwidth.

The nature of the costs faced by ISPs and content providers is quite different. The latter have a much lower proportion of fixed costs than ISPs, who must invest in network capacity. Ultimately, the costs of providing that capacity must be priced. At first blush, it seems natural for users of capacity to be billed proportionately, but allocating those costs over customers and over time is a complex undertaking. Like all problems in economics, however, network usage involves a scarce resource. A large increment to demand can lead to network congestion and higher costs, not only directly to the ISPs but to users experiencing a degradation in the speed and quality of their service. ISPs have traditionally had the flexibility to negotiate with large content providers, reaching mutually agreeable terms. That’s what brought us to the state of today’s internet, and most observers would say that it’s pretty damn good!

It is the network that makes all of these wonderful services possible. The ISPs provide and maintain that network, and they must provide for expansion of that network as traffic grows. It is important that ISPs have adequate incentives to do so. However, the form of regulation to which so-called common carriers are subjected is known historically for its failure to provide good incentives. That history goes back as far as 130 years in transportation and about 80 years in telecommunications. This is why many analysts, and FCC Chairman Ajit Pai, contend that common carrier status for ISPs, and “net neutrality”, would lead to shortfalls in network capacity and a deterioration in the quality of service. It would also reward large content providers (think Netflix) in the short term at the expense of ISPs, essentially giving the former access to the existing network at less than cost. That’s the whole idea for industry advocates of net netrality, of course. But in the end, net neutrality is a shortsighted goal, even for the content providers.

The content providers have made every effort to propagandize the public, stoking fears that the ISPs are treating certain kinds of traffic unfairly. Without net neutrality, would ISPs unfairly discriminate against certain kinds of content? Or against certain types of users? Price discrimination is one of the primary criticisms of the presumed behavior of ISPs in the absence of net neutrality. Economist Bronwyn Howell points out that price discrimination is not unusual, however, and is not necessarily undesirable. Indeed, consumers of internet, telephone, mobile, and cable TV services seem to prefer certain forms of price discrimination! Consumers with heavy usage who purchase flat rate monthly internet access pay a lower charge per Gb than light users. Consumers who purchase “bundles” of internet and voice service may benefit from price discrimination relative to those who choose not to bundle their services. Strictly usage-based pricing would prevent price discrimination on this basis, but few would advocate the abolition of bundled offers, which provide benefits in terms of flexibility of use and predictability of cost, yielding net welfare gains for many consumers at no incremental cost to others. Like all voluntary trade, these are positive sum transactions: consumers capture more  “surplus” value while ISPs earn a greater contribution to the fixed costs of the network.

When ISPs charge a data rate based on usage, consumers face a positive marginal cost on incremental data. As usage increases, its marginal value to the consumer declines; the consumer will not use data beyond the point at which its value equals the data rate they pay. That places a cap on consumer surplus (the area above the price and below the consumer’s demand curve). When the consumer faces a zero marginal cost (an unlimited data plan), their usage rises to the point at which its marginal value is zero. The total amount of “surplus” in that scenario is larger, and it is possible for an ISP to split the gain with the consumer by offering a price for unlimited usage. Thus, as long as the network capacity is in place, both parties are made better off! If not, the practice can lead to congestion, but competition for users often dictates that such packages be offered.

Especially in the presence of positive network externalities, it makes no sense for the ISPs, as a group, to price users or traffic out of the market, unless they are punished for doing otherwise at below cost. As always, pricing is an exercise in balancing costs with the benefits to potential buyers. It should remain a private and unfettered exercise ending only in trades that are mutually beneficial.

And what of network capacity and the big content providers? At the “price discrimination” link above, Howell says:

“… available bandwidth allowed Netflix to happen, not the other way around. But now, as Netflix comes to dominate existing bandwidth, leading to higher costs, it is causing externalities (delays) and higher costs (ISP fees are now rising in real terms in some markets) to pay for new capacity.“

Should the ISPs charge all customers higher rates in order to manage growth in traffic and fund new capacity? How can they allocate costs to the cost-causers? Usage-based data rates are one simple alternative. Tiered rates would act to minimize the extent to which light users are penalized. ISPs have also negotiated with individual content providers directly, reaching agreements to compensate ISPs for access to their customers. Tim Wu, the Columbia Law professor credited with coining the term “net neutrality”, was quoted at the last link bemoaning these types of deals:

“‘I think it is going to be bad for consumers,’ he added, because such costs are often passed through to the customer.“

Well, yes! Netflix charges its customers, and it will attempt to recover these payments for network capacity. Streaming is an integral component of the service they offer, and they cannot do it without the ISPs. Would Wu propose that the pipes be provided at less than cost?

Some have said that it is more economically efficient for ISPs to charge users directly for incremental short-run network “externalities” caused by large data demands. (Conceptually, it is better to think of these costs as long-run marginal costs of network expansion.) It may be that a tiered rate structure can approximate the optimal solution, and packages are often tiered by download speed. Nevertheless, passing costs along to large content providers is a viable approach to allocating costs as well.

Another argument is that small content providers cannot afford these payments. However, if they don’t generate a significant amount of traffic, they probably won’t have to negotiate special deals. If they grow to require a large share of the “pipe”, it would indicate that they have passed a market test. Ultimately, their customers should pay the costs of providing the capacity in one way or another.

Net neutrality and regulation of ISPs is the wrong approach to encouraging the growth and value delivered by the internet. It would stifle incentives to provide the needed capacity and to develop new network technologies. We certainly didn’t get here by treating the ISPs like public utilities. Rather, the process was facilitated by the freedom to experiment technologically and contractually. ISPs are well aware that the value of their networks are enhanced by ubiquity. Affordable access to a broad share of the population is in their best interest. In the end, consumers are sovereign and should be the sole arbiters of the value offered by ISPs and content providers. Regulators will promise to protect us, but the inevitable result will be a market hampered by rules that degrade the network, leading to substandard service and a less vibrant internet.

Administrative Supremacy, Lost Checks and Balances

16 Friday Jun 2017

Posted by in Regulation

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The two-for-one regulatory order issued by the Trump White House in January raises some practical difficulties in implementation. It requires that federal agencies eliminate two regulatory rules for every new rule promulgated, both in terms of the number of rules and any incremental regulatory costs imposed. Two out for every one in. Questions surrounding the meaning of “a regulation”, how to define incremental costs, and whether a particular rule is actually mandated by legislation are not trivial. Nevertheless, the spirit of this order is admirable and it serves as the leading edge of the Administration’s attempt to roll back the scope and impact of excessive government authority.

The cost of regulation is vast. Economists at the Mercatus Center at George Mason University have estimated the total cumulative cost of regulation in the U.S., finding that regulation has reduced economic growth by 0.8 percent per year since 1980. Without the additional regulatory growth since 1980, the U.S. economy would have been about 25 percent larger than it was in 2012. That’s a $4 trillion shortfall, or roughly $13,000 per person.

While regulation and administrative control over the private economy takes an increasing toll on economic growth and human welfare, the problem goes beyond economic considerations: administrative agencies have “progressively” usurped not just legislative but also judicial power. The concentration of executive, legislative and judicial power constitutes a “fourth branch of government“, a development inimical to the principles enshrined in our Constitution and a prescription for slow-boil tyranny. It facilitates rent seeking and corporatism just as surely as it creates a ruling class of individuals who act on their personal and arbitrary inclinations. We are ruled by men backed by police power, not impartial laws.

Glenn Reynolds writes that unelected rule makers and central planners are able to manipulate decisions across a broad swath of the economy and society. He quotes a new book by Philip Hamburger of Columbia Law School called “The Administrative Threat“:

“Government agencies regulate Americans in the full range of their lives, including their political participation, their economic endeavors, and their personal conduct. Administrative power has thus become pervasively intrusive. But is this power constitutional?

A similar sort of power was once used by English kings, and this book shows that the similarity is not a coincidence. In fact, administrative power revives absolutism. On this foundation, the book explains how administrative power denies Americans their basic constitutional freedoms, such as jury rights and due process. No other feature of American government violates as many constitutional provisions or is more profoundly threatening. As a result, administrative power is the key civil liberties issue of our era.“

Two previous posts on Sacred Cow Chips have dealt with Hamburger’s work. The first, “Hamburger Nation: An Administrative Nightmare“(1) provides the following explanation of his position:

“Hamburger examines the assertion that rule-making must be delegated by Congress to administrative agencies because legislation cannot reasonably be expected to address the many details and complexities encountered in the implementation of new laws. Yet this is a delegation of legislative power. Once delegated, this power has a way of metastasizing at the whim of agency apparatchiks, if not at the direction of the chief executive. If you should want to protest an administrative ruling, your first stop will not be a normal court of law, but an administrative review board or a court run by the agency itself! You’ll be well advised to hire an administrative attorney to represent you. Eventually, and at greater expense, an adverse decision can be appealed to the judicial branch proper.“

The exercise of rule-making authority, and even extra-legal legislative action by the administrative state, has economic costs that are bad enough. Hamburger also emphasizes the breakdown of the separation of executive and judicial powers inherent in the enforcement and adjudication of disputes under administrative law. This was the subject of the second Sacred Cow Chips post referenced above: “Courts and Their Administrative Masters“. It reviewed an unfortunate standard established by court precedent involving judicial (“Chevron”) deference to administrative agency fact-finding and even interpretation of law. While the decisions of administrative courts, which are run by the agencies themselves, can be appealed to the judicial branch, such appeals often amount to exercises in futility.

“…courts apply a test of judgement as to whether the administrative agency’s interpretation of the law is “reasonable”, even if other “reasonable” interpretations are possible. This gets particularly thorny when the original legislation is ambiguous with respect to a certain point.

…the courts should not abdicate their role in reviewing an agency’s developmental evidence for any action, and the reasonability of an agency’s applications of evidence relative to alternative courses of action. Nor should the courts abdicate their role in ruling on the law itself.“

This paper on Judicial Deference to Agencies by Evan D. Bernick of Georgetown Law makes the case that judicial deference is a violation of the constitutional separation of powers, concluding that:

“… in cases involving administrative deprivations of core private rights to ‘life, liberty, or property,’ fact deference violates Article III’s vesting of ‘[t]he judicial power’ in the federal courts; constitutes an abdication of the duty of independent judgment that Article III imposes upon federal judges; and violates the Fifth Amendment by denying litigants ‘due process of law,’ which requires (1) judicial proceedings in an Article III court prior to any individualized deprivation of ‘life, liberty, or property’; and (2) fact-finding by independent, impartial fact-finders.“

Inez and Jarrett Stepman in Townhall note that there are almost three million well-paid federal employees with job security that would make most private sector workers envious.

“Though the abolishment of the spoils system [which allowed civil service hiring and firing based on political party] was meant to mitigate corruption and incompetence, it has resulted in a toxic combination of enhanced agency power and an entrenched civil servant class with its own institutional—and frequently political—interests, virtually unaccountable to the president or any other elected official.“

The Stepmans discuss legislation that might stem the usurpation of lawmaking power by the administrative state. They are convinced that the administrative state must be reigned-in. Ironically, expanded executive authority means that the process of reversal is not that difficult in many cases. By way of example, here’s a piece on the ease of undoing certain Obama era regulations. Executive orders, or “the pen and the phone” in Obama’s charming parlance, lack legitimate legislative authority and can be reversed by new executive orders. I firmly believe that reversing the earlier orders is the right thing to do at the moment, but the unchecked authority that makes it possible (and the supremacy of the administrative state) is a source of economic instability, and it must end. Eric Boehm makes this point eloquently in Reason at the last link above:

“New policies that affect wide swaths of the economy and reshape entire business models should go through Congress, or at the very least should be subject to the public rulemaking process. Guidance documents and other ‘dark matter’ regulations that by-pass those processes can be un-made as quickly as they were made, leaving businesses to deal with an ever-changing and unpredictable regulatory state that does not really help anyone, no matter which side you’re on in any individual policy fight.“

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(1) The principle title “Hamburger Nation” was intended as a play on Glenn Reynolds’ paper “Ham Sandwich Nation: Due Process When Everything Is a Crime“, in which he discussed the judicial implications of over-criminalization and regulatory overreach.

 

Courts and Their Administrative Masters

04 Tuesday Apr 2017

Posted by in Big Government, Regulation

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Supreme Court nominee Neil Gorsuch says the judicial branch should not be obliged to defer to government agencies within the executive branch in interpreting law. Gorsuch’s  opinion, however, is contrary to an established principle guiding courts since the 1984 Supreme Court ruling in Chevron USA vs. The Natural Resources Defense Council. In what is known as Chevron deference, courts apply a test of judgement as to whether the administrative agency’s interpretation of the law is “reasonable”, even if other “reasonable” interpretations are possible. This gets particularly thorny when the original legislation is ambiguous with respect to a certain point. Gorsuch believes the Chevron standard subverts the intent of Constitutional separation of powers and judicial authority, a point of great importance in an age of explosive growth in administrative rule-making at the federal level.

Ilya Somin offers a defense of Gorsuch’s position on Chevron deference, stating that it violates the text of the Constitution authorizing the judiciary to decide matters of legal dispute without ceding power to the executive branch. The agencies, for their part, seem to be adopting increasingly expansive views of their authority:

“Some scholars argue that in many situations, agencies are not so much interpreting law, but actually making it by issuing regulations that often have only a tenuous basis in congressional enactments. When that happens, Chevron deference allows the executive to usurp the power of Congress as well as that of the judiciary.”

Jonathan Adler quotes a recent decision by U.S. Appeals Court Judge Kent Jordan in which he expresses skepticism regarding the wisdom of Chevron deference:

Deference to agencies strengthens the executive branch not only in a particular dispute under judicial review; it tends to the permanent expansion of the administrative state. Even if some in Congress want to rein an agency in, doing so is very difficult because of judicial deference to agency action. Moreover, the Constitutional requirements of bicameralism and presentment (along with the President’s veto power), which were intended as a brake on the federal government, being ‘designed to protect the liberties of the people,’ are instead, because of Chevron, ‘veto gates’ that make any legislative effort to curtail agency overreach a daunting task.

In short, Chevron ‘permit[s] executive bureaucracies to swallow huge amounts of core judicial and legislative power and concentrate federal power in a way that seems more than a little difficult to square with the Constitution of the [F]ramers’ design.’

The unchecked expansion of administrative control is a real threat to the stability of our system of government, our liberty, and the health of our economic system. It imposes tremendous compliance costs on society and often violates individual property rights. Regulatory actions are often taken without performing a proper cost-benefit analysis, and the decisions of regulators may be challenged initially only within a separate judicial system in which courts are run by the agencies themselves! I covered this point in more detail one year ago in “Hamburger Nation: An Administrative Nightmare“, based on Philip Hamburger’s book “Is Administrative Law Unlawful?“.

Clyde Wayne Crews of the Competitive Enterprise Institute gives further perspective on the regulatory-state-gone-wild in “Mapping Washington’s Lawlessness: An Inventory of Regulatory Dark Matter“. He mentions some disturbing tendencies that may go beyond the implementation of legislative intent: agencies sometimes choose to wholly ignore some aspects of legislation; agencies tend to apply pressure on regulated entities on the basis of interpretations that stretch the meaning of such enabling legislation as may exist; and as if the exercise of extra-legislative power were not enough, administrative actions have a frequent tendency to subvert the price mechanism in private markets, disrupting the flow of accurate information about resource-scarcity and the operation of incentives that give markets their great advantages. All of these behaviors fit Crews’ description of “regulatory dark matter.”

Chevron deference represents an unforced surrender by the judicial branch to the exercise of power by the executive. As Judge Jordan notes in additional quotes provided by Adler at a link above, this does not deny the usefulness or importance of an agency’s specialized expertise. Nevertheless, the courts should not abdicate their role in reviewing an agency’s developmental evidence for any action, and the reasonability of an agency’s applications of evidence relative to alternative courses of action. Nor should the courts abdicate their role in ruling on the law itself. Judge Gorsuch is right: Chevron deference should be re-evaluated by the courts.

Big-Time Regulatory Rewards

27 Wednesday Jul 2016

Posted by in Big Government, Central Planning, Regulation

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Government Control

Why does regulation of private industry so often inure to the benefit of the regulated at the expense of consumers? In the popular mind, at least, regulating powerful market players restrains “excessive” profits or ensures that their practices meet certain standards. More often than not, however, regulation empowers the strongest market players at the expense of the very competition that would otherwise restrain prices and provide innovative alternatives. The more complex the regulation, the more likely that will be the result. Smaller firms seldom have the wherewithal to deal with complicated regulatory compliance. Moreover, regulatory standards are promulgated by politicians, bureaucrats, and often the most powerful market players themselves. If ever a system was “rigged”, to quote a couple of well-known presidential candidates, it is the regulatory apparatus. Pro-regulation candidates might well have the voters’ best interests at heart, or maybe not, but the losers are usually consumers and the winners are usually the dominant firms in any regulated industry.

The extent to which our wanderings into the regulatory maze have rewarded crony capitalists — rent seekers — is bemoaned by Daniel Mitchell in “A Very Depressing Chart on Creeping Cronyism in the American Economy“. The chart shows that about 40% of the increase in U.S. corporate profits since 1970 was generated by rent-seeking efforts — not by activities that enhance productivity and output. The chart is taken from an article in the Harvard Business Review by James Bessen of Boston University called “Lobbyists Are Behind the Rise in Corporate Profits“. Here are a couple of choice quotes from the article:

“Lobbying and political campaign spending can result in favorable regulatory changes, and several studies find the returns to these investments can be quite large. For example, one study finds that for each dollar spent lobbying for a tax break, firms received returns in excess of $220. …regulations that impose costs might raise profits indirectly, since costs to incumbents are also entry barriers for prospective entrants. For example, one study found that pollution regulations served to reduce entry of new firms into some manufacturing industries.”

“This research supports the view that political rent seeking is responsible for a significant portion of the rise in profits [since 1970]. Firms influence the legislative and regulatory process and they engage in a wide range of activity to profit from regulatory changes, with significant success. …while political rent seeking is nothing new, the outsize effect of political rent seeking on profits and firm values is a recent development, largely occurring since 2000. Over the last 15 years, political campaign spending by firm PACs has increased more than thirtyfold and the Regdata index of regulation has increased by nearly 50% for public firms.“

A good explanation of Bessen’s findings is provided by Guy Rolnik, including an interview with Bessen. Law Professor Glenn Reynolds of the University of Tennessee put his finger on the same issue in an earlier article entitled “Why we still don’t have flying cars“. One can bicker about the relative merits of various regulations, but as Reynolds points out, the expansion of the administrative and regulatory state has led to a massive diversion of resources that is very much a detriment to the intended beneficiaries of regulation:

“… 1970 marks what scholars of administrative law (like me) call the ‘regulatory explosion.’ Although government expanded a lot during the New Deal under FDR, it wasn’t until 1970, under Richard Nixon, that we saw an explosion of new-type regulations that directly burdened people and progress: The Clean Air Act, the Clean Water Act, National Environmental Policy Act, the founding of Occupation Safety and Health Administration, the creation of the Environmental Protection Agency, etc. — all things that would have made the most hard-boiled New Dealer blanch.

Within a decade or so, Washington was transformed from a sleepy backwater (mocked by John F. Kennedy for its ‘Southern efficiency and Northern charm’) to a city full of fancy restaurants and expensive houses, a trend that has only continued in the decades since. The explosion of regulations led to an explosion of people to lobby the regulators, and lobbyists need nice restaurants and fancy houses.“

Matt Ridley hits on a related point in “Industrial Strategy Can Be Regressive“, meaning that government planning and industrial regulation have perverse effects on prices and economic growth that hit the poor the hardest. Ridley, who is British, discusses regressivity in the context of his country’s policy environment, but the lessons are general:

“The history of industrial strategies is littered with attempts to pick winners that ended up picking losers. Worse, it is government intervention, not laissez faire, that has done most to increase inequality and to entrench wealth and privilege. For example, the planning system restricts the supply of land for housebuilding, raising property prices to the enormous benefit of the haves (yes, that includes me) at the expense of the have-nots. … 

Why are salaries so high in financial services? Because there are huge barriers to entry erected by government, which hands incumbent firms enormous quasi-monopoly advantages and thereby shelters them from upstart competition. Why are cancer treatments so expensive? Because governments give monopolies called patents to the big firms that invent them. Why are lawyers so rich? Because there is a government-licensed cartel restricting the supply of them.“

Ridley’s spirited article gives emphasis to the fact that the government cannot plan the economy any more than it can plan the way our tastes and preferences will evolve and respond to price incentives; it cannot plan production any more than it can anticipate changes in resource availability; it cannot dictate technologies wisely any more than it can predict the innumerable innovations brought forth by private initiative and market needs; it almost never can regulate any better than the market can regulate itself! But government is quite capable of distorting prices, imposing artificial rules, picking suboptimal technologies, consuming resources, and rewarding cronies. One should never underestimate the potential for regulation, and government generally, to screw things up!

Obama’s On-The-Clock Undertime Rule

23 Monday May 2016

Posted by in Labor Markets, Regulation, Uncategorized

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Hurting the ones you love: one of the Obama Administration’s calling cards is a penchant for misguided economic policy; the change in an overtime rule announced Wednesday by the Department of Labor (DOL) is a classic example. The DOL has amended the rule, which requires payments of time-and-a-half to workers who exceed 40 hours per week, by doubling the threshold at which salaried employees are exempt from overtime to $47,500 annually. This affects almost 5 million workers earning between the old threshold of $23,660 and the new threshold. While the media heralds Obama for “lifting the wages of millions of workers”, those with a grasp of economic reality know that it is a destructive policy.

The rule change is unambiguously bad for employers, many of which are small businesses. That should not be too difficult to understand. Most private employers operate in competitive markets and do not earn lavish profits at the expense of their employees. They need good employees, especially those in positions of responsibility, and they must pay them competitively. By imposing higher costs on these businesses, the rule puts them in a position of greater vulnerability in the marketplace. The higher costs also include extra record keeping to stay in compliance with the rule. The impact on new business formation is likely to be particularly damaging:

“We might be told that the answer for a startup is simply to ‘go and raise more money.’ But — aside from diluting the founders who are paying for the company with their sweat in exchange for the hope of a payoff that comes in years, if ever — raising capital is the single most difficult thing I do as a startup entrepreneur. I would invite anyone not in our field to give it a shot before he endorses a regulation that will impose greater capital costs on us.

Regulators often act as though they cannot imagine a world where a few hundred or a few thousand dollars can make the difference between success and failure. If you raise our costs even modestly, you will put some of us out of business.“

Shutting down, or not starting up, is a bad outcome, but that will be a consequence in some cases. However, there are other margins along which employers might respond. First, a lucky few well-placed managers might be rewarded with a small salary bump to lift them above the new exemption threshold. More likely, employers will reduce the base salaries of employees to accommodate the added overtime costs, leaving total compensation roughly unchanged.

Many other salaried employees with pay falling between the old and new thresholds are likely to lose their salaried status. Their new hourly wage might be discounted to allow them to work the hours to which they’re accustomed, as demotivating as that sounds. If their employers limit their hours, it is possible that a few extra workers could be hired to fill the gap. Perhaps that is what the administration hopes when it claims that an objective of the new rule is to create jobs. Unfortunately, those few lucky hires will owe their jobs to the forced sacrifice of hours by existing employees.

A change from a salary to hourly pay will have other repercussions for employees. Their relationships to their employers will be fundamentally transformed. Ambitious “hourly” managers might not have the opportunity to work extra hours in order to demonstrate their commitment to the business and a job well done. When the rule change was first proposed last June, I paraphrased a businessman who is one of my favorite bloggers, Warren Meyer (also see Meyer’s follow-ups here and here):

“As [Meyer] tells it, the change will convert ambitious young managers into clock-punchers. In case that sounds too much like a negative personality change, a more sympathetic view is that many workers do not mind putting in extra hours, even as it reduces their effective wage. They have their reasons, ranging from the non-pecuniary, such as simple work ethic, enjoyment and pride in their contribution to reward-driven competitiveness and ambition.“

As hourly employees, these workers might have to kiss goodbye to bonus payments, certain benefits, and flexible work arrangements, not to mention prestige. The following quotes are from a gated Wall Street Journal article but are quoted by James Pethokoukis in his piece at the AEIdeas blog of the American Enterprise Institute:

“Jason Parker, co-founder of K-9 Resorts, a franchiser of luxury dog hotels based in Fanwood, N.J., said the chain will reduce starting pay for newly hired assistant managers to about $35,000 from the $40,000 it pays now. That will absorb the overtime pay he expects he would have to give them, he said. …

Terry Shea, co-owner of two Wrapsody gift shops in Alabama, would prefer to keep her store managers exempt from the overtime-pay requirement as they are now. But raising their salaries above the new threshold to ensure that would be too big of a jump for those jobs in her region, she said. Instead, she’ll convert the managers to hourly employees and try to limit their weekly hours to as close to 40 as possible. She’ll also have to stop giving them a comp day when their weekly hours exceed 46, a benefit she said they like as working moms.

‘I will be demoted,’ said one of her store managers Bridget Veazey, who views the hourly classification as a step backward. ‘Being salaried means I have the flexibility to work the way I want,’ including staying an extra 30 minutes to perfect a window display or taking work home, she said. She is particularly concerned Ms. Shea might stop taking the managers on out-of-town trips to buy goods from retail markets, an experience she said would help her résumé but includes long days.“

Here is some other reading on the rule change: Nick Gillespie in Reason  agrees that it’s a bad idea. Andy Puzder in Forbes weighs in on the negative consequences for workers.  John Cochrane explores the simple economic implications of mandated wage increases, of which the overtime rule is an example. As he shows, only when the demand for labor hours is perfectly insensitive to wages can a mandated wage avoid reducing labor input.

This is another classic example of progressive good intentions gone awry. Government is singularly incapable of managing the private economy to good effect via rules and regulations. Private businesses hire employees to meet their needs in serving customers. The private compensation arrangements they make are mutually beneficial to businesses and their employees and are able to accommodate a variety of unique employee life-circumstances. Good employees are rewarded with additional compensation and more responsibility. By and large, salaried workers like being salaried! Hard work pays off, but the Obama Administration seems to view that simple, market truism as a defect. Please, don’t try to help too much!

Anti-Glyphosate Goons and Gullibility

15 Sunday May 2016

Posted by in Agriculture, Regulation, Technology

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See the Postscript below.

A “roundup” of findings on the safety of glyphosate shows that the herbicide is very benign, highly unlikely to pose any real threat to humans, and far less toxic than many common household chemicals and even natural hazards in the environment. However, the debate over glyphosate is heavily politicized, as illustrated by the unsavory details surrounding a report issued last year by the International Agency for Research on Cancer (IARC), an arm of the World Health Organization (WHO). The IARC reclassified glyphosate as “probably carcinogenic to humans” based on a few cherry-picked, poorly-designed studies with weak statistical power. That finding is inconsistent with the vast preponderance research, which shows that glyphosate is not a significant threat to human health.

The Farmer’s Daughter provided a good summary of the issues shortly after the IARC’s ruling was announced last year. She offers the following quote from the U.S. Environmental Protection Agency (EPA):

“The U.S. EPA classified glyphosate as Group E, evidence of non-carcinogenicity in humans. The U.S. EPA does not consider glyphosate to be a human carcinogen based on studies of laboratory animals that did not produce compelling evidence of carcinogenicity.“

European regulators reached similar conclusions and are rather damning in their assessment of the IARC’s findings, though Brussels recently disregarded their findings and decided to ban the sale of glyphosate for gardening. In this post at Biology Fortified, Anastasia Bodnar discusses the low toxicity of glyphosate with links to several recent studies on its safety. And here is the Risk Monger blogs’s list of “ten reasons why glyphosate is the herbicide of the century“:

  1. Controlling invasive weeds leads to better agricultural yields
  2. Better yields = less land in production = more meadows and biodiversity
  3. Extremely low toxicity levels compared to (organic) alternatives
  4. Allows for no or low till farming – better for soil management
  5. Reduces CO2 emissions (compared to organic)
  6. Glyphosate saves lives
  7. It is much more affordable and effective than other options
  8. Glyphosate is off patent so no single company is profiting heavily from it
  9. Glyphosate-resistant crops allow for more ecological weed management practices
  10. There is overwhelming scientific evidence that glyphosate is safe for humans

How, then, did the IARC reach such a negative conclusion? Again from the Risk Monger, David Zaruk, the IARC hired just one external technical advisor, Christopher Portier, an activist previously employed by an NGO, the anti-pesticide Environmental Defense Fund (EDF). Portier has no technical background in toxicology, and the IARC apparently went to pains to avoid references to his affiliation with the EDF. Moreover, the IARC’s conclusion seems to have been preordained:

“The IARC study rejected thousands of documents on glyphosate that had industry involvement and based their decision on carcinogenicity on the basis of eight studies (rejecting a further six because they did not like their conclusions).“

The lead author of the report, Kathryn Guyton, gave a speech in 2014 in which she stated that herbicide studies slated for 2015 showed indications of a link to cancer. Just how did she know, so far ahead of time? And then there’s this revelation:

“According to the observer document, the glyphosate meeting started with the participants being told to rule out the possibility of classifying the substance as non-carcinogenic.“

Zaruk believes there is internal pressure for the IARC study to be retracted. The organization has suffered a great loss of credibility in the scientific community over the report. In addition, WHO has remained neutral thus far, but they are expected to address the issue this month.

Zaruk and Julie Kelly provide a more succinct summary of the issues in “The Facebook Age of Science at The World Health Organization” at National Review. The suggestion made in the title seems to be that WHO’s decision might be swayed by public pressure, measured by Facebook “likes” by the superstitious, such as unknowing David Wolfe devotees, rather than science:

“Environmentalists and organic companies tout phony studies claiming that glyphosate is found in everything from breast milk to bagels. … Meanwhile, farmers who use glyphosate to protect their crops and boost yields are caught in the crossfire. Even if glyphosate is banned, they will need to use another herbicide, probably more toxic, because the romantic notion of hand-weeding millions of acres of crops is promoted only by those who have never done it.“

I’ll keep using Monsanto’s Roundup, thanks! Or a competitive brand of glyphosate. To close, here’s a quote from Matt Ridley’s Rational Optimist blog on the embrace of pseudoscience at the IARC and elsewhere (including social media):

“Science, humanity’s greatest intellectual achievement, has always been vulnerable to infection by pseudoscience, which pretends to use the methods of science, but actually subverts them in pursuit of an obsession. Instead of evidence-based policymaking, pseudoscience specialises in policy-based evidence making. Today, this infection is spreading.“

Postscript: On May 16, WHO announced that glyphosate is “unlikely to cause cancer in people via dietary exposure.” Here is a Q&A from WHO regarding its assessment, explaining that it is based on risk as opposed to mere hazard, upon which the earlier IARC report was based. This is good news!

 

Hamburger Nation: An Administrative Nightmare

04 Friday Mar 2016

Posted by in Big Government, Judicial Branch, Legislative Branch, Regulation

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By what authority do unelected bureaucrats in administrative agencies increasingly make laws, enforce those laws and adjudicate violations? The fact that all of these activities take place within the executive branch of government appears to be an obvious contradiction of the separation of powers required by the first three articles of the Constitution, the principle of “Rule By Consent” of the governed, and protections of individual liberty. In a strong sense, the regulatory apparatus has grown so unwieldy that the powers routinely exercised by administrative agencies today seem beyond even the reach of elected executives. The rules promulgated by this “fourth branch” of government are essentially extralegal, a point discussed at length in Philip Hamburger’s “Is Administrative Law Unlawful“. He has also explained these issues at the Volokh Conspiracy blog in “Extralegal power, delegation, and necessity“, and “The Constitution’s repudiation of extralegal power“.

Hamburger examines the assertion that rule-making must be delegated by Congress to administrative agencies because legislation cannot reasonably be expected to address the many details and complexities encountered in the implementation of new laws. Yet this is a delegation of legislative power. Once delegated, this power has a way of metastasizing at the whim of agency apparatchiks, if not at the direction of the chief executive. If you should want to protest an administrative ruling, your first stop will not be a normal court of law, but an administrative review board or a court run by the agency itself! You’ll be well advised to hire an administrative attorney to represent you. Eventually, and at greater expense, an adverse decision can be appealed to the judicial branch proper.

This adds up to a dangerous lack of accountability and power. Marginal Revolution points out that critics of Hamburger’s book overlook the potential for harm that could be done by a “vindictive” president. But we should not lose sight of the fact that bureaucrats themselves, at any level, can be vindictive, as the IRS targeting scandal has shown. But that is only one motive for abuse of power; another motive may be more pervasive: the ability to reward those in a position to promote the self-interests of those who populate the administrative state. These are dangers that are endemic to big government. In a post entitled “Are Government Regulators More Virtuous than Everyone Else” (No!), Ivan Carrino highlights the weakness of arguments like those made by George Akerlof and Robert Shiller in “Phishing For Phools“, who call for greater government regulation on the grounds that consumers are vulnerable to manipulation by businesses. Carrino says:

“One can’t help but notice the central contradiction in this analysis. On the one hand, it is assumed that markets fail because of ‘normal human weakness.’ On the other hand, it is assumed that regulation, which must necessarily be implemented by human beings with equal or greater ‘weaknesses,’ will somehow solve the problem.

Akerlof and Shiller simultaneously demonize human beings who operate in the private sector while idealizing human beings who operate in the public sector.“

Glenn Reynolds has been a prominent critic of the administrative state. As a consequence of the vast and growing body of regulatory rules, it’s become increasingly difficult for individuals, acting on their own or as businesspeople, to know whether they are in acting in violation of administrative law. Reynolds discusses regulatory crime and over-criminalization in “You May Be Breaking The Law Right Now“, and in his great paper “Ham Sandwich Nation: Due Process When Everything is a Crime” (free download).

Hamburger’s main position is that law should be made by elected representatives, not by bureaucrats who lack direct accountability to voters. Ilya Somin believes that with time, Hamburger will have great influence on legal theorists in this regard. He compares Hamburger’s insights on administrative law to Richard Epstein’s work on takings. Epstein insisted that “almost all regulations that restrict property rights should be considered ‘takings’ that require compensation under the Fifth Amendment.” Somin notes that Epstein’s position, despite harsh criticism from certain quarters, has influenced legal thinking in a dramatic way over the years.

What’s to be done? Can a line reasonably be drawn between constitutional legislative power and delegated rule-making authority? Somin is skeptical that absolute restrictions on lawmaking by the administrative state are practical, in the sense that there will always be details that cannot be addressed in enabling legislation. Others have suggested practical paths forward: Joseph Postell attempts to give a roadmap in “From Administrative State to Constitutional Government“. A recent Glenn Reynolds op-ed, “Blow Up The Administrative State“, gives a qualified defense of Texas Governor Greg Abbot’s proposed amendments to the Constitution. Among other things, Abbot proposes to:

“–Prohibit administrative agencies … from creating federal law.
  –Prohibit administrative agencies … from preempting state law.
  –Give state officials the power to sue in federal court when … officials overstep their bounds.
  –Allow a two-thirds majority of the states to override a federal law or regulation.”

I would add that administrative review and adjudication should be independent of the agencies themselves. Also, Representative Mia Love (R-UT) has proposed legislation that would restrict Congress to bills focused on points directly related to a single issue (i.e., no omnibus bills), which would help to check the growth of the administrative state.

All of these measures seem consistent with Hamburger’s views. Reynolds is fully cognizant of the dangers of a constitutional convention. Nevertheless, he recognizes that Abbot’s proposals would impose harder limits on the size of government, and defends them in colorful fashion:

“A smaller government would mean fewer phony-baloney jobs for college graduates with few marketable skills but demonstrated political loyalty. It would mean fewer opportunities for tax dollars to be directed to people and entities with close ties to people in power. It would mean less ability to engage in social engineering and ‘nudges’ aimed at what are all-too-often seen as those dumb rubes in flyover country. The smaller the government, the fewer the opportunities for graft and self-aggrandizement — and graft and self-aggrandizement are what our political class is all about.“

For further reading, Michael Ramsey at The Originalism Blog posts links to several other essays by Hamburger at The Volokh Conspiracy, where he acted as a guest-blogger.

 

 

 

Horizons Lost To Coercive Intervention

27 Wednesday Jan 2016

Posted by in Human Welfare, Price Controls, Regulation

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Every action has a cost. When you’re on the hook, major decisions are obviously worth pondering. But major societal decisions are often made by agents who are not on the hook, with little if any accountability for long-term consequences. They have every incentive to discount potential downside effects, especially in the distant future. Following Frederic Bastiat, Don Boudreaux writes of three levels of “What Is Not Seen” as a consequence of human decisions, which I summarize here:

  1. Immediate foregone alternatives: Possession, use and enjoyment of X is not seen if you buy Y.
  2. Resources not directed to foregone alternatives: The reduction in X inventory is not seen, compensating production of X is not seen, and extra worker hours, capital use and flow of raw materials needed for X production are not seen.
  3. The future implied by foregone alternatives: Future impacts can take many forms. X might have been a safer or healthier alternative, but those benefits are unseen. X might have been lower quality, so the potential frustration and repairs are unseen. X might have been less expensive, but the future benefits of the money saved are unseen. All of these “unseens” have implications for the future world experienced by the decision-maker and others.

These effects take on much more significance in multiples, but (2) and (3) constitute extended unseen implications for society at large. In multiples, the lost (unseen) X production and X labor-hours, capital and raw materials are more obvious to the losers in the X industry than the winners in the Y industry, but they matter. In the future, no vibrant X industry will not be seen; the resources diverted to meet Y demand won’t be seen at new or even old X factories. X might well vanish, leaving only nontransformable detritus as a token of its existence.

Changes in private preferences or in production technologies create waves in the course of the “seen” reality and the “unseen” world foregone. Those differences are caused by voluntary, private choice, so gains are expected to outweigh losses relative to the “road not traveled”. That’s not a given, however, when decisions are imposed by external authorities with incentives unaligned with those in their thrall. For that reason, awareness of the unseen is of great importance in policy analysis, which is really Boudreaux’s point. Here is an extreme example he offers in addressing the far-reaching implications of government intrusions:

“Suppose that Uncle Sam in the early 20th century had, with a hypothetical Ludd Act, effectively prohibited the electrification of American farms, businesses, and homes. That such a policy would have had a large not-seen element is evident even to fans of Bernie Sanders. But the details of this not-seen element would have been impossible today even to guess at with any reliability. Attempting to quantify it econometrically would be an exercise in utter futility. No one in a 2015 America that had never been electrified could guess with any sense what the Ludd Act had cost Americans (and non-Americans as well). The not-seen would, in such a case, loom so large and be so disconnected to any known reality that it would be completely mysterious.“

Price regulation provides more familiar examples. Rent controls intended to “protect” the public from landlords have enormous “unintended” consequences. Like any price regulation, rent controls stifle exchange, reducing the supply and quality of housing. Renters are given an incentive to remain in their units, and property owners have little incentive to maintain or upgrade their properties. Deterioration is inevitable, and ultimately displacement of renters. The unseen, lost world would have included more housing, better housing, more stable neighborhoods and probably less crime.

A price floor covered by Boudreaux is the minimum wage. The fully predictable but unintended consequences include immediate losses in some combination of jobs, hours, benefits, and working conditions by the least-skilled class of workers. Higher paid workers feel the impact too, as they are asked to perform more (and less complex) tasks or are victimized by more widespread substitution of capital for labor. Consumers also feel some of the pain in higher prices. The net effect is a reduction in mutually beneficial trade that continues and may compound with time:

“As the time span over which obstructions to certain economic exchanges lengthens, the exchanges that would have, but didn’t, take place accumulate. The businesses that would have been created absent a minimum wage – but which, because of the minimum wage, are never created – grow in number and variety. The instances of on-the-job worker training that would have occurred – but, because of the minimum wage, didn’t occur – stack up increasingly over time.“

Regulation and taxation of all forms have such destructive consequences, but policy makers seldom place a heavy weight on the unobserved counterfactual. Boudreaux emphasizes the futility of quantifying the “unseen” effects these policies:

“… those who insist that only that which can be measured and quantified with numerical data is real must deny, as a matter of their crabbed and blinding scientism, that such long-term effects … are not only not-seen but also, because they are not-seen, not real.“

The trade and welfare losses of coercive interventions of all types are not hypothetical. They are as real as the losses caused by destruction of property by vandals. Never again can the owners enjoy the property as they once had. Future pleasures are lost and cannot be observed or measured objectively. Even worse, when government disrupts economic activity, the cumulative losses condemn the public to a backward world that they will find difficult to recognize as such.

 

End The FDA’s War On Drug Development

16 Wednesday Dec 2015

Posted by in Health Care, Regulation

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FDA Secret Happiness

For the seriously ill, the phrase “regulated to death” might hit close to home when it comes to the U.S. Food and Drug Administration. The agency is a notorious bottleneck on the availability of new, potentially life-saving drugs. Its policies seem to rely on an over-reading of the precautionary principle: that the risk of harm must be weighted heavily regardless of the opportunity cost in terms of curative, life-extending or palliative potential. The facts are as economist Alex Tabarrok describes:

“It costs well over a billion dollars to get the average new drug approved and much of that cost comes from FDA required clinical trials. Longer and larger clinical trials mean that the drugs that are eventually approved are safer. But longer trials also mean that good drugs are delayed. And the more expensive it is to produce new drugs the fewer new drugs will be produced. In short, longer and larger trials mean drug delay and drug loss.“

One billion-plus dollars of incremental cost for the average new drug! Not only are the lengthy delays unacceptable, but the added cost seriously inflates new drug prices. Furthermore, it is difficult for small, innovative competitors to engage in development in the face of costs like these. And while large pharmaceutical companies might be forced to limit investment in new drug research and might rightfully bemoan their cost structures, they are in a much better position to handle the regulatory burden than start-ups.

Tabarrok has long advocated “reciprocity”, or U.S. approval of “drugs, devices and biologics” that have been approved by authorities (such as the European Medicines Agency, or EMA) in certain other developed countries. He has also advocated “Free To Choose Medicine” principles, which would create a dual track allowing certain patients to opt into the use of drugs at a relatively early stage in the FDA’s approval process. Research studies cited by Tabarrok suggest that expedited drug approval can provide substantial benefits in terms of patient survival years without compromising safety.

A bill introduced by Senators Ted Cruz (R-TX) and Mike Lee (R-UT) would authorize reciprocity in the U.S. In October, Cruz discussed the legislation in this article:

“The FDA model is risk-averse, by its very nature obstructing promising innovations. It largely assumes that the biology of patients is the same, rather than recognizing that individuals’ genetic makeup varies widely. As a result, the only drugs the agency tends to approve are those that help a broad spectrum of patients and harm close to no one. That method may work to fight diseases that affect us all in a similar way, such as smallpox or cholera, but it does not work for diseases such as Alzheimer’s and cancer, which are highly tailored to each individual’s genetic makeup. In medicine, a one-size-fits-all approach ignores the diversity of the human person and limits the discovery of innovative cures to a small segment of those afflicted with disease.“

Tabarrok anticipates a certain objection to reciprocity:

“The argument for reciprocity, however, isn’t that the FDA is uniquely bad or always worse than the EMA or vice-versa. The argument is that it’s wasteful to duplicate the lengthy approval process and that both agencies sometimes make mistakes. As a result, it’s simple common sense to let Americans avail themselves of drugs and devices approved in other developed countries.“

There are other reform proposals in play. The Goldwater Institute has advocated “Right to Try” laws at the state level that would allow terminally-ill patients to access unapproved medicines. Representative Fred Upton (R-MI) has introduced the 21st Century Cures Act, which includes:

“... steps to streamline clinical trials; advance personalized medicine by encouraging greater use of drug development tools, such as biomarkers; and creat[es] incentives for developing drugs for uncommon but deadly diseases.”

Regulation is often an obstacle to vibrant competition and innovation, and the FDA’s antiquated drug approval process is certainly a hindrance. The process adds time and expense to drug development that carries unacceptable human costs. It is beyond comprehension that drugs can be rejected for procedural reasons when their proposed use involves circumstances that could hardly be worse, when those drugs carry little incremental downside risk. The rights of patients and the judgements of their physicians should take precedence over the sometimes picayune concerns of a regulatory bureaucracy. The reforms discussed above would be positive steps toward establishing that primacy.

 

Government Economy; Government Science: You Wanted Growth?

28 Wednesday Oct 2015

Posted by in Central Planning, Regulation, Technology

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Economic growth allows us to enjoy an improving material existence and the wealth to pursue other goals as a society, such as a clean environment. Yet we often pursue other goals in ways that strangle growth, when in fact those goals and growth are fundamentally compatible.

Two articles that caught my attention today approach this issue from different but complementary perspectives. One is by John Cochrane of the University of Chicago, a lengthy piece called simply “Economic Growth“. At the outset, Cochrane asserts that the one, ultimate source of economic growth in the long-run is through advancing productivity. He notes, however, that the U.S. has been falling short in that department of late. Re-establishing growth should start with a clean-up of the many harmful public policies that have cluttered the economic landscape, especially over the last few decades. Unfortunately, politics makes this easier said than done:

“The golden rule of economic policy is: Do not transfer incomes by distorting prices or slowing competition and innovation. The golden rule of political economics seems to be: Transfer incomes by distorting prices and regulating away competition. Doing so attracts a lot less attention than on-budget transfers or subsidies. It takes great political leadership to force the political process to obey the economic rule.“

Cochrane’s discussion is wide ranging, covering a number of areas of public policy that require “weeding”, as he puts it: the regulatory arena (finance, health care, energy and the environment), tax policy, debt and deficits, the design of social programs and entitlements, labor law and regulation, immigration, education, agricultural policy, trade, and the process of infrastructure investment. There may be a year’s worth of blog posts to be drawn from Cochrane’s essay, but I think “weeding” understates the difficulty of the tasks outlined by Cochrane to reignite growth.

The second article that interested me today dealt with technological advance, which is a primary driver of productivity growth. Economists and pundits often prescribe policies that they believe will lead to transformational breakthroughs in technology. This usually manifests in advocacy for increased public funding for basic scientific research. This is a mistake, according to Matt Ridley’s great article, “The Myth of Basic Science“. In fact, one might say that he’s identified another government-nourished weed for Cochrane to pull. I found Ridley’s opening paragraph intriguing:

“Innovation is a mysteriously difficult thing to dictate. Technology seems to change by a sort of inexorable, evolutionary progress, which we probably cannot stop—or speed up much either. And it’s not much the product of science. Most technological breakthroughs come from technologists tinkering, not from researchers chasing hypotheses. Heretical as it may sound, “basic science” isn’t nearly as productive of new inventions as we tend to think.“

Ridley’s thesis (actually, he credits several others for formulating this line of thinking) is that technology growth is very much an independent process, impossible to push or steer effectively. He goes so far as to say that it can’t be stopped, but he also cites ways in which it can be inhibited.

This perspective on technology has implications for patent law, a subject that Ridley explores to some extent. It also reflects badly on government efforts to direct and stimulate advances by granting subsidies to favored technologies and more aggressive funding of  “basic science”. Government, in Ridley’s view, is largely impotent in spawning technological advance. By pushing technologies that are uneconomic, government distorts price signals, diverts resources from more productive investments, and embeds inferior technologies in the economy’s productive capital base.

But Ridley’s point has more to do with the futility of basic science as a driver of technological advance, and the strong possibility that causation often runs in the other direction:

“It is no accident that astronomy blossomed in the wake of the age of exploration. The steam engine owed almost nothing to the science of thermodynamics, but the science of thermodynamics owed almost everything to the steam engine. The discovery of the structure of DNA depended heavily on X-ray crystallography of biological molecules, a technique developed in the wool industry to try to improve textiles.

Technological advances are driven by practical men who tinkered until they had better machines; abstract scientific rumination is the last thing they do. As Adam Smith, looking around the factories of 18th-century Scotland, reported in ‘The Wealth of Nations’: ‘A great part of the machines made use in manufactures…were originally the inventions of common workmen,’ and many improvements had been made ‘by the ingenuity of the makers of the machines.’

It follows that there is less need for government to fund science: Industry will do this itself. Having made innovations, it will then pay for research into the principles behind them. Having invented the steam engine, it will pay for thermodynamics. This conclusion … is so heretical as to be incomprehensible to most economists, to say nothing of scientists themselves.“

It’s good to qualify that “industry will do this itself” only if it isn’t severely hamstrung by meddling politicians and regulators.

Ridley goes on to cite a few inconvenient historical facts that run counter to the narrative that public funding of science is a necessary condition for technical advance. He also cites empirical work suggesting that the return on publicly-funded R&D is paltry. In fact, he allows that government involvement in “basic science” may inhibit more economically viable advances and their adoption. There is no question that government often chooses unwisely without the discipline of market incentives. If it gets funded, then bad science, politically-driven “science” and ultimately nonproductive science might very well crowd-out better private science and innovation.

In a time of strained government budgets, public funding for basic science should be subjected to as much scrutiny as any other spending category. Like Ridley, I have much more faith in private tinkerers to choose wisely when it comes to the development of new technologies. Intimacy with actual markets and with the production process itself improve the odds that private developers and technologists will be more effective at boosting productivity.