Markets Deal With Scarcity, Left Screams “Price Gouging”

11 Monday Apr 2022

Posted by Nuetzel in Antitrust, Environmental Fascism, Oil Prices

Tags

Antitrust, Barack Obama, central planning, ESG Scores, FDR, Fossil fuels, Gas Prices, Green New Deal, Intermittancy, Joe Biden, Keystone Pipeline, Lawrence Summers, Oil Prices, Oil Profits, OPEC, Power Grid, Price Gouging, Profit Margins, Profiteering, Renewable energy, Strategic Petroleum Reserve, Ukraine Invasion, Vladimir Putin, West Texas Intermediate

Democrats claim profiteering by oil companies is responsible for the sustained rise in oil prices since Joe Biden’s inauguration (really, his election). That’s among the more laughable attempts at gaslighting in recent memory, right up there with blaming market concentration for the sustained increase in inflation since Biden’s inauguration. At a hearing this week, congressional Democrats, frightened by the prospect of a beat-down just ahead in the mid-term elections, couldn’t resist making “price-gouging” accusations against oil producers. These pols stumble over their own contradictory talking points, insisting on more oil production only when they aren’t hastily sabotaging oil and gas output. Their dishonestly is galling, but so is the foolishness of voters who blindly accept the economic illiteracy issuing from that side of the aisle.

Break It Then Blame It

Those who level “price gouging” charges at oil companies are often the same people seeking to eliminate fossil fuel consumption by making those energy choices unaffordable. The latter is a bad look this close to mid-term elections, so they follow the playbook I described recently in “Break the Market, Blame It, Then Break It Some More“. And this post is instructive: “House Dem: Big Oil is profiteering by, er … doing what we demanded”.

Not only have the Democrats’ policies caused oil prices to soar; for many years they’ve been undermining the stability of the power grid via forced conversion into intermittent renewable energy sources like wind and solar, all while preventing the expansion of safe and carbon-free nuclear power generation. It’s ironic that these would-be industrial planners seem so eager to botch the job, though failure is all too typical of central planning. Just ask the Germans about their own hapless efforts at energy planning.

As economist Lawrence Summers, former Treasury Secretary under Barack Obama, said recently:

“Look, the net effect of the things the administration talks about in terms of micro policies to reduce inflation, this gouging talk is frivolous, nonserious, and utterly ineffectual. A gas price holiday would, ultimately, push up prices by raising demand. … The student loan relief … is injecting resources into the economy at a hundred billion dollar a year annual rate when the economy needs to be cooled off, not heated up. … The administration could be much more constructive than it has been with respect to energy supply.”

The market functions to allocate scarce resources. When conditions of scarcity become more acute, the market mechanism responds by pricing available supplies to both curtail use and incentivize delivery of additional quantities. That involves the processing of vast amounts of information, and it is a balancing at which the market performs extremely well relative to bumbling politicians and central planners, whose actions are too often at the root of acute scarcities.

Antitrust Nonsense

Of course, the Democrats have seized upon the inescapable fact that soaring oil prices cause profits to soar for anyone producing oil or holding stocks of oil. But oil company profits are notoriously volatile. Margins were negative for most of 2020, when demand weakened in the initial stages of the pandemic. And now, some companies are bracing for massive write-downs on abandoned drilling projects in Russia. The oil and gas business is certainly not known for high profit margins. Short-term profits, while they last, must be used to meet the physical or financial needs of the business.

The threats of antitrust action by the Biden Administration are an extension of the price-gouging narrative, even if the threat reflects an injudicious grasp of what it takes to prove collusion. It takes a fertile imagination to think western oil companies could successfully collude on pricing in a market dominated by the following players:

Fat chance. In any case, it’s a global market, and it’s impossible for western oil producers to dictate pricing. Even the OPEC cartel has been unable to dictate prices, not to mention keeping it’s members from violating production quotas. But if a successful conspiracy among oil companies to raise prices was possible, one would guess they’d have done it a lot sooner!

Nor is it possible for the oil majors to dictate prices at the pump, because retail prices are set independently. While the cost of crude oil is only about 54% of the cost of refined gas at retail, fluctuations in prices at the pump correlate strongly with crude oil prices. Here is a ten-year chart of daily price data, where the blue line is the price of West Texas Intermediate crude oil and the orange line is the average price of regular gas in the U.S.:

Here are the same two series for 2022 year-to-date:

Coerced Scarcity

Again, oil prices have been under upward pressure for over a year until a break in early March, following the steep run-up in the immediate wake of the Ukraine invasion. First there was Biden’s stultifying rhetoric, before and after the 2020 election, assisted by radical members of Congress. Then there were executive orders halting drilling on federal lands, killing the Keystone pipeline, efforts to shut down several other existing pipelines, and the imposition of regulatory penalties on drillers. In addition, unrest in certain parts of the Middle East curtailed production, compounded this year by the boycott on Russian oil (which, as a foreign policy matter, was far too late in coming).

However, existing facilities have been capable of squeezing out more oil and gas. Lo and behold, supply curves slope upward, even in the short-run! Despite all of Biden’s efforts to cripple domestic oil production, higher crude prices have brought forth some additional supplies. Biden’s raid on the Strategic Petroleum Reserve has also boosted supply for now, but its magnitude won’t help much, and it must be replaced for use during real U.S. national emergencies, which the war in Ukraine is not, as awful as it is.

That said, investing in new drilling capacity is not wise given the political climate created by Biden and the Democrats: they have been quite clear that they mean to crush the fossil fuel industry. For some time, the oil companies have been busy investing cash flows in “green” initiatives in an effort to bolster their ESG scores, a dubious exercise to say the least. Arguably, in this policy environment, the most responsible thing to do is to return some of the capital over which these firms are stewards to its rightful owners, many of whom are middle-class savers who hold oil stocks in their 401(k) funds. That approach is manifest in the recent stock buybacks and dividend payments oil companies have announced and defended before Congress.

Conclusion

A forced shutdown of fossil fuel energy was much ballyhooed by the Left as a part of Joe Biden’s agenda. Biden himself bought into the “Green New Deal”, imagining it might win him a vaunted place alongside FDR’s legacy in American history. The effort was unwise, but Biden is trying to hang onto the narrative and maintain his punitive measures against American oil companies. All the while, he begs OPEC producers to step up production, bending a knee to despots in countries such as Iran and Venezuela. Why, it’s as if their fossil fuels are somehow cleaner than those extracted in the U.S! The feeble Biden and congressional Democrats are proving just how mendacious they are. They can rightfully blame Vladimir Putin for the recent escalation in oil prices, but they bear much responsibility themselves for the burden of high gas prices, energy bills, and the unnecessary, ongoing scarcity victimizing the American public.

ESG Scoring: Political Tool Disguised as Investment Guide

30 Wednesday Mar 2022

Posted by Nuetzel in Capital Markets, Corporatism, Environmental Fascism, Social Justice

≈ 3 Comments

Tags

Access to Capital, Antitrust, Blackrock, Climate Action 100+, Corporatism, Diversity, Equity, ESG Fees, ESG Scores, Great Reset, Green Energy, Inclusion, John Cochrane, Mark Brnovich, Principal-Agent Problem, Renewable energy, Renewables, rent seeking, Shareholder Value, Social Justice, Stakeholder Capitalism, Sustainability, Too big to fail, Ukraine Invasion, Vladimir Putin, Woke Investors, Zero-Carbon

ESG scores are used to rate companies on “Environmental, Social, and Governance” criteria. The truth, however, is that ESGs are wholly subjective measures of company performance. There are many different ESG scores available, with no uniform standards for methodology, specific inputs, or weighting schemes. If you think quarterly earnings reports are manipulated, ESGs are an even more pliable tool for misleading investors. It is a market fad, and fund managers are using it as an excuse to charge higher fees to investors. But like any trending phenomenon, for a time, the focus on ESGs might feed-back positively to returns on favored companies. That won’t be sustainable, however, without legislative and regulatory cover, plus a little manipulative help from the ESG engineers and “Great Reset” propagandists.

It’s 100% Political, 0% Economic

ESGs are founded on prioritizing objectives that have little to do with shareholder value or any well-understood yardsticks of financial or operating performance. The demands on company resources for scoring highly on ESG are often nakedly political. This includes adoption of environmental goals such as fraudulent “zero carbon” impacts, the nebulous “sustainability” objective promoted by “green” activists, diversity, inclusion and equity initiatives, and support for activist groups such as Black Lives Matter and Antifa.

Concepts like “stakeholder value” are critical to the rationale for ESGs. “Stakeholders” can include employees, suppliers, and customers, as well as potential employees. suppliers, and customers. In other words, they can be just about anyone in the broader community, or more likely activists for “social change” whose interests have but the thinnest connection to the business’s productive activities. In essence, so-called stakeholder capitalism amounts to a ceding of control over corporate resources, and ultimately confiscation of wealth from equity owners.

Corporations have long engaged in various kinds of defensive actions, amounting to a modern-day trade in indulgences. No one will be upset about your gas-powered fleet if you buy enough carbon offsets, which just might neutralize the impact of the fleet on your ESG! On a more sinister level, ESG’s provide opportunities for cover against information that might be damaging to firms, such as the use of slave labor overseas. Flatter the right people, give to their causes, “partner” with them on pet initiatives, and your sins will be ignored and your ESG will climb! And ESGs are used in attempts to pacify leftist investors who see the corporation as a vessel for their own social objectives, quite apart from any mission it might have had as a productive enterprise.

Your ESG will shine if you do business that’s politically-favored, like renewable energy, despite its inefficiencies and significant environmental blemishes. But ESGs are not merely used to reward those anointed as virtuous by the Left. They are more forcefully used to punish firms in industries that are out of favor, or firms refusing to participate in buying off authoritarian crusaders. For example, you might be so berserk as to think fossil fuels and climate change represent imminent threats of catastrophe. Naturally, you’ll want to punish oil and gas producers. In fact, if you are in charge of ESG modeling, you might want to penalize almost any extraction industry, with certain exceptions: the massive extraction and disposal costs of renewables will pass without notice.

All these machinations occur despite the huge uncertainty surrounding flimsy, model-based predictions of warming and global catastrophe. Never mind that fossil fuels are still relied upon to provide for most of our energy needs and will be for some time to come, including base-load power generation when intermittency prevents renewables from meeting demand. The stability of the power grid depends upon the availability of carbon-based energy, which in fact is marvelously efficient. Yet the ESG crowd (not to mention the Biden Administration) seeks to drive up its cost, including the cost of capital, and these added costs fall most heavily on the poor.

ESG-guided efforts by activists to deny capital to certain segments of the energy sector may constitute antitrust violations. Some big players in the financial industry, who together manage trillions of dollars in investment funds, belong to an advocacy organization called Climate Action 100+. They coordinate on a mission to completely transform the energy industry via “green” investments and divestments of presumptively “dirty” concerns. These players and their clients have huge investments in green energy, and it is in their interest to provide cheap capital to those firms while denying capital to fossil fuel industries. As Arizona Attorney General Mark Brnovich writes at the link above, this is restraint of trade “hiding in plain sight”.

Manipulation

ESGs could be the mother of all principal-agent problems. Corporate CEOs, hired by ownership as stewards and managers of productive assets, are promoting these metrics and activities, which may not align with the interests of ownership. ESG’s are not standardized, and most users will have little insight into exactly how these “stakeholder” sausages are stuffed. In fact, much of the information used for ESGs is extremely ad hoc, not universally disclosed, and is often qualitative. The applicability of these scores to the universe of stocks, and their reliability in guiding investment decisions, is extremely questionable no matter what the investor’s objectives. And of course the models can be manipulated to produce scores that suit the preferences of money managers who have a stake in certain firms or industry segments, and who inflate their fees in exchange for ESG investment advice. And firms can certainly engage in deceptions that boost ESGs, as already discussed.

Like many cultural or consumer trends, investment trends can feed off themselves for a time. If there are enough “woke” investors, ESGs might well feed an unvirtuous cycle of stock purchases in which returns become positively correlated with wokeness. Such a divorce from business fundamentals will eventually take its toll on returns, especially when economic or other conditions present challenges, but that’s not the answer you’ll get from many stock pickers and investment pundits.

At the same time, there are ways in which the preoccupation with ESGs dovetails with the rents often sought in the political arena. Subsidies, for example, will be awarded to firms producing renewables. Politically favored firms are also likely to receive better regulatory treatment.

There are other ways in which firms engaging in wasteful activities can survive profitably, at least for a time. Monopoly power is one, and companies often develop a symbiosis with regulators that hampers smaller competitors. This is traditional rent-seeking corporatism in action, along with the “too-big-to-fail” regime. Sometimes sheer growth in demand for new technologies or networking potential helps to conceal waste. Hot opportunities can leave growing companies awash in cash, some of which will be burned in wasteful endeavors. ESG scoring offers them additional cover.

Cracks In the Edifice

John Cochrane notes a fundamental, long-term contradiction for those who invest based on ESGs: an influx of capital will tend to drive down returns in those firms and industries, while the returns on firms having low ESGs will be driven upward. Yet advocates claim you can invest for virtue and superior returns. That can’t outlast real market forces, especially as ESG efforts dilute any mission a firm might have as a productive enterprise.

Vladimir Putin’s brutal invasion of Ukraine has revealed other cracks in the ESG edifice. We now have parties arguing that defense stocks should be awarded ESG points! Also, that oil production by specific nations should be scored highly. There is also an awakening to the viability of nuclear power as an energy source. Then we have the problem of delivering on Biden’s promise to Europe of more liquified natural gas exports. That will be difficult given the way Biden has bludgeoned the industry, as well as the ESG conspiracy to deny it access to capital. Just watch the ESG hacks backpedal. Now, even the evangelists at Blackrock are wavering. To see the thread of supposed ESG consistency unravel would be enough to make you laugh if the entire conspiracy weren’t so grotesque.

Closing

The pretensions underlying “green” initiatives undertaken by large corporations are good mainly for virtue signaling, to collect public subsidies, and to earn better ESG scores. They are usually wasteful in a pure economic sense. The same is true of social justice and diversity initiatives, which can be perversely racist in their effects and undermine the rule of law.

Ultimately, we must recognize that the best contribution any producer can make to society is to create value for shareholders and customers by doing what it does well. The business world, however, has gone far astray in the direction of rank corporatism, and keep this in mind: any company supporting a sprawling HR department, pervasive diversity efforts, “sustainability” initiatives, and preoccupations with “stakeholder” outreach is distracted from its raison d’etre, its purpose as a business enterprise to produce something of value. It is probably captive to outside interests who have essentially commandeered management’s attention and shareholders’ resources.

When it comes to investing, I prefer absolute neutrality with respect to out-of-mission social goals. Sure, do no harm, but the focus should remain squarely on goals inherent in the creation of value for customers and shareholders.

Break the Market, Blame It, Then Break It Some More

28 Sunday Nov 2021

Posted by Nuetzel in Energy, Environmental Fascism, Free markets, Uncategorized

≈ 2 Comments

Tags

Antitrust, Asymmetric Information, Build Back Better, Capital Controls, central planning, Endangered Species Act, Energy Policy, Externalities, Fossil fuels, Fracking, FTC, Government Failure, Green New Deal, Greenbook, Hart Energy, Industrial Policy, Industry Concentration, Joe Biden, Keystone XL Pipeline, Knowledge Problem, Line 5 Pipeline, Mark Theisen, Market Failure, Monetary policy, OPEC, Price Gouging, Principles of Economics, Quotas, Regulatory Overreach, Stephen Green, Strategic Petroleum Reserve, Subsidies, Tariffs, Taxes, The Fatal Conceit

Much of what is labeled market failure is a consequence of government failure, or rather, failure caused by misguided public intervention, not just in individual markets but in the economy more generally. Misguided efforts to correct perceived excesses in pricing are often the problem, but there are myriad cases of regulatory overreach, ham-handed application of taxes and subsidies for various enterprises, and widespread cronyism. But it is often convenient for politicians to appear as if they are doing something, which makes activism and active blame of private enterprise a tempting path. The Biden Administration’s energy crisis offers a case in point. First, a digression on the efficiency of free markets. Skip the next two sections to get straight to Biden’s mess.

Behold the Bounty

I always spent part of the first class session teaching Principles of Economics on some incredible things that happen each and every day. Most college freshmen seem to take them for granted: the endless variety of goods that arrive on shelves each day; the ongoing flow of services, many appearing like magic at the flick of a switch; the high degree of coincidence between specific wants and all these fresh supplies; the variety and flow of raw materials and skills that are brought to bear; the fantastic array of sophisticated equipment deployed to assist in these efforts; and the massive social coordination necessary to accomplish all this. How does it all happen? Who collects all the information on what is wanted, and by whom? On the feasibility of actually producing and distributing various things? What miracle computer processes the vast set of information guiding these decisions and actions? Does some superior intelligence within an agency plan all this stuff?

The answer is simple. The seemingly infinite set of knowledge is marshaled, and all these tasks are performed, by the greatest institution of social cooperation to ever emerge: decentralized, free markets! Buying decisions are guided by individual needs and wants. Production and selling decisions are guided by resource availability and technology. And all sides react to evolving prices. Preferences, resources, and technology are in a constant state of flux, but prices react, signaling producers and consumers to make individual adjustments that correct larger imbalances. It is tempting to describe the process as the evolving solution to a gigantic set of dynamic equations.

The Impossible Conceit

No human planner or government agency is capable of solving this problem as seamlessly and efficiently as markets, nor can they hope to achieve the surplus welfare that redound to buyers and sellers in markets. Central planners or intervening authorities cannot possess the knowledge and coordinating power of the market mechanism. That doesn’t mean markets are “perfect”, of course. Things like external costs and benefits, dominant sellers, and asymmetric information can cause market outcomes to deviate from the competitive “ideal”. Inequities can arise from some of these imperfections as well.

What can be much worse is the damage to market performance caused by government policy. Usually the intent is to “correct” imperfections, and the rationale might be defensible. The knowledge to do it very well is often lacking, however. Taxes, subsidies, regulations, tariffs, quotas, capital controls, and manipulation of interest rates (and monetary and credit aggregates) are very general categories of distortion caused by the public sector. Then there is competition for resources via government procurement, which is frequently graft-ridden or price-insensitive.

Many public interventions create advantages for large sellers, leading to greater market concentration. This might best serve the private political power of the wealthy or might convey advantages to investments that happen to be in vogue among the political class. These are the true roots of fascism, which leverages coercive state power for the benefit of private interests.

Energy Vampires

Now we have the curious case of the Biden Administration and it’s purposeful disruption of energy markets in an effort to incentivize a hurried transition from fossil fuels to renewable energy. As I described in a recent post on stagflation,

“… Biden took several steps to hamstring the domestic fossil fuel industry at a time when the economy was still recovering from the pandemic. This included revoking permits for the Keystone pipeline, a ban on drilling on federal lands and federally-controlled waters in the Gulf, shutting down production on some private lands on the pretext of enforcing the Endangered Species Act, and capping methane emissions by oil and gas producers. And all that was apparently just a start.

As Mark Theisen notes, when you promise to destroy a particular industry, as Joe Biden has, by taxing and regulating it to death, who wants to invest in or even maintain production facilities? Some leftists with apparent influence on the administration are threatening penalties against the industry up to and including prosecution for ‘crimes against humanity’!”

In addition to killing Keystone, there remains a strong possibility that Biden will shut down the Line 5 pipeline in Michigan, and there are other pipelines currently under federal review. Biden’s EPA also conducted a purge of science advisors considered “too friendly” to oil and gas industry. This was intertwined with a “review” of new methane rules, which harm smaller, independent oil and gas drillers disproportionately.

Joe Biden’s “Build Back Better” (BBB) legislation, as clumsy in policy as it is in name, introduces a number of “Green New Deal” provisions that would further disadvantage the production and use of fossil fuels. Hart Energy provides descriptions of various tax changes that appeared in the Treasury’s so-called “Greenbook”, a collection of revenue proposals, many of which appear in the BBB legislation that recently passed in the House. These include rollbacks of various deductions for drilling costs, depletion allowances, and recovery rules, as well as hikes in certain excise taxes as well as taxes on foreign oil income. And all this while granting generous subsidies to intermittent and otherwise uneconomic technologies that happen to be in political favor. This is a fine payoff for cronies having invested significantly in these rent seeking opportunities. While the bill still faces an uphill fight in the Senate, apparently Biden has executive orders, held in abeyance, that would inflict more pain on consumers and producers of fossil fuels.

Biden’s energy policies are obviously intended to reduce supplies of oil, gas, and other fossil fuels. Prices have responded, as Green notes:

“Gas is up an average of 57% this year, with corresponding increases of 44% for diesel and a whopping 60% for fuel oil.”

The upward price pressure is not limited to petroleum: electricity rates are jumping as well. Consumers and shippers have noticed. In fact, while Biden crows about wanting “the rich” to pay for BBB, his energy policies are steeply regressive in their impact, as energy absorbs a much larger share of budgets among the poor than the rich. This is politically suicidal, but Biden’s advisors have chosen a most cynical tact as the reality has dawned on them.

Abusive Victim Blaming

Who to blame? After the predictable results of cramping domestic production and attacking fossil fuel producers, the Biden team naturally blames them for rising prices! “Price gouging” is a charge made by political opportunists and those who lack an understanding of how markets allocate scarce resources. More severe scarcity means that prices must rise to ration available quantities and to incentivize those capable of bringing forth additional product under difficult circumstances. That is how a market is supposed to function, and it mitigates scarcity!

But here comes the mendacious and Bumbling Buster Biden. He wants antitrust authorities at the FTC to investigate oil pricing. Again from Stephen Green:

“… the Biden Administration has decided to launch a vindictive legal campaign against oil producers in order to deflect blame for the results of Biden’s policies: Biden’s Solution to Rising Gas Prices Appears to Be Accusing Oil Companies of Price Gouging.”

There’s nothing quite like a threat to market participants to prevent the price mechanism from performing its proper social function. But a failure to price rationally is a prescription for more severe shortages.

Biden has also ordered the Strategic Petroleum Reserve (SPR) to release 50 million barrels of oil, a move that replaces a total of 2.75 days of monthly consumption in the U.S. The SPR is supposed to be drawn upon only in the case of emergencies like natural disasters, so this draw-down is as irresponsible as it is impotent. In fact, OPEC is prepared to offset the SPR release with a production cut. Biden has resorted to begging OPEC to increase production, which is pathetic because the U.S. was a net exporter of oil not long ago … until Biden took charge.

Conclusion

Properly stated, the challenge mounted against markets as an institution is not that they fall short of “perfection”. It is that some other system would lead to superior results in terms of efficiency and/or equity. Central planning, including the kind exercised by the Biden Administration in it’s hurried and foolish effort to tear down and remake the energy economy, is not even a serious candidate on either count.

Granted, there is a long history of subsidies to the oil and gas sector. I cannot defend those, but the development of the technology (even fracking) largely preceded the fruits of the industry’s rent seeking. At this point, green fuels receive far more subsidies (despite some claims to the contrary). Furthermore, the primacy of fossil fuels was not achieved by tearing down competing technologies and infrastructure. In contrast, the current round of central planning requires destruction of entire sectors of the economy that could otherwise produce efficiently for the foreseeable future, if left unmolested.

The Biden Administration has adopted the radical green agenda. Their playbook calls for a severe tilting of price incentives in favor uneconomic, renewable energy sources, despite the economy’s heretofore sensible reliance on plentiful fossil fuels. It’s no surprise that Biden’s policy is unpopular across the economic spectrum. His natural inclination is to blame a competitive industry victimized by his policy. It’s a futile attempt to avoid accountability, as if he thinks doubling down on the fascism will help convince the electorate that oil and gas producers dreamt up this new, nefarious strategy of overcharging customers. People aren’t that dumb, but it’s typical for the elitist Left presume otherwise.

Behold Our Algorithmic Overlords

18 Thursday Jul 2019

Posted by Nuetzel in Automation, Censorship, Discrimination, Marketplace of Ideas

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Algorithmic Governance, American Affairs, Antitrust, Behavioral Economics, Bryan Caplan, Claremont Institute, David French, Deplatforming, Facebook, Gleichschaltung, Google, Jonah Goldberg, Joseph Goebbels, Mark Zuckerberg, Matthew D. Crawford, nudge, Peeter Theil, Political Legitimacy, Populism, Private Governance, Twitter, Viewpoint Diversity

A willingness to question authority is healthy, both in private matters and in the public sphere, but having the freedom to do so is even healthier. It facilitates free inquiry, the application of the scientific method, and it lies at the heart of our constitutional system. Voluntary acceptance of authority, and trust in its legitimacy, hinges on our ability to identify its source, the rationale for its actions, and its accountability. Unaccountable authority, on the other hand, cannot be tolerated. It’s the stuff of which tyranny is made.

That’s one linchpin of a great essay by Matthew D. Crawford in American Affairs entitled “Algorithmic Governance and Political Legitimacy“. It’s a lengthy piece that covers lots of ground, and very much worth reading. Or you can read my slightly shorter take on it!

Imagine a world in which all the information you see is selected by algorithm. In addition, your success in the labor market is determined by algorithm. Your college admission and financial aid decisions are determined by algorithm. Credit applications are decisioned by algorithm. The prioritization you are assigned for various health care treatments is determined by algorithm. The list could go on and on, but many of these “use-cases” are already happening to one extent or another.

Blurring Private and Public Governance

Much of what Crawford describes has to do with the way we conduct private transactions and/or private governance. Most governance in free societies, of the kind that touches us day-to-day, is private or self-government, as Crawford calls it. With the advent of giant on-line platforms, algorithms are increasingly an aspect of that governance. Crawford notes the rising concentration of private governmental power within these organizations. While the platforms lack complete monopoly power, they are performing functions that we’d ordinarily be reluctant to grant any public form of government: they curate the information we see, conduct surveillance, exercise control over speech, and even indulge in the “deplatforming” of individuals and organizations when it suits them. Crawford quotes Facebook CEO Mark Zuckerberg:

“In a lot of ways Facebook is more like a government than a traditional company. . . . We have this large community of people, and more than other technology companies we’re really setting policies.”

At the same time, the public sector is increasingly dominated by a large administrative apparatus that is outside of the normal reach of legislative, judicial and even executive checks. Crawford worries about “… the affinities between administrative governance and algorithmic governance“. He emphasizes that neither algorithmic governance on technology platforms nor an algorithmic administrative state are what one could call representative democracy. But whether these powers have been seized or we’ve granted them voluntarily, there are already challenges to their legitimacy. And no wonder! As Crawford says, algorithms are faceless pathways of neural connections that are usually difficult to explain, and their decisions often strike those affected as arbitrary or even nonsensical.

Ministry of Wokeness

Political correctness plays a central part in this story. There is no question that the platforms are setting policies that discriminate against certain viewpoints. But Crawford goes further, asserting that algorithms have a certain bureaucratic logic to elites desiring “cutting edge enforcement of social norms“, i.e., political correctness, or “wokeness”, the term of current fashion.

“First, in the spirit of Václav Havel we might entertain the idea that the institutional workings of political correctness need to be shrouded in peremptory and opaque administrative mechanisms because its power lies precisely in the gap between what people actually think and what one is expected to say. It is in this gap that one has the experience of humiliation, of staying silent, and that is how power is exercised.

But if we put it this way, what we are really saying is not that PC needs administrative enforcement but rather the reverse: the expanding empire of bureaucrats needs PC. The conflicts created by identity politics become occasions to extend administrative authority into previously autonomous domains of activity. …

The incentive to technologize the whole drama enters thus: managers are answerable (sometimes legally) for the conflict that they also feed on. In a corporate setting, especially, some kind of ass‑covering becomes necessary. Judgments made by an algorithm (ideally one supplied by a third-party vendor) are ones that nobody has to take responsibility for. The more contentious the social and political landscape, the bigger the institutional taste for automated decision-making is likely to be.

Political correctness is a regime of institutionalized insecurity, both moral and material. Seemingly solid careers are subject to sudden reversal, along with one’s status as a decent person.”

The Tyranny of Deliberative Democracy

Crawford takes aim at several other trends in intellectual fashion that seem to complement algorithmic governance. One is “deliberative democracy”, an ironically-named theory which holds that with the proper framing conditions, people will ultimately support the “correct” set of policies. Joseph Goebbels couldn’t have put it better. As Crawford explains, the idea is to formalize those conditions so that action can be taken if people do not support the “correct” policies. And if that doesn’t sound like Gleichschaltung (enforcement of conformity), nothing does! This sort of enterprise would require:

“… a cadre of subtle dialecticians working at a meta-level on the formal conditions of thought, nudging the populace through a cognitive framing operation to be conducted beneath the threshold of explicit argument.

… the theory has proved immensely successful. By that I mean the basic assumptions and aspirations it expressed have been institutionalized in elite culture, perhaps nowhere more than at Google, in its capacity as directorate of information. The firm sees itself as ‘definer and defender of the public interest’ …“

Don’t Nudge Me

Another of Crawford’s targets is the growing field of work related to the irrationality of human behavior. This work resulted from the revolutionary development of experimental or behavioral economics, in which various hypotheses are tested regarding choice, risk aversion, an related issues. Crawford offers the following interpretation, which rings true:

“… the more psychologically informed school of behavioral economics … teaches that we need all the help we can get in the form of external ‘nudges’ and cognitive scaffolding if we are to do the rational thing. But the glee and sheer repetition with which this (needed) revision to our understanding of the human person has been trumpeted by journalists and popularizers indicates that it has some moral appeal, quite apart from its intellectual merits. Perhaps it is the old Enlightenment thrill at disabusing human beings of their pretensions to specialness, whether as made in the image of God or as ‘the rational animal.’ The effect of this anti-humanism is to make us more receptive to the work of the nudgers.”

While changes in the framing of certain decisions, such as opt-in versus opt-out rules, can often benefit individuals, most of us would rather not have nudgers cum central planners interfere with too many of our decisions, no matter how poorly they think those decisions approximate rationality. Nudge engineers cannot replicate your personal objectives or know your preference map. Indeed, externally applied nudges might well be intended to serve interests other than your own. If the political equilibrium involves widespread nudging, it is not even clear that the result will be desirable for society: the history of central planning is one of unintended consequences and abject failure. But it’s plausible that this is where the elitist technocrats in Silicon Vally and within the administrative state would like to go with algorithmic governance.

Crawford’s larger thesis is summarized fairly well by the following statements about Google’s plans for the future:

“The ideal being articulated in Mountain View is that we will integrate Google’s services into our lives so effortlessly, and the guiding presence of this beneficent entity in our lives will be so pervasive and unobtrusive, that the boundary between self and Google will blur. The firm will provide a kind of mental scaffold for us, guiding our intentions by shaping our informational context. This is to take the idea of trusteeship and install it in the infrastructure of thought.

Populism is the rejection of this.”

He closes with reflections on the attitudes of the technocratic elite toward those who reject their vision as untrustworthy. The dominance of algorithmic governance is unlikely to help them gain that trust.

What’s to be done?

Crawford seems resigned to the idea that the only way forward is an ongoing struggle for political dominance “to be won and held onto by whatever means necessary“. Like Bryan Caplan, I have always argued that we should eschew anti-trust action against the big tech platforms, largely because we still have a modicum of choice in all of the services they provide. Caplan rejects the populist arguments against the tech “monopolies” and insists that the data collection so widely feared represents a benign phenomenon. And after all, consumers continue to receive a huge surplus from the many free services offered on-line.

But the reality elucidated by Crawford is that the tech firms are much more than private companies. They are political and quasi-governmental entities. Their tentacles reach deeply into our lives and into our institutions, public and private. They are capable of great social influence, and putting their tools in the hands of government (with a monopoly on force), they are capable of exerting social control. They span international boundaries, bringing their technical skills to bear in service to foreign governments. This week Peter Theil stated that Google’s work with the Chinese military was “treasonous”. It was only a matter of time before someone prominent made that charge.

The are no real safeguards against abusive governance by the tech behemoths short of breaking them up or subjecting them to tight regulation, and neither of those is likely to turn out well for users. I would, however, support safeguards on the privacy of customer data from scrutiny by government security agencies for which the platforms might work. Firewalls between their consumer and commercial businesses and government military and intelligence interests would be perfectly fine by me.

The best safeguard of viewpoint diversity and against manipulation is competition. Of course, the seriousness of threats these companies actually face from competitors is open to question. One paradox among many is that the effectiveness of the algorithms used by these companies in delivering services might enhance their appeal to some, even as those algorithms can undermine public trust.

There is an ostensible conflict in the perspective Crawford offers with respect to the social media giants: despite the increasing sophistication of their algorithms, the complaint is really about the motives of human beings who wish to control political debate through those algorithms, or end it once and for all. Jonah Goldberg puts it thusly:

“The recent effort by Google to deny the Claremont Institute the ability to advertise its gala was ridiculous. Facebook’s blocking of Prager University videos was absurd. And I’m glad Facebook apologized.

But the fact that they apologized points to the fact that while many of these platforms clearly have biases — often encoded in bad algorithms — points to the possibility that these behemoths aren’t actually conspiring to ‘silence’ all conservatives. They’re just making boneheaded mistakes based in groupthink, bias, and ignorance.”

David French notes that the best antidote for hypocrisy in the management of user content on social media is to expose it loud and clear, which sets the stage for a “market correction“. And after all, the best competition for any social media platform is real life. Indeed, many users are dropping out of various forms of on-line interaction. Social media companies might be able to retain users and appeal to a broader population if they could demonstrate complete impartiality. French proposes that these companies adopt free speech policies fashioned on the First Amendment itself:

“…rules and regulations restricting speech must be viewpoint-neutral. Harassment, incitement, invasion of privacy, and intentional infliction of emotional distress are speech limitations with viewpoint-neutral definitions…”

In other words, the companies must demonstrate that both moderators and algorithms governing user content and interaction are neutral. That is one way for them to regain broad trust. The other crucial ingredient is a government that is steadfast in defending free speech rights and the rights of the platforms to be neutral. Among other things, that means the platforms must retain protection under Section 230 of the Telecommunications Decency Act, which assures their immunity against lawsuits for user content. However, the platforms have had that immunity since quite early in internet history, yet they have developed an aggressive preference for promoting certain viewpoints and suppressing others. The platforms should be content to ensure that their policies and algorithms provide useful tools for users without compromising the free exchange of ideas. Good governance, political legitimacy, and ultimately freedom demand it.

Preserve the Separation of Google and State

28 Friday Sep 2018

Posted by Nuetzel in Antitrust, Censorship, Privacy

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Anti-Competitive, Antitrust, Biased Search Results, China, Do the Right Thing, European Union, FICO Score, Google, Government Monopoly, J.D. Tuccille, Limited government, Liu Hu, Personal Information, Privatized Authoritarianism, Social Credit Score, Surveillance, Unenumerated Rights

Little did we suspect that Google’s collection of personal data and manipulation of search results was mere practice for the job of censoring, curating, and providing behavioral surveillance for repressive governments (more on search manipulation here and here). Actually, some of us have expressed trepidation that our own individual liberty might face such a vulnerability, with Google working in concert with our own government:

“As a firm like Google attains the status of an arm of the state, or multiple states, it could provide a mechanism whereby those authorities could manipulate behavior and coerce their citizens, making the internet into a tool of tyranny rather than liberty. ‘Don’t be evil’ is not much of a guarantee.”

Now, however, the company is working with the government of mainland China to implement a version of its search engine that meets the needs of the Communist regime. J.D. Tuccille calls this “Privatized Authoritarianism”. Search results from Google’s Chinese utility might come back blank, or certain sites might be banned, or at least banned from the first page of results (e.g., Wikipedia, the BBC).

Not only that, the Chinese government is building a system of “social credit scores” for its citizens, essentially a one-number report card like the FICO credit score in the West. This one, however, is driven by more than financial transactions; it’s intended to account for a variety of behaviors including one’s record in criminal and civil matters, anything reflecting one’s “trustworthiness”, general comportment, and alignment with official doctrine. The country is building a gargantuan network of surveillance cameras with visual recognition technology and artificial intelligence that will be used to generate inputs to the social score. And Google’s Chinese search platform?

“… users’ interest in pursuing forbidden paths of inquiry will certainly become part of their permanent record. That’s no joke in a country that’s rapidly modernizing the hoary old mechanisms of the police state with a modern ‘social credit’ system that can effectively place people under house arrest with nary a trench coat in sight.

‘A poor Chinese social credit score can lead to bans from travel, certain schools, luxury hotels, government positions, and even dating apps,’ notes the Brookings Institution. Liu Hu, an investigative journalist, incurred the Chinese government’s wrath for exposing corruption among Communist Party officials. He’s among millions who have been punished with a tanked social credit score that prevents him from easily working or even leaving his hometown.”

Political search activity is one thing. What happens if you search for information on foreign news sources? Certain medications or certain disfavored goods? Movies? Books? Sex? What are the consequences of actually clicking on a particular link in a search result? Could the governments place “honey pots” into search results? Could the system be used by the government to entrap citizens? You bet it could!

The Chinese government is everything a liberal should hate, classical or otherwise. But they do what they do. Google, which takes pride in its “do the right thing” mantra, is most certainly not doing the right thing by contributing to this intrusive effort. And it could happen here in the West. In fact, it is probably already happening here to some degree.

Google was fined $2.7 billion by the European Union in 2017 for biasing its search results in favor of its own services. That ruling was made on traditional antitrust grounds: the bias in search results was judged to have anti-competitive effects on the searched-for service markets. But apart from a direct connection to some other form of commerce, traditional antitrust arguments are difficult to make against a free search engine. The company has a high market share but by no means a monopoly over search results, at least in the U.S.

Still, a partnership between Google and government is potentially troublesome, and more so than run-of-the-mill corporatism, though there is that, too. Many individuals are blasé about managing their privacy on social media, while many others seek a level of anonymity to those outside of their social circle. The latter may be wise, but it won’t do them much good if the government gains access to their on-line behavior. The real issue is ownership of our personal information, and that is an unsettled area of the law. Google acquires that information for free in exchange for providing a free search engine. But can Google or any other company with an online platform legally use your personal data as it likes? No, at least not in principle, but that’s no guarantee that the data won’t be used in ways to which you’d object. If anyone should have rightful monopoly rights over the use of individual data, it’s the individual. But strict data privacy might mean we’ll have to pay to use the search engine.

Government has a monopoly on force, but one can hardly bring antitrust action against government, Google partnership or not. That monopoly on force is why our constitutional rights are so critical. Those rights are primarily unenumerated in the U.S. Constitution, while the powers of the federal government are explicitly limited and enumerated. Individual liberty, including the right to privacy, must be respected and protected by our institutions. That should include data privacy. As the reach of government social programs grows, however, participation requires that personal data is increasingly shared with the government. That’s another good reason to keep government small!

Social Media and the Antitrust Reflex

10 Tuesday Apr 2018

Posted by Nuetzel in Antitrust, Regulation, Social Media

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Anticompetitive Behavior, Antitrust, Brendan KIrby, Cambridge Analytica, Data Privacy, EconTalk, Facebook, Fact-Checking, Geoffrey A. Fowler, Information Fiduciary, John O. McGinnis, Jonathan Zittrain, Judicial Restraint, Mark Zuckerberg, Matt Stoller, MeWe, Navneet Alang, Predatory Pricing, Social Media, Trust- Busting

Facebook is under fire for weak privacy protections, its exploitation of users’ data, and the dangers it is said to pose to Americans’ free speech rights. Last week, Mark Zuckerberg, who controls all of the voting stock in Facebook, attempted to address those issues before a joint hearing of the Senate Judiciary and Commerce Committees. It represented a major event in the history of the social media company, and it happened at a time when discussion of antitrust action against social media conglomerates like Facebook, Google, and Amazon is gaining support in some quarters. I hope this intervention does not come to pass.

The Threat

At the heart of the current uproar are Facebook’s data privacy policy and a significant data breach. The recent scandal involving Cambridge Analytica arose because Facebook, at one time, allowed application developers to access user data, and the practice continued for a few developers. Unfortunately, at least one didn’t keep the data to himself. There have been accusations that the company has violated privacy laws in the European Union (EU) and privacy laws in some states. Facebook has also raised ire among privacy advocates by lobbying against stronger privacy laws in some states, but it is within its legal rights to do so. Violations of privacy laws must be adjudicated, but antitrust laws were not intended to address such a threat. Rather, they were intended to prevent dominant producers from monopolizing or restraining trade in a market and harming consumers in the process.

Matt Stoller, in an interview with Russ Roberts on EconTalk, says antitrust action against social media companies may be necessary because they are so pervasive in our lives, have built such dominant market positions, and have made a practice of buying nascent competitors over the years. Steps must be taken to “oxygenate” the market, according to Stoller, promoting competition and protecting new entrants.

Tim Wu, the attorney who coined the misleading term “network neutrality”, is a critic of Facebook, though Wu is more skeptical of the promise of antitrust or regulatory action:

“In Facebook’s case, we are not speaking of a few missteps here and there, the misbehavior of a few aberrant employees. The problems are central and structural, the predicted consequences of its business model. From the day it first sought revenue, Facebook prioritized growth over any other possible goal, maximizing the harvest of data and human attention. Its promises to investors have demanded an ever-improving ability to spy on and manipulate large populations of people. Facebook, at its core, is a surveillance machine, and to expect that to change is misplaced optimism.”

Google has already been subject to antitrust action in the EU due to the alleged anti-competitive nature of its search algorithm, and Facebook’s data privacy policy is under fire there. But the prospect of traditional antitrust action against a social media company like Facebook seems rather odd, as acknowledged by the author at the first link above, Navneet Alang:

“… Facebook specifically doesn’t appear to be doing anything that actively violates traditional antitrust rules. Instead, it’s relying on network effects, that tendency of digital networks to have their own kind of inertia where the more people get on them the more incentive there is to stay. It’s also hard to suggest that Facebook has a monopoly on advertising dollars when Google is also raking in billions of dollars.“

Competition

The size of Facebook’s user base gives it a massive advantage over most of the other platforms in terms of network effects. I offer myself as an example of the inertia described by Alang: I’ve been on Facebook for a number of years. I use it to keep in touch with friends and as a vehicle for attracting readers to my blog. As I contemplated this post, I experimented by opening a MeWe account, where I joined a few user groups. It has a different “feel” than Facebook and is more oriented toward group chats. I like it and I have probably spent as much time on MeWe in the last week as Facebook. I sent MeWe invitations to about 20 of my friends, nearly all of whom have Facebook accounts, and a few days later I posted a link to MeWe on my Facebook wall. Thus far, however, only three of my friends have joined MeWe. Of course, none of us has deactivated our Facebook account, and I speculate that none of us will any time soon. This behavior is consistent with “platform inertia” described by Alang. Facebook users are largely a captive market.

But Facebook is not a monopoly and it is not a necessity. Neither is Google. Neither is Amazon. All of these firms have direct competitors for both users and advertising dollars. It’s been falsely claimed that Google and Facebook together control 90% of online ad revenue, but the correct figure for 2017 is estimated at less than 57%. That’s down a bit from 2016, and another decline is expected in 2018. There are many social media platforms. Zuckerberg claims that the average American already uses eight different platforms, which may include Facebook, Google+, Instagram, LinkedIn, MeWe, Reddit, Spotify, Tinder, Tumblr, Twitter, and many others (also see here). Some of these serve specialized interests such as professional networking, older adults, hook-ups, and shopping. Significant alternatives for users exist, some offering privacy protections that might have more appeal now than ever.

Antitrust vs. Popular, Low-Priced Service Providers

Facebook’s business model does not fit comfortably into the domain of traditional antitrust policy. The company’s users pay a price, but one that is not easily calculated or even perceived: the value of the personal data they give away on a daily basis. Facebook is monetizing that data by allowing advertisers to target individuals who meet specific criteria. Needless to say, many observers are uncomfortable with the arrangement. The company must maintain a position of trust among its users befitting such a sensitive role. No doubt many have given Facebook access to their data out of ignorance of the full consequences of their sacrifice. Many others have done so voluntarily and with full awareness. Perhaps they view participation in social media to be worth such a price. It is also plausible that users benefit from the kind of targeted advertising that Facebook facilitates.

Does Facebook’s business model allow it to engage in an ongoing practice of predatory pricing? It is far from clear that its pricing qualifies as “anti-competitive behavior”, and courts have been difficult to persuade that low prices run afoul of U.S. antitrust law:

“Predatory pricing occurs when companies price their products or services below cost with the purpose of removing competitors from the market. … the courts use a two part test to determine whether they have occurred: (1) the violating company’s production costs must be higher than the market price of the good or service and (2) there must be a ‘dangerous probability’ that the violating company will recover the loss …”

Applying this test to Facebook is troublesome because as we have seen, users exchange something of value for their use of the platform, which Facebook then exploits to cover costs quite easily. Fee-based competitors who might complain that Facebook’s pricing is “unfair” would be better-advised to preach the benefits of privacy and data control, and some of them do just that as part of their value proposition.

More Antitrust Skepticism

John O. McGinnis praises the judicial restraint that has characterized antitrust law over the past 30 years. This practice recognizes that it is not always a good thing for consumers when the government denies a merger, for example, or busts up a firm deemed by authorities to possess “too much power”. An innovative firm might well bring new value to its products by integrating them with features possessed by another firm’s products. Or a growing firm may be able to create economies of scale and scope that are passed along to consumers. Antitrust action, however, too often presumes that a larger market share, however defined, is unequivocally bad beyond some point. Intervention on those grounds can have a chilling effect on innovation and on the value such firms bring to the market and to society.

There are more fundamental reasons to view antitrust enforcement skeptically. For one thing, a product market can be defined in various ways. The more specific the definition, the greater the appearance of market dominance by larger firms. Or worse, the availability of real alternatives is ignored. For example, would an airline be a monopolist if it were the only carrier serving a particular airport or market? In a narrow sense, yes, but that airline would not hold a monopoly over intercity transportation, for which many alternatives exist. Is an internet service provider (ISP) a monopoly if it is the only ISP offering a 400+ Mbs download speed in a certain vicinity? In a very narrow sense, yes, but there may be other ISPs offering slower speeds that most consumers view as adequate. And in all cases, consumers always have one very basic alternative: not buying. Even so-called natural monopolies, such as certain public utilities, offer services for which there are broad alternatives. In those cases, however, a grant of a monopoly franchise is typically seen as a good solution if exchanged for public oversight and regulation, so antitrust is generally not at issue.

One other basic objection that can be made to antitrust is that it violates private property rights. A business that enjoys market dominance usually gets that way by pleasing customers. It’s rewards for excellent performance are the rightful property of its owners, or should be. Antitrust action then becomes a form of confiscation by punishing such a firm and its owners for success.

Political Bias

Another major complaint against Facebook is political bias. It is accused of selectively censoring users and their content and manipulating user news feeds to favor particular points of view. Promises to employ fact-check mechanisms are of little comfort, since the concern involves matters of opinion. Any person or organization held to be in possession of the unadulterated truth on issues of public debate should be regarded with suspicion.

Last Tuesday at the joint session, Zuckerberg acted as if such a bias was quite natural, given that Facebook’s employee base is concentrated in the San Francisco Bay area. But his nonchalance over the matter partly reflects the fact that Facebook is, after all, a private company. It is free to host whatever views it chooses, and that freedom is for the better. Facebook is not like a public square. Instead, the scope of a user’s speech is largely discretionary: users select their own network of friends; they can choose to limit access to their posts to that group or to a broader group of “friends of friends”; they can limit posts to subgroups of friends; or they can allow the entire population of users to see their posts, if interested. No matter how many users it has, Facebook is still a private community. If its “community standards” or their enforcement are objectionable, then users can and should find alternative outlets. And again, as a private company, Facebook can choose to feature particular news sources and censor others without running afoul of the First Amendment.

Revisiting Facebook’s Business Model

The greatest immediate challenge for Facebook is data privacy. Trust among users has been eroded by the improprieties in Facebook’s exploitation of data. It’s as if everyone in the U.S. has suddenly awoken to the simple facts of its business model and the leveraging of user data it requires. But it is not of great concern to some users, who will be happy to continue to use the platform as they have in the past. Zuckerberg did not indicate a willingness to yield on the question of Facebook’s business model in his congressional testimony, but there is a threat that regulation will require steps to protect data that might be inconsistent with the business model. If users opt-out of data sharing in droves, then Facebook’s ability to collect revenue from advertisers will be diminished.

As Jonathan Zittrain points out, Facebook might find new opportunity as an information fiduciary for users. That would require a choice between paying a monthly fee or allowing Facebook to continue targeted advertising on one’s news feed. Geoffrey A. Fowler writes that the idea of paying for Facebook is not an outrageous proposition:

“Facebook collected $82 in advertising for each member in North America last year. Across the world, it’s about $20 per member. … Netflix costs $11 and Amazon Prime is $13 per month. Facebook would need $7 per month from everyone in North America to maintain its current revenue from targeted advertising.”

Given a choice, not everyone would choose to pay, and I doubt that a fee of $7 per month would cost Facebook much in terms of membership anyway. It could probably charge slightly more for regular memberships and price discriminate to attract students and seniors. Fowler contends that a user-paid Facebook would be a better product. It might sharpen the focus on user-provided and user-linked content, rather than content provided by advertisers. As Tim Wu says, “… payment better aligns the incentives of the platform with those of its users.” Fowler also asserts that regulatory headaches would be less likely for the social network because it would not be reliant on exploiting user data.

A noteworthy aspect of Zuckerberg’s testimony at the congressional hearing was his stated willingness to consider regulatory solutions: the “right regulations“, as he put it. That might cover any number of issues, including privacy and political advertising. But as Brendan Kirby warns, regulating Facebook might not be a great idea. Established incumbents are often capable of bending regulatory bodies to their will, ultimately using them to gain a stronger market position. A partnership between the data-rich Facebook and an agency of the government is not one that I’d particularly like to see. Tim Wu believes that what we really need are competitive alternatives to Facebook: he floats a few ideas about how a Facebook competitor might be structured, most prominently the fee-based alternative.

Let It Evolve

Like many others, I’m possessed by an anxiety about the security of my data on social media, an irritation with the political bias that pervades social media firms, and a suspicion that certain points of view are favored over others on their platforms. But I do not favor government intervention against these firms. Neither antitrust action nor regulation is likely to improve the available platforms or their services, and instead might do quite a bit of damage. “Trust-busting” of social media platforms would present technological challenges, but even worse, it would disrupt millions of complex relationships between firms and users and attempt to replace them with even more numerous and complex relationships, all dictated by central authorities rather than market forces. Significant mergers and acquisitions will continue to be reviewed by the DOJ and the FTC, preferably tempered by judicial restraint. I also oppose the regulatory option. Compliance is costly, of course, but even worse, the social media giants can afford it and will manipulate it. Those costs would inevitably present barriers to market entry by upstart competitors. The best regulation is imposed by customers, who should assert their sovereignty and exercise caution in the relationships they establish with social media platforms … and remember that nothing comes for free.

Does Google Dominance Threaten Choice, Free Speech and Privacy?

29 Tuesday Aug 2017

Posted by Nuetzel in Censorship, Free Speech, monopoly

≈ 1 Comment

Tags

Aaron M. Renn, Alan Reynolds, Alex Tabarrok, Amazon, Anti-Competitive, Antitrust, Bing DuckDuckGo, Censorship, City Journal, Cloudflare, Digital Advertising, Edge Providers, Eric Schmidt, Free Speech, Free State Foundation, Google, ISPs, Julian Assange, Michael Horney, Net Neutrality, Regulatory Capture, rent seeking, Ryan Bourne, Scott Cleland, Scott Shackford, Tyler Cowen, Whole Foods

I’ve long been suspicious of the objectivity of Google search results. If you’re looking for information on a particular issue or candidate for public office, it doesn’t take long to realize that Google searches lean left of center. To some extent, the bias reflects the leftward skew of the news media in general. If you sample material available online from major news organizations on any topic with a political dimension, you’ll get more left than right, and you’ll get very little libertarian. So it’s not just Google. Bing reflects a similar bias. Of course, one learns to craft searches to get the other side of a story, but I use Bing much more than Google, partly because I bridle instinctively at Google’s dominance as a search engine. I’ve also had DuckDuckGo bookmarked for a long time. Lately, my desire to avoid tracking of personal information and searches has made DuckDuckGo more appealing.

Google is not just a large company offering internet services and an operating system: it has the power to control speech and who gets to speak. It is a provider of information services and a collector of information with the power to exert geopolitical influence, and it does. This is brought into sharp relief by Julian Assange in his account of an interview he granted in 2011 to Google’s chairman Eric Schmidt and two of Schmidt’s advisors, and by Assange’s subsequent observations about the global activities of these individuals and Google. Assange gives the strong impression that Google is an arm of the deep state, or perhaps that it engages in a form of unaccountable statecraft, one meant to transcend traditional boundaries of sovereignty. Frankly, I found Assange’s narrative somewhat disturbing.

Monopolization

These concerns are heightened by Google’s market dominance. There is no doubt that Google has the power to control speech, surveil individuals with increasing sophistication, and accumulate troves of personal data. Much the same can be said of Facebook. Certainly users are drawn to the compelling value propositions offered by these firms. The FCC calls them internet “edge providers”, not the traditional meaning of “edge”, as between interconnected internet service providers (ISPs) with different customers. But Google and Facebook are really content providers and, in significant ways, hosting services.

According to Scott Cleland, Google, Facebook, and Amazon collect the bulk of all advertising revenue on the internet. The business is highly concentrated by traditional measures and becoming more concentrated as it grows. In the second quarter of 2017, Google and Facebook controlled 96% of digital advertising growth. They have ownership interests in many of the largest firms that could conceivably offer competition, and they have acquired outright a large number of potential competitors. Cleland asserts that the Department of Justice (DOJ) and the FTC essentially turned a blind eye to the many acquisitions of nascent competitors by these firms.

The competitive environment has also been influenced by other government actions over the past few years. In particular, the FCC’s net neutrality order in 2015 essentially granted subsidies to “edge providers”, preventing broadband ISPs (so-called “common carriers” under the ruling) from charging differential rates for the high volume of traffic they generate. In addition, the agency ruled that ISPs would be subject to additional privacy restrictions:

“Specifically, broadband Internet providers were prohibited from collecting and using information about a consumer’s browsing history, app usage, or geolocation data without permission—all of which edge providers such as Google or Facebook are free to collect under FTC policies.

As Michael Horney noted in an earlier Free State Foundation Perspectives release, these restrictions create barriers for ISPs to compete in digital advertising markets. With access to consumer information, companies can provide more targeted advertising, ads that are more likely to be relevant to the consumer and therefore more valuable to the advertiser. The opt-in requirement means that ISPs will have access to less information about customers than Google, Facebook, and other edge providers that fall under the FTC’s purview—meaning ISPs cannot serve advertisers as effectively as the edge providers with whom they compete.”

Furthermore, there are allegations that Google played a role in convincing Facebook to drop Bing searches on its platform, and that Google in turn quietly deemphasized its social media presence. There is no definitive evidence that Google and Facebook have colluded, but the record is curious.

Regulation and Antitrust

Should firms like Google, Facebook, and other large internet platforms be regulated or subjected to more stringent review of past and proposed acquisitions? These companies already have great influence on the public sector. The regulatory solution is often comfortable for the regulated firm, which submits to complex rules with which compliance is difficult for smaller competitors. Thus, the regulated firm wins a more secure market position and a less risky flow of profit. The firm also gains more public sector influence through its frequent dealings with regulatory authorities.

Ryan Bourne argues that “There Is No Justification for Regulating Online Giants as If They Were Public Utilities“. He notes that these firms are not natural monopolies, despite their market positions and the existence of strong network externalities. It is true that they generally operate in contested markets, despite the dominance of a just few firms. Furthermore, it would be difficult to argue that these companies over-charge for their services in any way suggestive of monopoly behavior. Most of their online services are free or very cheap to users.

But anti-competitive behavior can be subtle. There are numerous ways it can manifest against consumers, developers, advertisers, and even political philosophies and those who espouse them. In fact, the edge providers do manage to extract something of value: data, intelligence and control. As mentioned earlier, their many acquisitions suggest an attempt to snuff out potential competition. More stringent review of proposed combinations and their competitive impact is a course of action that Cleland and others advocate. While I generally support a free market in corporate control, many of Google’s acquisitions were firms enjoying growth rates one could hardly attribute to mismanagement or any failure to maximize value. Those combinations expanded Google’s offerings, certainly, but they also took out potential competition. However, there is no bright line to indicate when combinations of this kind are not in the public interest.

Antitrust action is no stranger to Google: In June, the European Union fined the company $2.7 billion for allegedly steering online shoppers toward its own shopping platform. Google faces continuing scrutiny of its search results by the EU, and the EU has other investigations of anticompetitive behavior underway against both Google and Facebook.

It’s also worth noting that antitrust has significant downsides: it is costly and disruptive, not only for the firms involved, but for their customers and taxpayers. Alan Reynolds has a cautionary take on the prospect of antitrust action against Amazon. Antitrust is a big business in and of itself, offering tremendous rent-seeking benefits to a host of attorneys, economists, accountants and variety of other technical specialists. As Reynolds says:

“Politics aside, the question ‘Is Amazon getting too Big?’ should have nothing to do with antitrust, which is supposedly about preventing monopolies from charging high prices. Surely no sane person would dare accuse Amazon of monopoly or high prices.“

Meanwhile, the proposed Amazon-Whole Foods combination was approved by the FTC and the deal closed Monday.

Speech, Again

Ordinarily, my views on “speech control” would be aligned with those of Scott Shackford, who defends the right of private companies to restrict speech that occurs on their platforms. But Alex Tabbarok offers a thoughtful qualification in asking whether Google and Apple should have banned Gab:

“I have no problem with Twitter or Facebook policing their sites for content they find objectionable, such as pornography or hate speech, even though these are permitted under the First Amendment. A free market in news doesn’t mean that every newspaper must cover every story. A free market in news means free entry. But free entry is exactly what is now at stake. Gab was created, in part, to combat what was seen as Facebook’s bias against conservative news and views. If Gab or services like cannot be accessed via the big platforms that is a significant barrier to entry.

When Facebook and Twitter regulate what can be said on their platforms and Google and Apple regulate who can provide a platform, we have a big problem. It’s as if the NYTimes and the Washington Post were the only major newspapers and the government regulated who could own a printing press.

In a pure libertarian world, I’d be inclined to say that Google and Apple can also police whom they allow on their platforms. But we live in a world in which Google and Apple are bound up with and in some ways beholden to the government. I worry when a lot of news travels through a handful of choke points.“

This point is amplified by Aaron M. Renn in City Journal:

“The mobile-Internet business is built on spectrum licenses granted by the federal government. Given the monopoly power that Apple and Google possess in the mobile sphere as corporate gatekeepers, First Amendment freedoms face serious challenges in the current environment. Perhaps it is time that spectrum licenses to mobile-phone companies be conditioned on their recipients providing freedoms for customers to use the apps of their choice.“

That sort of condition requires ongoing monitoring and enforcement, but the intervention is unlikely to stop there. Once the platforms are treated as common property there will be additional pressure to treat their owners as public stewards, answerable to regulators on a variety of issues in exchange for a de facto grant of monopoly.

Tyler Cowen’s reaction to the issue of private, “voluntary censorship” online is a resounding “meh”. While he makes certain qualifications, he does not believe it’s a significant issue. His perspective is worth considering:

“It remains the case that the most significant voluntary censorship issues occur every day in mainstream non-internet society, including what gets on TV, which books are promoted by major publishers, who can rent out the best physical venues, and what gets taught at Harvard or for that matter in high school.“

Cowen recognizes the potential for censorship to become a serious problem, particularly with respect to so-called “chokepoint” services like Cloudflare:

“They can in essence kick you off the entire internet through a single human decision not to offer the right services. …so far all they have done is kick off one Nazi group. Still, I think we should reexamine the overall architecture of the internet with this kind of censorship power in mind as a potential problem. And note this: the main problem with those choke points probably has more to do with national security and the ease of wrecking social coordination, not censorship. Still, this whole issue should receive much more attention and I certainly would consider serious changes to the status quo.“

There are no easy answers.

Conclusions

The so-called edge providers pose certain threats to individuals, both as internet users and as free citizens: the potential for anti-competitive behavior, eventually manifesting in higher prices and restricted choice; tightening reins on speech and free expression; and compromised privacy. All three have been a reality to one extent or another. As a firm like Google attains the status of an arm of the state, or multiple states, it could provide a mechanism whereby those authorities could manipulate behavior and coerce their citizens, making the internet into a tool of tyranny rather than liberty. “Don’t be evil” is not much of a guarantee.

What can be done? The FCC’s has already voted to reverse its net neutrality order, and that is a big step; dismantling the one-sided rules surrounding the ISPs handling of consumer data would also help, freeing some powerful firms that might be able to compete for “edge” business. I am skeptical that regulation of edge providers is an effective or wise solution, as it would not achieve competitive outcomes and it would rely on the competence and motives of government officials to protect users from the aforementioned threats to their personal sovereignty. Antitrust action may be appropriate when anti-competitive actions can be proven, but it is a rent-seeking enterprise of its own, and it is often a questionable remedy to the ills caused by market concentration. We have a more intractable problem if access cannot be obtained for particular content otherwise protected by the First Amendment. Essentially, Cowen’s suggestion is to rethink the internet, which might be the best advice for now.

Ultimately, active consumer sovereignty is the best solution to the dominance of firms like Google and Facebook. There are other search engines and there are other online communities. Users must take steps to protect their privacy online. If they value their privacy, they should seek out and utilize competitive services that protect it. Finally, perhaps consumers should consider a recalibration of their economic and social practices. They may find surprising benefits from reducing their dependence on internet services, instead availing themselves of the variety of shopping and social experiences that still exist in the physical world around us. That’s the ultimate competition to the content offered by edge providers.

Sacred Cow Chips

Tag Archives: Antitrust

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