Tag Archives: Coyote Blog

Trump’s Payroll Tax Ploy

15 Tuesday Sep 2020

Posted by in Fiscal policy, Taxes

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President Trump’s memorandum to Treasury Secretary Steve Mnuchin on payroll tax deferral is bad economic policy, but it might ultimately prove useful as a political weapon. The memo, released in August, instructed the Treasury to allow employers to suspend withholding of the employee’s share of FICA taxes (6.2%) until the end of the year, but it does not forgive the taxes. Only Congress (with the President’s signature) can eliminate the tax obligation. There are several reasons I don’t like it:

  1. Assuming the tax obligation is forgiven, it would provide some relief to those who are already employed (and earning less than $4,000 every two weeks), but not to the unemployed. Thus, as relief from coronavirus-induced job losses, this doesn’t cut it.
  2. It does not reduce the cost of hiring, as would a permanent reduction in the employer’s share, so it does not improve hiring incentives.
  3. The deferral creates uncertainty: will the tax bill be forgiven? If not, will the employee be on the hook? Or the employer? What if an employee leaves the company having received a deferral?
  4. The measure will not be an effective stimulus to spending. It is not an addition to workers’ permanent income since it is a temporary “holiday”. Income perceived as temporary adds little to consumer spending. And it doesn’t constitute a temporary tax break unless employers participate (see below), and even then only if Trump is re-elected and if Congress agrees to forgive the tax.
  5. Trump suggested that the tax will be forgiven if he is re-elected. It’s a rather unsavory proposition: create an immediate tax benefit paired with a matching future obligation with forgiveness contingent upon re-election!
  6. Long-term funding of Social Security is already problematic. Adding a payroll tax holiday on top of that, assuming the taxes are forgiven, only aggravates the situation. Yes, I can imagine various “long-game” reform proposals that might attempt to leverage such a break, but I consider that highly unlikely.

It’s no surprise that a number of large employers are not participating in the tax deferral. such as CVS, JP Morgan Chase, UPS, Home Depot, and Wells Fargo.

Small employers have an even bigger problem to the extent that they lack sophisticated accounting systems to handle such deferrals. Here’s Warren Meyers’ take on the payroll tax suspension:

“We have 400 employees today, but since we are a summer seasonal business we will have fewer than 100 in January. If there is a catch-up repayment in January (meaning Congress chooses not to forgive the taxes altogether), most of my employees who would need to repay the tax will be gone. Do you think the government is just going to say, ‘oh well, I guess we lost that money’? Hah! You don’t know how the government works with tax liens. My guess is that for every employee no longer on the payroll for whom back employment taxes need to be collected, the government is going to say our company is responsible for those payments instead. We could be out hundreds of thousands of extra dollars. President Biden will just say, ‘well I guess you should not have participated in a Trump program.’

So this is the vise we are in: Either we participate in the program, and risk paying a fortune in extra taxes at some future date, or we don’t participate, and have every employee screaming at us for deducting payroll taxes when President Trump told them they did not have to pay it anymore. And what happens if Congress does come along later and forgive the taxes, what kind of jerk am I for not allowing my employees to benefit from the tax break?

A payroll tax rollback was considered for the Republican stimulus packages that failed in Congress this summer, but that provision was said to be “negotiable”. In any case, nothing passed. Surely Trump’s economic advisors know that the economics of the payroll tax memo are lousy, even if Trump doesn’t get it.

I can’t decide whether the whole thing is Machiavellian or just a goof. Perhaps Trump is so eager to be seen as a tax cutter that he is willing to gloss over the distinction between a tax cut and a deferral. If the taxes owed are not forgiven, it won’t be on his watch. And Trump might believe he can weaponize the payroll tax deferral against obstinate Democrats in Congress as well as Joe Biden. Maybe he can.

TikTok Tax: The Heavy Wants a Cut

05 Wednesday Aug 2020

Posted by in Industrial Policy, Regulation, Trump Administration

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I have a certain ambivalence toward Donald Trump, and I could go on and on about why it’s so “complicated” for me. One thing for which I’ve credited the Trump Administration is its effort to “deconstruct the administrative state”, as Steve Bannon so aptly put it shortly after the 2016 election. Of course, the progress thus far hasn’t always lived up to my hopes, but the effort to deregulate continues. And after all, the regulatory state is deeply entrenched and difficult to uproot.

Then my eyes glazed over as Trump floated an idea so bad, an intervention so awful, that I can hardly gather it in! It has to do with TikTok, the Chinese video sharing service that has gained popularity worldwide. Crazy as this might sound, it’s not so much Trump’s threat to shut down TikTok’s U.S. operations. Like most libertarians, I’d find that appalling in and of itself, except for the legitimate data security issues at stake. The company’s ties to the Chinese Communist Party (CCP) are a national security concern and an ethical blot on the company, given the CCP’s brutal treatment of Muslim Uighurs, its roughshod treatment of Hong Kong, and its threats to Taiwan. In any case, at least Trump said he’s amenable to a sale of the company’s U.S. operations to a domestic firm. Several large tech firms have expressed strong interest, including Microsoft. So, while any government imposed shutdown or forced sale makes me squirm, it’s not my main issue here.

What really stunned me was to hear Trump say the U.S. Treasury must get a cut of the deal! This is “Hall-of-Fame” statism. Where in the hell does the U.S. government get a legitimate financial claim to the value of any private business that changes hands? Well, Trump seems to think the federal government is adding value as the heavy:

“But if you buy [TicTok], the United States, which is making it possible to buy, because without us they can’t do anything, should be compensated.”

Yes, the buyer would be the beneficiary of a shakedown, and the demand is another poke in the eye to the Chinese. Of course, it might well threaten the transaction, and I’m not even sure it’s in Trump’s interest politically. But that’s not even the worst of it: as Warren Meyer explains, it would be hard to think of a better way to weaponize financial regulation than having the Treasury at the bargaining table in private negotiations for corporate control:

“Already there are too many regulatory hurdles to doing about anything, and Trump wants agencies to use regulatory approvals to hold up corporations for payments. And you can be sure this is a precedent the Democrats will be only too happy to latch onto — want a pipeline built, where’s our vig? Who wants [this to be] the first Trump decision AOC comes out in support of? The Republican Party sure has come a long way in my lifetime.”

The Left would certainly love to exercise this kind of coercion as a revenue source, as a cudgel of industrial policy to wield against disfavored firms and industries, and as a way to favor cronies. It’s a ready extension of Barack Obama’s deranged “You-didn’t-build-that” theme.

Is this one of trade advisor Peter Navarro‘s brainstorms? I was relieved to see Trump economic advisor Larry Kudlow cast some doubt on whether the government would follow through on Trump’s idea:

“‘I don’t know if that’s a key stipulation. …. A lot of options here,’ Kudlow told ‘Varney & Co.’ on Tuesday. ‘Not sure it’s a specific concept that will be followed through.’“

I think Trump would really like to kill TikTok. Maybe his grudge is driven in part by the presumptive role that TikTok played in his under-attended Tulsa rally. But there are domestic competitors to TikTok, so consumers will have alternatives. The most popular of those seems to be another Chinese app called Likee. In any case, downloads of other video sharing apps have spiked over the past few weeks. If Trump’s real aim is simply to shut down TikTok in the U.S., I’d almost rather see him do that than start making a practice of horse trading with cronies over shares of corporate booty.

Amazon Fire Fraud

03 Tuesday Sep 2019

Posted by in Forest Fires, Global Greening

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Leftist activists recently pounced on another opportunity to mischaracterize events, this time in the Amazon Basin, where recent fires were held to be unprecedented. The fires were also characterized as evidence of a massive conspiracy between capitalists and the new government of President Jair Bolsonaro to open the rain forest to commercial exploitation. Warren Meyer squares away the facts at this Coyote Blog post, which is where I found the chart above. Forest clearing in Brazil has been much lower over the past 10 years than during period 1988-2008. It stepped-up somewhat during the first half of 2019, but it still ran at a rate well below 2008. A key reason for the increase is fascinating, but I’ll merely tease that for now.

As for the fires, Meyer provides the following quote about this year’s fires from NASA in a statement accompanying a satellite photo:

“As of August 16, 2019, satellite observations indicated that total fire activity in the Amazon basin was slightly below average in comparison to the past 15 years. Though activity has been above average in Amazonas and to a lesser extent in Rondônia, it has been below average in Mato Grosso and Pará, according to the Global Fire Emissions Database.“

So what was the cause of all the alarm? Meyer points to a August 22 story in the Washington Post, though WaPo might not have been the first. The article was either poorly researched and “fact checked” or it was a deliberate attempt to raise alarm. The sloppy story was picked up elsewhere, of course, and distorted memes spread on social media condemning the Brazilian government and capitalism generally.

The burning that is taking place has been started by farmers preparing land for crops, a process that occurs every year. Meyer quotes the New York Times on this point, which noted that very little of the burning was taking place in old-growth forests.

What’s really ironic and crazy about all this is that U.S. environmental policy is responsible for some of the burning that is taking place in the Amazon. Meyer notes that U.S. ethanol mandates have subsidized a years-long trend of increased sugar cane production in the Amazon Basin. Of course, burning is a regular part of the normal sugar cane harvest. Moreover, that production has contributed to land clearance, offsetting some of the forces that have brought the rate of deforestation in Brazil down overall.

The whole episode dovetails with the ongoing narrative that fires are burning out of control across the globe due to climate change. We heard similar propaganda last year after several large fires in California. Michael Shellenberger does his best to set the record straight, demonstrating that the annual land area burned worldwide has declined by 25% since 2003. He contrasts that record with the hopelessly errant reporting by major media organizations.

As P.T. Barnum once said, a sucker’s born every minute. He might as well have been talking about the armies of well-meaning but gullible greenies who fall for every scare story told by the likes of Al Gore and Leonardo DiCaprio. And scare stories are exactly what these tales of a global conflagration amount to. Meanwhile, as Alexander Hammond explains, global reforestation has taken hold. In what is apparently a paradox to some, this is largely the result of economic growth. Hammond discusses the logical connections between economic development and environmental goods, including reforestation and biodiversity. The bottom line is that the best policies for reforestation are not those imposing obstacles to growth, as the environmental Left would have it. Rather, it is policies that promote development and income growth, which are generally more compatible with individual liberty, that will encourage growth in the world’s forests.

Don’t Worry: Your IOUs To Yourself Are In a Trust Fund!

10 Sunday Jun 2018

Posted by in Medicare, Social Security, Socialism

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The Social Security and Medicare trust funds should offer no comfort as the obligations of those programs outrace revenues. Between them, the funds hold about $3.1 trillion of federal government bonds purchased with past surplus “contributions” from FICA and Medicare payroll taxes. In other words, those surplus contributions were used to pay for past government deficits. Here’s what Warren Meyer has to say on the topic:

“Imagine to cover benefits in a particular year the Social Security Administration needs $1 billion above and beyond Social Security taxes. If the trust fund exists, the government takes a billion dollars of government bonds out and sells them to private buyers on the open market. If the trust fund didn’t exist, the government would …. issue a billion dollars in bonds and sell them to private buyers on the open market. In either case, the government’s indebtedness to the outside world goes up by a billion dollars.”

Therefore, the trust funds do not provide any real cushion against future obligations. As Meyer says, you can write IOUs to yourself, put them in a piggy bank and call it a trust fund of your very own, but that won’t increase your wealth.

As it happens, last week the Trustees of the Medicare (MC) Trust Fund released the latest projections showing that it will be exhausted by 2026. Likewise, the Trustees of the Social Security (SS) Trust Fund reported that it will be depleted by 2036. But again, those trusts do not enhance the federal government’s fiscal position, so they really don’t matter. Even with the interest earned on the bonds held in trust, which is itself owed by the federal government, the trusts are merely placeholders for an equivalent dollar value of unfunded federal obligations. And in a very real sense, these funds hold no more than our own future tax liabilities: that debt is our debt.

Federal spending on discretionary and other on-budget entitlements is deeply in deficit on an ongoing basis, expected to be greater than $1 trillion annually by 2020, according to the Congressional Budget Office. Then add the bonds that will be sold to the public from the SS and MC trust funds, and total government borrowing from “the public” will become that much larger. After the trust funds are exhausted, accounting for the impact of the annual SS and MC system deficits will be more transparent.

The previous use of SS and MC contributions to pay for other government outlays strikes many as a violation of trust. Remember, however, that contributions to these systems are taxes, after all. And despite apparent impressions to the contrary, and perhaps for worse, individual vesting was never part of the SS system. But if the government must borrow a dollar (on a unified basis), is it always better to do it later? That was essentially the decision made (repeatedly) when FICA and Medicare taxes were used to purchase government bonds. The answer depends on whether the government has an immediate uses for the surplus that can be expected to earn returns superior to investment opportunities of suitable risk otherwise available to the trust funds. I would argue, however, that most of the “spent” funds from surplus FICA and Medicare taxes were put toward government consumption, and much less to investment in physical or social infrastructure. In fact, the availability of the SS and MC surpluses probably encouraged that consumption. To that extent, it was a certainly a mistake.

If the question is at what point must the government address the shortfall in its ability to pay future obligations to seniors, the answer is not “2026 and 2034”. It is now. The programs are racking-up obligations to future retirees that will be impossible to meet. The long-run (75-year) SS deficit projected by the trustees has a present value of $13.2 trillion, with an annual deficit growing to about 1.5% of GDP. By then, the Medicare deficit is expected to bring the combined shortfall of the two programs up to 2.3% of GDP. The trustees estimate that SS benefits would have to be cut by 25% in order to eliminate that deficit, with additional cuts to Medicare.

Oh, but those estimates treat the trust funds as if they are meaningful assets, and they are not! Of course, there are other solutions to the funding shortfall, but I truly hope that current workers have realistic expectations. They should adjust their saving rates to avoid excessive reliance on government social and medical insurance programs.

The Master Negotiator: I’ll Beat Myself Till You Accept My Terms!

07 Wednesday Mar 2018

Posted by in Free Trade, Tariffs, Trump Administration

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As if you needed more evidence that governments are incompetent, look no further than trade policy: public officials the world over are almost universally ignorant regarding the effects of international trade and trade imbalances. In this sense, the Trump Administration’s new tariffs on imported steel and aluminum are in keeping with the long history of public sector foibles on trade. This phenomenon stems from an unhealthy and obsessive focus on the well-being of producers without regard to the implications of policy for consumers. Warren Meyer of Coyote Blog offers an evaluation of Chinese trade policy, which he mischievously (I believe) claims was written by a Chinese blogger on a “sister blog” called “Panda Blog“. Despite Meyer’s playfulness, the post is instructive:

“Our Chinese government continues to pursue a policy of export promotion, patting itself on the back for its trade surplus in manufactured goods with the United States. The Chinese government does so through a number of avenues, … each and every one of these government interventions subsidizes US citizens and consumers at the expense of Chinese citizens and consumers. A low yuan makes Chinese products cheap for Americans but makes imports relatively dear for Chinese. So-called ‘dumping’ represents an even clearer direct subsidy of American consumers over their Chinese counterparts. And limiting foreign exchange re-investments to low-yield government bonds has acted as a direct subsidy of American taxpayers and the American government, saddling China with extraordinarily low yields on our nearly $1 trillion in foreign exchange. Every single step China takes to promote exports is in effect a subsidy of American consumers by Chinese citizens.“

The very idea of a trade deficit is often used to intimate a threat to a nation’s economic health. Conversely, a trade surplus is used to suggest that a nation is achieving great economic success. Both contentions are nonsense. Here is more from “Panda Blog“:

“We at Panda Blog believe it is insane for our Chinese government to continue to chase the chimera of ever-growing foreign exchange and trade surpluses. These achieved nothing lasting for Japan and they will achieve nothing for China. In fact, the only thing that amazes us more than China’s subsidize-Americans strategy is that the Americans seem to complain about it so much. They complain about their trade deficits, which are nothing more than a reflection of their incredible wealth. … They complain about China buying their government bonds, which does nothing more than reduce the costs of their Congress’s insane deficit spending. They even complain about dumping, which is nothing more than a direct subsidy by China of lower prices for American consumers.

And, incredibly, the Americans complain that it is they that run a security risk with their current trade deficit with China! This claim is so crazy, we at Panda Blog have come to the conclusion that it must be the result of a misdirection campaign by CIA-controlled American media. After all, the fact that China exports more to the US than the US does to China means that by definition, more of China’s economic production is dependent on the well-being of the American economy than vice-versa.“

By the way, those “quotes” from “Panda Blog” appeared on Coyote Blog 12 years ago!

All nations tend to play these trade games to one extent or another. But protectionist actions always harm a nation’s consumers more than they help producers, a proposition that is easy to demonstrate using a simple supply and demand diagram. While the class of consumers is broader than the class of producers, ultimately “producer” and “consumer” are different roles played by the same individuals. So protectionism is always harmful to a nation, on balance. Furthermore, retaliation against another nation for its dim-witted trade barriers also harms the retaliating nation’s consumers more than it helps its producers, and that’s true regardless of whether retaliation begets reciprocal actions.

Of course, producers are generally in a better position than consumers to grease the political skids in their favor. In a separate post, Meyer notes that protectionist trade policies are rooted in cronyism. The costs to society are very real, but they tend to be diffuse and therefore less obvious to most consumers.

“A lot of the media seems to believe the biggest reason they are bad is that they will incite retaliatory tariffs from other countries, which they almost certainly will.  But even if no one retaliated, even if the tariffs were purely unilateral, they would still be bad. In case after case, they are justified as increasing the welfare of a certain number of workers in targeted industries, but they hurt the welfare of perhaps 100x more people who consume or work for companies that consume the targeted products. Prices will rise for everyone and choices will be narrowed.“

A couple of points deserve emphasis in relation to my last post on Trump’s tariff action:

  • In terms of jobs, the tariffs announced by President Trump present a very poor risk-reward tradeoff (WSJ article is gated):

“The policy point is that Mr. Trump’s tariffs are trying to revive a world of steel production that no longer exists. He is taxing steel-consuming industries that employ 6.5 million and have the potential to grow more jobs to help a declining industry that employs only 140,000.“

  • Stephen Mihm discusses ways in which the U.S. steel industry squandered its superiority in the post-World War II era. Much of Mihm’s article is devoted to the industry’s failure to upgrade to new production technologies. Interestingly, however, it fails to mention the damaging role played by unions in the process. “Dumping” had very little to do with it.
  • Finally, Pierre Lemieux takes a closer look at the national security argument for trade barriers. He concludes that it is fallacious. Of course, it is an excuse for cronyism. Protectionism harms the competitiveness of the protected industries, which actually undermines national security. And protectionism is usually unnecessary on close examination. In the case of steel, for example, national defense and homeland security use only about 3% of American steel production. Beyond that simple fact, the argument is dangerously open-ended. Almost anything can be represented as critical to national security: steel, food, clothing, and many other categories. Even human resources.

Today, Trump announced that Canada and Mexico will be exempt from the new tariffs while a renegotiation of the North American Free Trade Agreement (NAFTA) is underway. That’s better, but this carve-out exempts only 25% of U.S. steel imports. Perhaps Australia will be granted an exemption as well, but additional carve-outs will prompt further increases in tariffs on non-exempt imports. Trump also said that U.S. flexibility in applying the new tariffs to allies will depend on their commitments for military spending!

Thus, rather than maintaining the pretense that trade relationships are about economics, the administration has conceded that the tariffs and the exemption process will be transparently political, never a prescription for efficient resource allocation. Moreover, U.S. trading partners are likely to be reluctant to test the politics of modifying their own trade manipulations at home. Indeed, the politics may dictate retaliation, rather than concessions. In any case, the governments of our trading partners are as clueless on trade as Trump, his Commerce Secretary Wilbur Ross, and his economic advisor Peter Navarro, or they would never intervene in private trade decisions to begin with.

Electric Cars: EPA Serves Up Green Kool-Aid To Pair With Subsidies

03 Tuesday Oct 2017

Posted by in Environment, Subsidies, Technology

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Electric cars don’t save much energy over gas-burners if at all, at least for now. Warren Meyer’s recent Coyote Blog post on this topic is aptly titled “Why Is It So Hard To Get Even Smart People To Think Clearly On Electric Vehicle Efficiency“. Meyer begins by quoting the following tweet from Google smarty Eric Schmidt, which typifies the general level of public awareness regarding the supposed energy savings from electric cars produced by Tesla and many others:

“Electric motors are the unsung hero of clean energy – the latest are 97% efficient, vs. 45% for internal combustion.“

Meyer emphasizes these major points:

  1. the efficiency with which source fuels are converted to physical work via electric and gas-burning cars is more comparable than Schmidt’s tweet suggests;
  2. differences in energy density weigh heavily in favor of fuel-burning vehicles.
  3. the so-called miles-per-gallon equivalent (MPGe) calculated by the U.S. Environmental Protection Agency (EPA) is a sham.

First, Schmidt’s tweet is accurate only if the discussion is confined to simple conversion of energy to physical work performed by the respective engines. The tweet ignores energy losses that occur prior to that conversion: electricity must be generated with far less than 100% efficiency, mainly by burning coal and natural gas. In an earlier Forbes article, Meyer compares this situation to a distorted comparison of two refrigerator installers:

“In both cases the customer lives in a fourth floor walkup. The first installer finds the refrigerator has been left on the street. He has to … haul the appliance up four flights of stairs. After that, relatively speaking, the installation is a breeze. The second installer finds his refrigerator has thoughtfully been delivered right to the customer’s door on the fourth floor. He quickly brings the unit inside and completes the installation. So who is a better installer?“

The fact is that both gas-burning and electric vehicles rely heavily on fossil fuels. And, in addition to losses in the generation process, there are other losses of energy attributable to electric cars: transmission of power involves a significant energy loss, as does charging batteries and storage itself. Meyer considers only the extra losses from production and transmission of electricity in the following comparison:

“We take 97% times 90% transmission efficiency times 50% electricity production efficiency equals 43.6%.  This is actually less than his 45% figure.  By his own numbers, the electric motor is worse….“

Meyer qualifies this comparison, as some of his assumptions are of the “best outcome” variety, but contrary to Schmidt’s assertion, gasoline and electric engines are reasonably comparable in terms of energy efficiency.

Some contend, however, that power losses in electricity transmission are much larger than the 10% Meyer assumes (see the comments on his post). Battery charging involves a loss of perhaps 20%. And a replacement for a Tesla battery, post 8-year warranty, is $8,000 – $12,000, an additional storage “cost” that is virtually non-existent for gas-powered vehicles. Beyond a certain point in its life, that cost will have an impact on a Tesla’s resale value. Moreover, some contend that the production of electric vehicles is more energy-intensive, putting them in an energy efficiency hole right from the get-go.

Meyer then takes up the notion of storage density as an explanation for why early experiments with electric cars were essentially abandoned:

“15 gallons of gasoline weighs 90 pounds and takes up 2 cubic feet. This will carry a 40 mpg car 600 miles. The Tesla Model S 85kwh battery pack weighs 1200 pounds and will carry the car 265 miles (from this article the cells themselves occupy about 4 cubic feet if packed perfectly but in this video the whole pack looks much larger). We can see that even with what Musk claims is twice the energy density of other batteries, the Tesla gets  0.22 miles per pound of fuel/battery while the regular car can get 6.7. More than an order of magnitude, that is simply an enormous difference…“

Meyer notes in the Forbes article that the EPA calculates its MPG conversion factor for electric vehicles by dividing BTU’s in a gallon of gas by the BTUs in a kilowatt hour: 33.7 KwH per gallon. Thus, the EPA multiplies an electric car’s miles per KwH by 33.7 to arrive at the so-called MPG equivalent: MPGe. But as we’ve seen above, the conversion factor ignores the generation and transmission of electricity required at the front end, and the associated energy losses that occur before a single KwH is released by a Tesla battery.

Despite what we hear from the EPA, Tesla, and other interests today, electric cars have not really overcome these disadvantages, at least not yet. The EPA’s MPGe estimates are vastly inflated. Perhaps if they were accurate, these vehicles would not have to rely so heavily on taxpayer subsidies to be competitive. By extension, the presumed environmental benefits of electric cars are nonexistent at this stage of development. I’m certain that Eric Schmidt and many other smart people are capable of understanding these nuances, but they might be too busy tripping over their politics to bother.

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.

Parks, Prisons and Profits

30 Friday Sep 2016

Posted by in Government, Profit Motive

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One of my favorite pastimes is tallying the economic and social death wishes espoused by leftists, populists and other statists. A frequent theme of their entreaties is the presumed ugliness of profits sought by private businesses. Their expressed distaste is usually couched in terms suggesting that profits are a certainty, which of course they are not. Profits are always at risk unless protected by government. The critics are sometimes focused on lines of business that involve public assets or a supposed public purpose, such as education. Two other examples of that nature recently came up in my news feed: privately-operated prisons and private management of public parks.

The complaints heard about these kinds of business operations are based on ill-founded notions about the function of profit: that it is appropriate for resources to earn rewards only in some endeavors and not others, regardless of the property invested and the risks assumed by the enterprise. Another fallacy is that somehow, as if by magic, the motives and competence of public employees are beyond question. In fact, the ineffective and sometimes perverse incentives faced by public institutions and employees tend to undermine effective performance. That’s the underlying reason why privatization of services is often in the public interest. The detractors of profit usually rely on anecdotal evidence of poor performance by private managers without any objective basis of comparison.

Warren Meyer at Coyote Blog discusses the common misconception held by many regarding the relative morality of profits and wages. His comments are in the context of the company he owns and manages, which operates public parks under contract with the US Forest Service (USFS) and other public agencies, collecting revenue via entry and camping fees. Meyer (and I) find it astonishing that the aversion to private park operations is so common:

“The most typical statement I hear from USFS employees that summarizes this opposition — and it is quite common to hear it — is that ‘It is wrong to make a profit on public lands.’ …. This general distaste for profit, which is seen as “dirty” in contrast to wages which are relatively ‘clean’ (at least up to some number beyond which they are dirty again), is not limited to the USFS or even to government agencies in general, but permeates much of the public.“

Meyer goes on to describe a conversation he had with a USFS District Ranger. I provide a few excerpts below:

“Me: If you think it’s wrong to make money on public lands, I assume you must volunteer, else you too would be making money on public lands.
Ranger: No, of course I get paid.
Me: Well, I know what I make for profit in your District, and I have a good guess what your salary probably is, and I can assure you that you make at least twice as much as me on these public lands.
Ranger: But that is totally different.
Me: How? … My profit is similar to your wage in that it is the way I get paid for my effort on this land — efforts that are generally entirely in harmony with yours as we are both trying to serve visitors and protect the natural resources here. But unlike your wage, my profit is also a return on the investment I have made. Every truck, uniform, and tool we use comes out of my profit, whereas you get all the tools you need paid for by your employer above and beyond your salary. Further, your salary is virtually guaranteed to you, short of some staggering malfeasance. Even if you do a bad job you likely would just get shunted to a less interesting staff position at the same salary, rather than fired. On the other hand if I do a bad job, or if one of my employees slips up, or even if some absolutely random occurrence entirely outside my control occurs (like, say, a flood that closes our operations) my profit can completely evaporate, or even turn into a loss. So like you, I get paid for my efforts here on public lands, but I have to take risk and make investments that aren’t required of you. So what about that makes my profit less honorable than your wage?
Ranger: Working on public lands should be a public service, not for profit
Me: Well, I think you are starting to make the argument again that you should be volunteering and not taking a salary. But leaving that aside, why is profit inconsistent with service to the public?”

Privatization is not inconsistent with service to the public except under one circumstance highlighted by Meyer in a postscript. The ranger might have asked:

“How do we know your profits are not just the rents from a corrupt, cronyist government contracting process?“

Of course, if that were true, it would not necessarily be worse than a park operated exclusively by a public agency with no incentive to operate efficiently. The key here is to have effective review of the contracting process and good performance incentives in place. Meyer notes that his company serves millions of visitors each year at high service levels for a cost that is low relative to government-operated parks, and the company receives excellent reviews. More power to him! Profits are not synonymous with graft. Unfortunately, the purely emotional “feeling” that profits are immoral or dishonorable is amplified by the public nature of park assets, and that idea won’t ever be purged from the populist mind.

Ann Althouse brought similar thoughts to mind in describing Hillary Clinton’s weakly-reasoned condemnation of privately-operated prisons. Here’s Hillary at the first presidential debate early this week, after expressing approval of the Obama Administration’s decision to phase out most privately-operated federal prisons:

“You shouldn’t have a profit motivation to fill prison cells with young Americans.“

You can almost hear Althouse, a law professor at the University of Wisconsin, laughing at the idea that operators of private correctional facilities have any ability “to fill prison cells”. That’s not how our justice system works, Hillary! Some argue that “occupancy guarantees” in private prison contracts give prosecutors an incentive to seek harsh sentences, but that is a tenuous argument, especially with prisons generally over-crowded as they are. And it isn’t as if private prisons are free of oversight. Althouse contends that Hillary Clinton’s position is a concession to the left made necessary by earlier outrage that the Clinton campaign had accepted contributions from the private prison industry, itself prompted by a Bernie Sanders’ attack on that point.

Reason Magazine commented on Sanders’ condemnation of private prisons last year, which then housed only about 12 percent of the federal prison population. Reason noted that closing private federal prisons would contribute to over-crowding at publicly-operated facilities. Sanders also proposed forcing state and local governments to close private prisons under their jurisdictions within two years. Not only would that action ignore objective measures of performance and cost, it would violate established contracts and constitute an outrageous overreach of federal authority.

The Administration’s decision to phase out private prisons was subjected to an even-handed critique by Sasha Volokh (younger brother of Eugene) in August. Volokh covers the evidence on costs and quality of private versus publicly-operated prisons. He finds that the DOJ memo announcing the decision to phase out private operators exaggerates cost and quality differences that favor government operations, and discounts evidence that favors private prisons. Reminiscent of Warren Meyer’s notes on privately-operated parks, Volokh stresses the importance of creating appropriate incentives for operators. Current quality incentives are weak, and he believes there is vast room for improvement:

“It might seem surprising, but private prisons have almost never been evaluated on their performance and compensated on that basis. …. In light of that, maybe it’s even surprising that private prisons have done as well as they have in the comparative studies. Be that as it may, the advent of performance-based contracting could open up possibilities for substantial quality improvements. This could work in the public sector too (bonus payments for public prison wardens?), but the private sector is probably better situated to take advantage of monetary incentives.“

The Reason Foundation published a report earlier this year entitled “Private Prisons: Quality Corrections at a Lower Cost“. The study reveals the leftist critique of private prisons to be a sham. Here are the two major takeaways:

“Private prisons save money-10 to 15 percent average savings on operations costs, based on fourteen independent cost comparison studies.

Private prisons provide at least the same quality services that government prisons do-based on six independent quality comparison studies, rates of American Correctional Association accreditation, recidivism comparison studies, contract terminations, and prisoner and correctional officer lawsuits.“

People often get their “facts” from questionable sources. As to privately-operated correctional facilities, I’ve heard critics state that people should watch the fictional Netflix serial “Orange Is the New Black” to gain a proper understanding of the horrors of private prisons. And many seem eager to accept that narrative without any knowledge of the facts. That’s probably because they have been taught that profits are “dirty”, that public purposes like the operations of parks and prisons are so pure of public purpose that private operators can have no legitimate role, and that government operation can be counted upon for quality and efficiency. Now doesn’t that sound oxymoronic?

 

The Broken-Climate Canard

19 Thursday May 2016

Posted by in Global Warming

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In the imagination of the climate alarmist, almost everything portends an approaching catastrophe. A hurricane? Tornado? Draught? Warm spell? Cold spell? Blizzard? Bad harvest? To their way of thinking, these are all signs that CO2 is damaging the climate. Obviously, these are weather events that imply nothing in the absence of corroborating evidence, though you wouldn’t know it from listening to the precaution pols. Warren Meyer at Coyote Blog has posted another in his series of essays on this topic, this time called “Are We Already Seeing Climate Change?” He provides links to the earlier installments — all interesting. In this installment, he covers five topics under the heading “Manufacturing A Sense that the Climate Is Broken”, which I think would have made a better title for his post. I’ll try to summarize the five points briefly, but do read the whole thing:

Publication Bias:  This quote speaks for itself: “Every single tail-of-the-distribution weather event from around the world is breathlessly reported, leaving the impression among viewers that more such events are occurring, even when there is in fact no such trend. Further, since weather events can drive media ratings, there is an incentive to make them seem scarier.”

Claiming a Trend From One Data Point: This is the kind of error to which I alluded in the first paragraph. Think of Al Gore’s reaction to Hurricane Katrina. The charts offered by Meyer in this section are very nice. There is no upward trend in any of the following: hurricane energy; severe tornadic activity; the incidence of draughts or draught severity; heat waves; extremely hot days; and there is no abatement in the upward trend in crop yields. In fact, there is no trend in high temperature records in the U.S. The upward trend in average surface temperatures in the U.S. is entirely due to warmer nighttime temperatures.

Measurement Technology Bias: We now have the technology to measure various aspects of the climate from space. We can track polar ice extent with much more precision. Doppler radar technology and weather chasers have helped to identify more small tornados than we’d have known of 50 years ago. But when events seem noteworthy to alarmists, they draw extreme conclusions. To their great chagrin, these phenomena are often products of our enhanced ability to measure things.

What Is Normal?: This is related to measurement bias. Our detailed records on surface temperatures go back about 150 years, which is an extremely short slice of history. Temperature proxies from earlier eras, such as ice cores and fossilized tree rings, tell us that the recent past is not all that unusual. Moreover, we also know that glacier melting and sea level increases have been happening for much longer than the buildup of CO2. Those trends began near the end of the “Little Age Age”, around 1800. And there is evidence that these types of developments have happened before. Alarmists, however, assume that what we’ve witnessed in the recent past is unprecedented.

Collapsing Causality in a Complex System To a Single Variable:  “With all the vast complexity of the climate, are we really to believe that every unusual weather event is caused by a 0.013 percentage point change (270 ppm to 400 ppm) in the concentration of one atmospheric gas?” Not likely! Here Meyer helps put the recent temperature trends in perspective: they are tiny relative to their annual variation, which occurs both across seasons and within days.

The public seems to regard the co-called climate catastrophe with more skepticism today than perhaps ten years ago. Not only do the facts contradict the dire predictions of carbon-forcing climate models and alarmist scare stories, but people also recognize that the costs of attempting to avoid a global warming trend are massive and, well, probably not worth it. Moreover, they rightly suspect unworthy political motives in the alarmist community. If some carbon-induced warming is an eventuality, and that’s an “if”, it might well prove to be beneficial for people and the planet. Relax!

 

Climate Alarmists Warm To Speech Control

02 Monday May 2016

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The reactionaries in the global warming plunderbund are revealing their philosophical bankruptcy, dishonesty, and inner fascism. Science is a continuous process of learning through empirical observation, theory and testing. Refutation is as important to the process as original research and replication. Experimental results can be confirmed, but theory can never be established as absolute fact. The term “settled science” is very nearly an oxymoron, yet we constantly hear that climate science is “settled”. Nothing could be further from the truth.

We are asked by the warmists to accept sweeping conclusions on the basis of an extremely short historical record, one that is clouded by sharp disputes over measurement issues. The long-term record based on temperature proxies shows that recent trends are well within the range of natural variability. We are asked to accept conclusions based largely on models that have proven to be extremely inaccurate and that fail to account for important climate influences such as solar variation and oceanic cycles. And with essentially no historical justification, we are asked to accept assumptions about what global temperatures “should be”, and that we should make drastic sacrifices in a quixotic effort to make temperatures stay put. To do so, we are asked to divert resources on a massive scale to mitigate a risk that is speculative at best. An alternative view is that mankind should make sacrifices in order to adapt to change when it occurs, rather than taking the arrogant view that we can, with sufficient coercion and manipulation of private decisions, dominate natural forces to assure climate stability.

Warren Meyer at Coyote Blog has an excellent series of posts on climate change. The most recent of those posts is on natural attribution of climate change. It includes links to earlier parts of his series. Meyer compares today’s alarmists to a hypothetical observer predicting future temperatures in the year 1600, roughly the minimum of the “mini ice-age”. Of course, that observer would have said it would get colder based on his experience, but that would have been wrong. Today’s alarmists rest their case on a 20-year uptrend between 1978 and 1998, tying it to man-made carbon dioxide emissions. In fact, a longer-term view shows that surface temperatures had increased in similar spurts before carbon emissions were a factor of any kind.

Scoundrels tend to twist facts when the facts don’t support their view. Rick Moran reports on an academic paper concluding that it’s acceptable to lie about the threat posed by climate change. It’s not enough to present research and the full range of uncertainty surrounding forecasts, which is very wide. No, the reporting must be wrapped in a sort of Grimm’s fairy tale in order to teach the public a lesson, unschooled children that they are. Such is the manipulative nature of the warmist community.

And the dishonesty is extensive. Remember the claim that 97% of climate scientists accept the proposition of man-made global warming? It was debunked in short order, but the media seemingly can’t get enough of a disaster scenario, so the claim lives on. Famed climatologist Judith Curry has a number of posts on her blog explaining the misleading details of this bit of disinformation. Among the problems of methodology and reporting of this “survey” result is that it was not based on an actual survey of scientists. Instead, it rated abstracts of publications as to their consistency with particular views of the anthropomorphic global warming (AGW) proposition. Not only does this method double-count the views of individual scientists; the authors were highly selective about which scientists and how many of their publications were counted. Even more interestingly, the criteria were so loose that abstracts written by certain scientists known to be skeptical of AGW were counted within the 97%! In one of Curry’s posts, entitled “The Conceits of Consensus“, she discusses the weaknesses and refutations of the claim of a strong consensus, including the participation of non-scientist evaluators of research abstracts in the sample:

“Bottom line: inflating the numbers of ‘climate scientists’ in such surveys attempts to hide that there is a serious scientific debate about the detection and attribution of recent warming, and that scientists who are skeptical of the IPCC consensus conclusion are disproportionately expert in the area of climate change detection and attribution.“

Other studies have found that a majority of surveyed meteorologists (see here and here), geoscientists and engineers are skeptical of AGW. But again, this information is essentially ignored by the media and self-interested politicos because it does not support the crisis narrative that dictates coercive action by government.

Apparently, propaganda in support of the increasingly dubious warmist position must be reinforced by more drastic measures. Prominent leftists in government are asking whether disputing climate change is punishable under the law. You read that right! Two state attorneys general have threatened to prosecute ExxonMobil for allegedly misleading investors and the public about climate change. Senator Sheldon Whitehouse (D-RI) has proposed using RICO organized crime law to go after certain energy companies for climate change “denial”. Loretta Lynch, the U.S. Attorney General, has asked the FBI to look into it. To hell with freedom of speech. To hell with the spirit of free scientific inquiry. Your authoritarian masters insist that you must fall into line with their climate change agenda or else!

Josh Gelernter opens his recent discussion of this tyrannical gambit this way:

“Four hundred years ago this week, the Inquisition met in Rome to discuss Galileo’s support for the Copernican model of the cosmos, which placed the Sun at the center of the solar system. After five days of deliberation, a commission of inquisitors ruled that heliocentrism was ‘foolish and absurd in philosophy, and formally heretical since it explicitly contradicts in many places the sense of the Holy Scripture.’ Not a good moment for the Church. Two days later, Galileo was summoned to the Vatican and ordered ‘to abstain completely from teaching or defending this doctrine and opinion or from discussing it . . . to abandon it completely . . . and henceforth not to hold, teach, or defend it in any way whatever, either orally or in writing.’“

To underscore the hypocrisy of these threats of prosecution, David French observes that there are many other instances in which the public has been misled while the presumed climate mavens profited from the hysteria. Could these opportunistic ploys also be subject to prosecution?:

  • Al Gore insisted ten years ago that by now we’d suffer a “climate doomsday” if we failed to take the measures he advocated;
  • Perhaps ABC/Walt Disney has profited from its breathless warnings that “in 2015 milk would cost almost $13 a gallon, gas would be more than $9 a gallon, ‘flames [would] cover hundreds of square miles,’ one billion people would be malnourished, and Manhattan would be flooding — all because of climate change.“
  • The Chairman of the United Nations Intergovernmental Panel on Climate Change (IPCC) said, “If there’s no action before 2012, that’s too late….” And as French says: “The IPCC has received tens of millions of dollars while hyping the threat of global warming.“

French’s suggestions are not entirely tongue-in-cheek. These suggestions are no more outlandish than threats to prosecute anyone else over a legitimate dispute in scientific debate.

The AGW community suffers from a weak understanding of the philosophy of science, a dishonest presentation of the facts, and a tyrannical streak that should can only be tamed by stripping them of power. First, however, the voting public must wise up to the danger to our economic well being and our freedom posed by these fascist activists.