Archives For political economy

Yet another sad story was caught on camera this week showing a group of police officers killing an unarmed African-American man named George Floyd. While the officers were fired from the police department, there is still much uncertainty about what will happen next to hold those officers accountable as a legal matter. 

A well-functioning legal system should protect the constitutional rights of American citizens to be free of unreasonable force from police officers, while also allowing police officers the ability to do their jobs safely and well. In theory, civil rights lawsuits are supposed to strike that balance.

In a civil rights lawsuit, the goal is to make the victim (or their families) of a rights violation whole by monetary damages. From a legal perspective, this is necessary to give the victim justice. From an economic perspective this is necessary to deter future bad conduct and properly align ex ante incentives going forward. Under a well-functioning system, juries would, after hearing all the evidence, make a decision about whether constitutional rights were violated and the extent of damages. A functioning system of settlements would result as a common law develops determining what counts as reasonable or unreasonable uses of force. This doesn’t mean plaintiffs always win, either. Officers may be determined to be acting reasonably under the circumstances once all the evidence is presented to a jury.

However, one of the greatest obstacles to holding police officers accountable in misconduct cases is the doctrine of qualified immunity. Qualified immunity started as a mechanism to protect officers from suit when they acted in “good faith.” Over time, though, the doctrine has evolved away from a subjective test based upon the actor’s good faith to an objective test based upon notice in judicial precedent. As a result, courts have widely expanded its scope to the point that qualified immunity is now protecting officers even when their conduct violates the law, as long as the officers weren’t on clear notice from specific judicial precedent that what they did was illegal when they did it. In the words of the Supreme Court, qualified immunity protects “all but the plainly incompetent or those who knowingly violate the law.” 

This standard has predictably led to a situation where officer misconduct which judges and juries would likely find egregious never makes it to court. The Cato Institute’s website Unlawful Shield details many cases where federal courts found an officer’s conduct was illegal yet nonetheless protected by qualified immunity.

Immunity of this nature has profound consequences on the incentive structure facing police officers. Police officers, as well as the departments that employ them, are insufficiently accountable when gross misconduct does not get past a motion to dismiss for qualified immunity. On top of that, the regular practice of governments is to indemnify officers even when there is a settlement or a judgment. The result is to encourage police officers to take insufficient care when making the choice about the level of force to use. 

Economics 101 makes a clear prediction: When unreasonable uses of force are not held accountable, you get more unreasonable uses of force. Unfortunately, the news continues to illustrate the accuracy of this prediction.

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Eric Fruits, (Chief Economist, International Center for Law & Economics).]

In an earlier TOTM post, we argued as the economy emerges from the COVID-19 crisis, perhaps the best policy would allow properly motivated firms and households to themselves balance the benefits, costs, and risks of transitioning to “business as usual.” 

Sometimes, however, well meaning government policies disrupt the balance and realign motivations.

Our post contrasted firms who determined they could remain open by undertaking mitigation efforts with those who determined they could not safely remain open. One of these latter firms was Portland-based ChefStable, which operates more than 20 restaurants and bars. Kurt Huffman, the owner of ChefStable, shut down all the company’s properties one day before the Oregon governor issued her “Stay home, stay safe” order.

An unintended consequence

In a recent Wall Street Journal op-ed, Mr. Huffman reports his business was able to shift to carryout and delivery, which ended up being more successful than anticipated. So successful, in fact, that he needed to bring back some of the laid-off employees. That’s when he ran into one of the stimulus package’s unintended—but not unanticipated—consequences of providing federal-level payments on top of existing state-level guarantees:

We started making the calls last week, just as our furloughed employees began receiving weekly Federal Pandemic Unemployment Compensation checks of $600 under the Cares Act. When we asked our employees to come back, almost all said, “No thanks.” If they return to work, they’ll have to take a pay cut.

***

But as of this week, that same employee receives $1,016 a week, or $376 more than he made as a full time employee. Why on earth would he want to come back to work?

Mr. Huffman’s not alone. NPR reports on a Kentucky coffee shop owner who faces the same difficulty keeping her employees at work:

“The very people we hired have now asked us to be laid off,” Marietta wrote in a blog post. “Not because they did not like their jobs or because they did not want to work, but because it would cost them literally hundreds of dollars per week to be employed.”

With the federal government now offering $600 a week on top of the state’s unemployment benefits, she recognized her former employees could make more money staying home than they did on the job.

Or, a fully intended consequence

The NPR piece indicates the Trump administration opted for the relatively straightforward (if not simplistic) unemployment payments as a way to get the money to unemployed workers as quickly as possible.

On the other hand, maybe the unemployment premium was not an unintended consequence. Perhaps, there was some intention.

If the purpose of the stay-at-home orders is to “flatten the curve” and slow the spread of the coronavirus, then it can be argued the purpose of the stimulus spending is to mitigate some of the economic costs. 

If this is the case, it can also be argued that the unemployment premium paid by the federal government was designed to encourage people to stay at home and delay returning to work. In fact, it may be more effective than a bunch of loophole laden employment regulations that would require an army of enforcers.

Mr. Huffman seems confident his employees will be ready to return to work in August, when the premium runs out. John Cochrane, however, is not so confident, writing on his blog, “Hint to Mr. Huffman: I would not bet too much that this deadline is not extended.”

With the administration’s state-by-state phased re-opening of the economy, the unemployment premium payments could be tweaked so only residents in states in Phase 1 or 2 would be eligible to receive the premium payments.

Of course, this tweak would unleash its own unintended consequences. In particular, it would encourage some states to slow walk the re-opening of their economies as a way to extract more federal money for their residents. My wild guess: The slow walking states will be the same states who have been most affected by the state and local tax deductibility provisions in the Tax Cuts and Jobs Act.

As with all government policies, the unemployment provisions in the COVID-19 stimulus raise the age old question: If a policy generates unintended consequences that are not unanticipated, can those consequences really be unintended?

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Miranda Perry Fleischer, (Professor Law and Co-Director of Tax Programs at the University of San Diego School of Law); and Matt Zwolinski (Professor of Philosophy, University of San Diego; founder and director, USD Center for Ethics, Economics, and Public Policy; founder and contributor, Bleeding Heart Libertarians Blog)

This week, Americans began receiving cold, hard cash from the government. Meant to cushion the economic fallout of Covid-19, the CARES Act provides households with relief payments of up to $1200 per adult and $500 per child. As we have written elsewhere, direct cash transfers are the simplest, least paternalistic, and most efficient way to protect Americans’ economic health – pandemic or not. The idea of simply giving people money has deep historical and wide ideological roots, culminating in Andrew Yang’s popularization of a universal basic income (“UBI”) during his now-suspended presidential campaign. The CARES Act relief provisions embody some of the potential benefits of a UBI, but nevertheless fail in key ways to deliver its true promise.

Provide Cash, No-Strings-Attached

Most promisingly, the relief payments are no-strings-attached. Recipients can use them as they – not the government – think best, be it for rent, food, or a laptop for a child to learn remotely. This freedom is a welcome departure from most current aid programs, which are often in-kind or restricted transfers. Kansas prohibits welfare recipients from using benefits at movie theaters and swimming pools. SNAP recipients cannot purchase “hot food” such as a ready-to-eat roasted chicken; California has a 17-page pamphlet identifying which foods users of Women, Infants and Children (“WIC”) benefits can buy (for example, white eggs but not brown). 

These restrictions arise from a distrust of beneficiaries. Yet numerous studies show that recipients of cash transfers do not waste benefits on alcohol, drugs or gambling. Instead, beneficiaries in developing countries purchase livestock, metal roofs, or healthier food. In wealthier countries, cash transfers are associated with improvements in infant health, better nutrition, higher test scores, more schooling, and lower rates of arrest for young adults – all of which suggest beneficiaries do not waste cash.

Avoid Asset Tests

A second positive of the relief payments is that they eschew asset tests, unlike many welfare programs. For example, a family can lose hundreds of dollars of SNAP benefits if their countable assets exceed $2,250. Such limits act as an implicit wealth tax and discourage lower-income individuals from saving. Indeed, some recipients report engaging in transactions like buying furniture on lay-away (which does not count) to avoid the asset limits. Lower-income individuals, for whom a car repair bill or traffic ticket can lead to financial ruin, should be encouraged to – not penalized for – saving for a rainy day.

Don’t Worry So Much about the Labor Market  

A third pro is that the direct relief payments are not tied to a showing of desert. They do not require one to work, be looking for work, or show that one is either unable to work or engaged in a substitute such as child care or school. Again, this contrasts with most current welfare programs. SNAP requires able-bodied childless adults to work or participate in training or education 80 hours a month. Supplemental Security Income requires non-elderly recipients to prove that they are blind or disabled. Nor do the relief payments require recipients to pass a drug test, or prove they have no criminal record.

As with spending restrictions, these requirements display distrust of beneficiaries. The fear is that “money for nothing” will encourage low-income individuals to leave their jobs en masse. But this fear, too, is largely overblown. Although past experiments with unconditional transfers show that total work hours drop, the bulk of this drop is from teenagers staying in school longer, new mothers delaying entrance into the workforce, and primary earners reducing their hours from say, 60 to 50 hours a week. We could also imagine UBI recipients spending time volunteering, engaging in the arts, or taking care of friends and relatives. None of these are necessarily bad things.

Don’t Limit Aid to the “Deserving”

On these three counts, the CARES Act embraces the promise of a UBI. But the CARES Act departs from key aspects of a well-designed, true UBI. Most importantly, the size of the relief payments – one-time transfers of $1200 per adult – pale in comparison to the Act’s enhanced unemployment benefits of $600/week. This mismatch underscores how deeply ingrained our country’s obsession with helping only the “deserving” poor is and how narrowly “desert” is defined. The Act’s most generous aid is limited to individuals with pre-existing connections to the formal labor market who leave under very specific conditions. Someone who cannot work because they are caring for a family member sick with COVID-19 qualifies, but not an adult child who left a job months ago to care for an aging parent with Alzheimer’s. A parent who cannot work because her child’s school was cancelled due to the pandemic qualifies, but not a parent who hasn’t worked the past couple years due to the lack of affordable child care. And because unemployment benefits not only turn on being previously employed but also rise the higher one’s past wages were, this mismatch magnifies that our safety net helps the slightly poor much more than the very poorest among us. 

Don’t Impose Bureaucratic Hurdles

The botched roll-out of the enhanced unemployment benefits illustrates another downside to targeting aid only to the “deserving”: It is far more complicated than giving aid to all who need it. Guidance for self-employed workers (newly eligible for such benefits) is still forthcoming. Individuals with more than one employer before the crisis struggle to input multiple jobs in the system, even though their benefits increase as their past wages do. Even college graduates have trouble completing the clunky forms; a friend who teaches yoga had to choose between “aqua fitness instructor” and “physical education” when listing her job. 

These frustrations are just another example of the government’s ineptitude at determining who is and is not work capable – even in good times. Often, the very people that can navigate the system to convince the government they are unable to work are actually the most work-capable. Those least capable of work, unable to navigate the system, receive nothing. And as millions of Americans spend countless hours on the phone and navigating crashing websites, they are learning what has been painfully obvious to many lower-income individuals for years – the government often puts insurmountable barriers in the way of even the “deserving poor.” These barriers – numerous office visits, lengthy forms, drug tests – are sometimes so time consuming that beneficiaries must choose between obtaining benefits to which they are legally entitled and applying for jobs or working extra hours. Lesson one from the CARES Act is that universal payments, paid to all, avoid these pitfalls. 

Don’t Means Test Up Front

The CARES Act contains three other flaws that a well-designed UBI would also fix. First, the structure of the cash transfers highlights the drawbacks of upfront means testing. In an attempt to limit aid to Americans in financial distress, the $1200 relief payments begin to phase-out at five cents on the dollar when income exceeds a certain threshold: $75,000 for childless, single individuals and $150,000 for married couples. The catch is that for most Americans, their 2019 or 2018 incomes will determine whether their relief payments phase-out – and therefore how much aid they receive now, in 2020. In a world where 22 million Americans have filed for unemployment in the past month, looking to one or two-year old data to determine need is meaningless. Many Americans whose pre-pandemic incomes exceeded the threshold are now struggling to make mortgage payments and put food on the table, but will receive little or no direct cash aid under the CARES Act until April of 2021.

This absurdity magnifies a problem inherent in ex ante means tests. Often, one’s past financial status does not tell us much about an individual’s current needs. This is particularly true when incomes fluctuate from period to period, as is the case with many lower-income workers. Imagine a fast food worker and SNAP beneficiary whose schedule changes month to month, if not week to week. If she is lucky enough to work a lot in November, she may see her December SNAP benefits reduced. But what if her boss gives her fewer shifts in December? Both her paycheck and her SNAP benefits will be lower in December, leaving her struggling.

The solution is to send cash to all Americans, and recapture the transfer through the income tax system. Mathematically, an ex post tax is exactly the same as an ex ante phase out. Consider the CARES Act. A childless single individual with an income of $85,000 is $10,000 over the threshold, reducing her benefit by $500 and netting her $700. Giving her a check for $1200 and taxing her an additional 5% on income above $75,000 also nets her $700. As a practical matter, however, an ex post tax is more accurate because hindsight is 20-20. Lesson two from the CARES Act is that universal payments offset by taxes are superior to ex ante means-testing.

Provide Regular Payments

Third, the CARES Act provides one lump sum payment, with struggling Americans wondering whether Congress will act again. This is a missed opportunity: Studies show that families receiving SNAP benefits face challenges planning for even a month at a time. Lesson three is that guaranteed monthly or bi-weekly payments – as a true UBI would provide — would help households plan and provide some peace of mind amidst this uncertainty.

Provide Equal Payments to Children and Adults

Finally, the CARES Act provides a smaller benefit to children than adults. This is nonsensical. A single parent with two children faces greater hardship than a married couple with one child, as she has the same number of mouths to feed with fewer earners. Further, social science evidence suggests that augmenting family income has positive long-run consequences for children. Lesson four from the CARES Act – the empirical case for a UBI is strongest for families with children.

It’s Better to Be Overly, not Underly, Generous

The Act’s direct cash payments are a step in the right direction. But they demonstrate that not all cash assistance plans are created equal. Uniform and periodic payments to all – regardless of age and one’s relationship to the workforce – is the best way to protect Americans’ economic health, pandemic or not. This is not the time to be stingy or moralistic in our assistance. Better to err on the side of being overly generous now, especially when we can correct that error later through the tax system. Errors that result in withholding aid from those who need it, alas, might not be so easy to correct.

 

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Thomas W. Hazlett, (Hugh H. Macaulay Endowed Professor of Economics, John E. Walker Department of Economics Clemson University)

The brutal toll of the coronavirus pandemic has delivered dramatic public policies. The United States has closed institutions, banned crowds, postponed non-emergency medical procedures and instituted social distancing. All to “flatten the curve” of illness. The measures are expensive, but there is no obvious way to better save lives.

There is evidence that, even without the antivirals or vaccines we hope come soon, we are limiting the spread of COVID-19. Daily death totals for the world appear to be leveling; the most severely impacted countries, Italy and Spain, are seeing declines; the top U.S. hotspot, New York, appears to be peaking (and net new coronavirus hospital admissions fell substantially yesterday). I hope that, looking back, these inferences look reasonable.

But of course I do. Is that rational introspection, or confirmation bias? To try to know, we should look about to see how others are addressing this challenge, and how well they are doing. There are experiments being run, in real time on actual economies, and diversity of results is one of the few blessings conveyed by our coronavirus demon.

Differing approaches to mitigating externalities around the world

It strikes many as entirely off-topic to discuss the efficiency of our measures, as though only the most expensive, draconian remedies work. There is a tendency to stress how little room for optionality there exists. Exhortation seems to be the strategy. No doubt, we are confronted by a classic “public good” challenge, where individuals may impose costs on others. Not intentionally, but perhaps through actions that are short-sighted. If a neighbor fails to take “due care” they needlessly endanger others. To overcome such free riding, we “rally ‘round the flag” to condemn anti-social behavior. That is a community survival trait.

And entirely compatible with the pursuit of efficient rules. Shuttering the marketplace and freezing personal mobility imposes harsh hardships; they are, unsurprisingly, resisted. It is stunning how rapidly our Conventional Wisdom has changed, but as recently as January 29 N.Y. Times’ tech columnist Farhad Manjoo warned us to slow down, to “Beware the Pandemic Panic.” He echoed the World Health Organization’s view that the threat was meek and that we ought focus on “not the illness itself but the amped-up, ill-considered way our frightened world might respond to it.” (See Jonathan Tobin’s nice overview of the errors made, left and right, in the run-up to the lock-down. It notes Manjoo’s reversal in the Times, Feb. 26.) 

When the disease seemed less, we were reluctant to impose costs; as the threat loomed larger, we rushed to make up for lost time. We now pay the price for acting late, but without perfect foresight – our perennial state – that insight does not much help us today or prep us for tomorrow. Keen observation of more efficient ways, and robust public discussion, will. 

Sweden has adopted the hygiene and separation practices familiar to Americans. But the government has stopped short of mandates imposed elsewhere. While college courses have rolled over to the Internet, Sweden has not closed schools for students 16 and under. Bars and restaurants remain open, with gatherings up to 50 approved (the US President has asked crowds to be kept to 10 or less). Life seems almost normal to many – Americans might pay a ton for that. Still, substantial macroeconomic costs remain.  One estimate predicts a 4% decline in 2020 GDP, beating expectations for Europe but similar to U.S. forecasts (see Goldman Sachs’ March 26 report with 2020 U.S. GDP growth projection of -3.8% and -9% for European markets.) Alas, the Swedish fatality rate, population adjusted, is higher than its Scandinavian peers and (as of April 7) about one-half higher than the U.S. See Table.

 COVID-19 Fatality Rates per Million Population, Selected Countries (4.7.20)

CountryDeaths/mil.Days since 1/mil.Daily GrowthGeo. Avg. Weekly Growth/day 
USA38.6161.181.19
Italy284.3351.041.05
Spain298.2271.051.08
Czech Rep.8.2101.131.16
Sweden57.2191.241.19
Switzerland95.6251.071.10
U.K.92.9201.151.19
France154.2251.161.17
Germany24.2171.111.15
Singapore1.131.01.0
S. Korea3.7291.031.02
Japan<1n/an/an/a

Source: https://91-divoc.com/pages/covid-visualization/

The Czech Republic – with a much lower COVID-19 mortality rate – innovated. The Czechs imposed the standard hygiene and social distancing practices, but added a twist: every person, when in public, is obligated to wear a face mask. It need not be medical grade. This sidestep not only spares supplies for crucial medical professionals, who work in close proximity to patients infected with coronavirus, it has unleashed a popular movement to sew home-made masks. That has jump-started social norms to reduce infections by wearing protective gear. And its simple logic is compelling: you protect me, I protect you.

Of course, the masks do not block one hundred percent of potential transmissions – perhaps no more than two-thirds, under favorable conditions, according to a 2013 study in the journal Disaster Medicine and Public Health Preparedness, Testing Homemade Masks for Efficacy: Would they Protect in an Influenza Pandemic?. The findings, showing results for filtering effectiveness using different materials masks, are given in the Table below. They suggest that (a) no masks are perfectly effective in blocking all tiny particles, including infectious biological matter; (b) surgical masks are relatively effective; (c) homemade masks are less effective, but much better than nothing – and should be used in conjunction with other (distancing, hygiene, etc.) practices. Where surgical masks are too expensive or unavailable, cotton face masks (sewn with multiple layers) or vacuum bags (if you can snag them) are useful substitutes. Their role is to suppress rates of disease progression, bending the curve and managing the pandemic.

The decision to encourage and then require masks (with an order effective midnight March 18) led to an enthusiastic campaign to make stylish, personalized gear – soon posted on Insta. It channeled the desire of citizens to both battle coronavirus and yet to continue living their lives. Mask wearing then further served as a reminder to observe additional rules of separation, while discouraging people from touching their face. A video on the virus went viral. It’s beautifully logical and upbeat, as global emergency crisis responses go. Judge for yourself

No doubt more research should be performed; an entire industry of PhD theses from epidemiology to sociology to public health may homestead this topic in the post-Coronavirus world. But we also must pay attention to our experimental results in real time. The Demonstration Effect is, and should be, powerful. Countries such as Slovakia and Belgium saw the Czech Republic’s approach, relative openness (low-cost mitigation), and superior survival rates, and quickly adopted similar policies. 

The U.S. rationale for discouraging mask use

U.S. policy makers initially shielded themselves from the face mask question by issuing the “institutional no.”[1] The American public was instructed by the Center for Disease Control (CDC) to refrain from wearing masks save in the instance where they were infected. There were three reasons. First, that wearing masks would actually harm healthy people not impacted with COVID-19. Second, the masks were ineffective in shielding small aerosol particles, particularly since non-professionals would not wear them properly. Third, the limited supply of high-quality, medical grade face masks should be reserved for doctors, nurses, and other health care workers who, by the nature of their tasks, could not observe “social distancing” or otherwise avoid infected COVID-19 patients. 

The third rationale had an advantage over the first two as not being false. But by the logic used to prioritize medical professional mask protections, buttressed by a modicum of public education, the rest of us would be likely to benefit, as well. The CDC was arguing magnitude and rankings (OK), and then configuring the effectiveness arguments to justify the rankings (not OK). It was a blunder, squandering precious time and undercutting agency credibility.  Moreover, the administrative edict pretended to be scientific when it was crafting (bad) economics. The Czechs and many Asian countries discovered (as disaster preparedness research had already found) that ad hoc masks work reasonably cheaply, quickly and well, and that the population can be protected to a non-trivial degree by producing their own. No need to steal N-95 respirators from frontline warriors; we’ll just make more (lower quality) protection devices.

Tip your cap to the Czech Republic. The story busted out. On March 30, The Guardian wrote: “Czechs get to work making masks after government decree: Czech Republic and Slovakia are only countries in Europe to make coronavirus mask-wearing mandatory.” By April 2, Dr. Ronald Depinho, a former president of M.D. Anderson, was editorializing: “Every American should wear a face mask to defeat Covid-19.” His empirical take was informed by a graphic (popularly Tweeted) showing fatality rates across countries – in general, the mask wearing societies of Asia (Japan, South Korean, Singapore, Taiwan) were seen to be doing relatively well in limiting the COVID-19 carnage. 

Face Masks As Pandemic Defense (4.2.20) Source: STAT

Human experiments are often considered cruel. But when they are run, let us learn from them.  

 U.S. about-face on mask use

And so the U.S. policy flipped. As per TIME:

On April 3, President Trump announced that the CDC now recommends that the general population wear non-medical masks—meaning fabric that covers one’s nose and mouth, like bandanas or cut T-shirts—when they must leave their homes to go to places like the grocery store. The measure is voluntary. The mayors of Los Angeles and New York City have already made similar recommendations. In other parts of the country, it’s not voluntary: for example, officials in Laredo, Texas have said they can fine people up to $1,000 when residents do not wear a face covering in public.

Kudos to the agency. Mistakes will be made, and it’s a great idea to fix them. But it is also instructive to see where the policy was on March 4, when TIME ran a story on how the CDC was having to combat widespread public demand for masks. There had been a retail run on masks, wiping out inventories at stores, Amazon and everywhere else; many healthy people were ignoring the request not to mask up in public; celebrities like Gwyneth Paltrow and Bella Hadid were posting their pix online. And here’s the chilling part, and it’s sadly symptomatic: the magazine fully took the agency’s side on the science and had no trouble finding additional expert authority to suppress the urge to investigate. Instead, the issue was settled by decree and then embellished as factual necessity:

“It seems kind of intuitively obvious that if you put something—whether it’s a scarf or a mask—in front of your nose and mouth, that will filter out some of these viruses that are floating around out there,” says Dr. William Schaffner, professor of medicine in the division of infectious diseases at Vanderbilt University. The only problem: that’s not likely to be effective against respiratory illnesses like the flu and COVID-19. If it were, “the CDC would have recommended it years ago,” he says. “It doesn’t, because it makes science-based recommendations.”

About that, TIME wrote: “The science, according to the CDC, says that surgical masks won’t stop the wearer from inhaling small airborne particles, which can cause infection. Nor do these masks form a snug seal around the face.” The harm was not simply a run on supplies that would deprive health workers of necessary protective gear.

“Seriously people- STOP BUYING MASKS!” tweeted Dr. Jerome Adams, the U.S. Surgeon General, on Feb. 29. “They are NOT effective in preventing general public… Adams said that wearing a mask can even increase your risk of getting the virus.

This extended into the psychological realm:

Lynn Bufka, a clinical psychologist and senior director for practice, research and policy at the American Psychological Association, suspects that people are clinging to masks for the same reason they knock on wood or avoid walking under ladders. “Even if experts are saying it’s really not going to make a difference, a little [part of] people’s brains is thinking, well, it’s not going to hurt. Maybe it’ll cut my risk just a little bit, so it’s worth it to wear a mask,” she says. In that sense, wearing a mask is a “superstitious behavior”…

Earth to Experts: superstitions run in multiple directions. See: the current view of the CDC as a correction of their previous one. And note the new TIME, quoting quite a different expert view on April 6.

“Now with the realization that there are individuals who are asymptomatic, and those asymptomatic individuals can spread infection, it’s hard to make the recommendation that only ill individuals wear masks in the community setting for protection, because it’s not clear who is ill and who is not,” says Allison Aiello, a professor of epidemiology at the University of North Carolina at Chapel Hill’s Gillings School of Global Public Health, who has researched the efficacy of masks.

Another conventional view that COVID-19 spread needed person-to-person contact, touching or close-in exchange (via coughing, breathing). But now it appears to be the case that the virus hangs around in the air, and that dosing (how much you inhale) matters greatly. A well person who encounters a passing microbe might catch a mild case of COVID-19, whereas sitting next to an infected person for five hours on a bus or airplane will trigger severe infection. In this environment, the logic for masks swells.

Scientific inquiry continues. The World Health Organization posted (March 27) that there was insufficient evidence to say whether COVID-19 travels airborne for any distance. What is the action take-away? Nature (April 2) puts the state of debate like this:

[E]xperts that work on airborne respiratory illnesses and aerosols say that gathering unequivocal evidence for airborne transmission could take years and cost lives. We shouldn’t “let perfect be the enemy of convincing”, says Michael Osterholm, an infectious-disease epidemiologist at the University of Minnesota in Minneapolis. “In the mind of scientists working on this, there’s absolutely no doubt that the virus spreads in the air,” says aerosol scientist Lidia Morawska at the Queensland University of Technology in Brisbane, Australia. “This is a no-brainer.”

Nature notes that those working in the area recommended masks as a policy response. 

Challenge the orthodoxy of the expert class, encourage intellectual diversity

Challenging orthodoxy is key to science; how else are errors uncovered or innovations discovered? On the frontiers there cannot be utter consensus. If there is, the thinkers have yet to probe nearly far enough. Safi Bakhall, in his remarkable Loonshots: Nurturing the Crazy Ideas that Win Wars, Cure Diseases and Transform Industries (2019), quotes Nobel Laureate in Medicine, Sir James Black: “it’s not a good drug unless it’s been killed at least three times” (45).  The history of progress is pocked with failure, dispute, and persistence. Only then does a great breakthrough survive the Three Deaths.

Professor Zeynep Tufekci, of Information Sciences at the University of North Carolina, came to see her research to suggest that lives could be saved by the mass market adoption of simple, non-medical masks in the United States. She broke the ice on the N.Y. Times op-ed page with her March 17 gem: “Why Telling People They Don’t Need Masks Backfired: To help manage the shortage, the authorities sent a message that made them untrustworthy.” 

Dr. Zeynep Tufekci, a professor of information science who specializes in the social effects of technology.

She put pieces of the puzzle together and made rational comparisons:

[P]laces like Hong Kong and Taiwan that jumped to action early with social distancing and universal mask wearing have the pandemic under much greater control, despite having significant travel from mainland China. Hong Kong health officials credit universal mask wearing as part of the solution and recommend universal mask wearing. In fact, Taiwan responded to the coronavirus by immediately ramping up mask production.

I’d wager Zeynep deserves a promotion, if not a Medal of Freedom. Because the fear is that this sort of commentary in the public forum will spark the opposite reaction. She believed, based on her scholarly study, that mass mask adoption might save lives, but cost her own, academically speaking. In a nifty interview with tech explainer Ben Thompson published April 2 on Stratechery,[2] Zeynep confides in how her thinking progressed. 

I watched somewhat flabbergasted over the next few months as the recommendation not to wear masks got harder and harder. Instead of getting softer as the epidemic became a pandemic and saying, well, we should see, we should reevaluate, I started seeing all these messages, like people wouldn’t know how to wear masks and they would infect themselves more and also there is a big shortage of masks, and that all came together in a very frustrating moment for me. The idea that people wouldn’t figure out how to wear a surgical mask or N95s, which are those medical grade masks that we’re now reserving only for hospitals and medical workers, is kind of ridiculous. People don’t wash their hands correctly either, right? So when the pandemic hit, we have songs to get people to wash them for the right amount and we teach them how, people can obviously learn how to wear masks correctly. And as you know, people in Hong Kong can do it, in Taiwan can do it.

But I wanted somebody else from the medical fields to write this. I wanted an epidemiologist, I wanted a virologist to come out and say, look, all these health authorities in Hong Kong and Taiwan, in South Korea, in Japan where it’s kind of customary, there are all these places with lower spread… You don’t even know if you’re sick, so the recommendation of wear this if you’re sick made no sense.

So here’s how I came to write it, even though it wasn’t my place to write this, and I really kind of dragged my foot a little bit, because… I’m not an epidemiologist. I don’t have a degree in virology, I’m not the person: I wrote it because none of the doctors could write it…. I said we have to talk about this, we have to change this conversation… So I wrote the piece pretty much making the case against what was then the CDC and the World Health Organization guidelines, and I braced for the biggest backlash of my life… and I thought, I’m going to get in so much trouble over this, I’m going to be canceled, I’m going to have the huge backlash… I thought this might be the end of my writing career as I knew it… but I just have to say this, I have to say my truth.

I hope Zeynep remains asymptomatic. No – actually, I hope she is a star. If she survives and flourishes, maybe diversity of thought, and alert empirical analysis, comparing realistic options during real-time social stress, can make a splash. If so, I hope it becomes airborne.


[1] The term is attributed to Amazon CEO Jeff Bezos in Brad Stone, “The Everything Store: Jeff Bezos in the Age of Amazon” (2013). It refers to the tendency of any organization, particularly large and complicated ones, to reflexively dismiss new ideas and their sources. It is a twist on the classic NIH (Not Invented Here) problem.

[2] Subscription-required – I recommend it.

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Daniel Takash,(Regulatory policy fellow at the Niskanen Center. He is the manager of Niskanen’s Captured Economy Project, https://capturedeconomy.com, and you can follow him @danieltakash or @capturedecon).]

The pharmaceutical industry should be one of the most well-regarded industries in America. It helps bring drugs to market that improve, and often save, people’s lives. Yet last year a Gallup poll found that of 25 major industries, the pharmaceutical industry was the most unpopular– trailing behind fossil fuels, lawyers, and even the federal government. The opioid crisis dominated the headlines for the past few years, but the high price of drugs is a top-of-mind issue that generates significant animosity toward the pharmaceutical industry. The effects of high drug prices are felt not just at every trip to the pharmacy, but also by those who are priced out of life-saving treatments. Many Americans simply can’t afford what their doctors prescribe. The pharmaceutical industry helps save lives, but it’s also been credibly accused of anticompetitive behavior–not just from generics, but even other brand manufacturers.

These extraordinary times are an opportunity to right the ship. AbbVie, roundly criticized for building a patent thicket around Humira, has donated its patent rights to a promising COVID-19 treatment. This is to be celebrated– yet pharma’s bad reputation is defined by its worst behaviors and the frequent apologetics for overusing the patent system. Hopefully corporate social responsibility will prevail, and such abuses will cease in the future.

The most effective long-term treatment for COVID-19 will be a vaccine. We also need drugs to treat those afflicted with COVID-19 to improve recovery and lower mortality rates for those that get sick before a vaccine is developed and widely available. This requires rapid drug development through effective public-private partnerships to bring these treatments to market.

Without a doubt, these solutions will come from the pharmaceutical industry. Increased funding for the National Institutes for Health, nonprofit research institutions, and private pharmaceutical researchers are likely needed to help accelerate the development of these treatments. But we must be careful to ensure whatever necessary upfront public support is given to these entities results in a fair trade-off for Americans. The U.S. taxpayer is one of the largest investors in early to mid-stage drug research, and we need to make sure that we are a good investor.

Basic research into the costs of drug development, especially when taxpayer subsidies are involved, is a necessary start. This is a feature of the We PAID Act, introduced by Senators Rick Scott (R-FL) and Chris Van Hollen (D-MD), which requires the Department of Health and Human Services to enter into a contract with the National Academy of Medicine to figure the reasonable price of drugs developed with taxpayer support. This reasonable price would include a suitable reward to the private companies that did the important work of finishing drug development and gaining FDA approval. This is important, as setting a price too low would reduce investments in indispensable research and development. But this must be balanced with the risk of using patents to charge prices above and beyond those necessary to finance research, development, and commercialization.

A little sunshine can go a long way. We should trust that pharmaceutical companies will develop a vaccine and treatments or coronavirus, but we must also verify these are affordable and accessible through public scrutiny. Take the drug manufacturer Gilead Science’s about-face on its application for orphan drug status on the possible COVID-19 treatment remdesivir. Remedesivir, developed in part with public funds and already covered by three Gilead patents, technically satisfied the definition of “orphan drug,” as COVID-19 (at the time of the application) afflicted fewer than 200,000 patents. In a pandemic that could infect tens of millions of Americans, this designation is obviously absurd, and public outcry led to Gilead to ask the FDA to rescind the application. Gilead claimed it sought the designation to speed up FDA review, and that might be true. Regardless, public attention meant that the FDA will give Gilead’s drug Remdesivir expedited review without Gilead needing a designation that looks unfair to the American people.

The success of this isolated effort is absolutely worth celebrating. But we need more research to better comprehend the pharmaceutical industry’s needs, and this is just what the study provisions of We PAID would provide.

There is indeed some existing research on this front. For example,the Pharmaceutical Researchers and Manufacturers of America (PhRMA) estimates it costs an average of $2.6 billion to bring a new drug to market, and research from the Journal of the American Medical Association finds this average to be closer to $1.3 billion, with the median cost of development to be $985 million.

But a thorough analysis provided under We PAID is the best way for us to fully understand just how much support the pharmaceutical industry needs, and just how successful it has been thus far. The NIH, one of the major sources of publicly funded research, invests about $41.7 billion annually in medical research. We need to better understand how these efforts link up, and how the torch is passed from public to private efforts.

Patents are essential to the functioning of the pharmaceutical industry by incentivizing drug development through temporary periods of exclusivity. But it is equally essential, in light of the considerable investment already made by taxpayers in drug research and development, to make sure we understand the effects of these incentives and calibrate them to balance the interests of patients and pharmaceutical companies. Most drugs require research funding from both public and private sources as well as patent protection. And the U.S. is one of the biggest investors of drug research worldwide (even compared to drug companies), yet Americans pay the highest prices in the world. Are these prices justified, and can we improve patent policy to bring these costs down without harming innovation?

Beyond a thorough analysis of drug pricing, what makes We PAID one of the most promising solutions to the problem of excessively high drug prices are the accountability mechanisms included. The bill, if made law, would establish a Drug Access and Affordability Committee. The Committee would use the methodology from the joint HHS and NAM study to determine a reasonable price for affected drugs (around 20 percent of drugs currently on the market, if the bill were law today). Any companies that price drugs granted exclusivity by a patent above the reasonable price would lose their exclusivity.

This may seem like a price control at first blush, but it isn’t–for two reasons. First, this only applies to drugs developed with taxpayer dollars, which any COVID-19 treatments or cures almost certainly would be considering the $785 million spent by the NIH since 2002 researching coronaviruses. It’s an accountability mechanism that would ensure the government is getting its money’s worth. This tool is akin to ensuring that a government contractor is not charging more than would be reasonable, lest it loses its contract.

Second, it is even less stringent than pulling a contract with a private firm overcharging the government for the services provided. Why? Losing a patent does not mean losing the ability to make a drug, or any other patented invention for that matter.This basic fact is often lost in the patent debate, but it cannot be stressed enough.

If patents functioned as licenses, then every patent expiration would mean another product going off the market. In reality, that means that any other firm can compete and use the patented design. Even if a firm violated the price regulations included in the bill and lost its patent, it could continue manufacturing the drug. And so could any other firm, bringing down prices for all consumers by opening up market competition.

The We PAID Act could be a dramatic change for the drug industry, and because of that many in Congress may want to first debate the particulars of the bill. This is fine, assuming  this promising legislation isn’t watered down beyond recognition. But any objections to the Drug Affordability and Access Committee and reasonable pricing regulations aren’t an excuse to not, at a bare minimum, pass the study included in the bill as part of future coronavirus packages, if not sooner. It is an inexpensive way to get good information in a single, reputable source that would allow us to shape good policy.

Good information is needed for good policy. When the government lays the groundwork for future innovations by financing research and development, it can be compared to a venture capitalist providing the financing necessary for an innovative product or service. But just like in the private sector, the government should know what it’s getting for its (read: taxpayers’) money and make recipients of such funding accountable to investors.

The COVID-19 outbreak will be the most pressing issue for the foreseeable future, but determining how pharmaceuticals developed with public research are priced is necessary in good times and bad. The final prices for these important drugs might be fair, but the public will never know without a trusted source examining this information. Trust, but verify. The pharmaceutical industry’s efforts in fighting the COVID-19 pandemic might be the first step to improving Americans’ relationship with the industry. But we need good information to make that happen. Americans need to know when they are being treated fairly, and that policymakers are able to protect them when they are treated unfairly. The government needs to become a better-informed investor, and that won’t happen without something like the We PAID Act.

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Ben Sperry, (Associate Director, Legal Research, International Center for Law & Economics).]

The visceral reaction to the New York Times’ recent story on Matt Colvin, the man who had 17,700 bottles of hand sanitizer with nowhere to sell them, shows there is a fundamental misunderstanding of the importance of prices and the informational function they serve in the economy. Calls to enforce laws against “price gouging” may actually prove more harmful to consumers and society than allowing prices to rise (or fall, of course) in response to market conditions. 

Nobel-prize winning economist Friedrich Hayek explained how price signals serve as information that allows for coordination in a market society:

We must look at the price system as such a mechanism for communicating information if we want to understand its real function… The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on and passed on only to those concerned. It is more than a metaphor to describe the price system as a kind of machinery for registering change, or a system of telecommunications which enables individual producers to watch merely the movement of a few pointers, as an engineer might watch the hands of a few dials, in order to adjust their activities to changes of which they may never know more than is reflected in the price movement.

Economic actors don’t need a PhD in economics or even to pay attention to the news about the coronavirus to change their behavior. Higher prices for goods or services alone give important information to individuals — whether consumers, producers, distributors, or entrepreneurs — to conserve scarce resources, produce more, and look for (or invest in creating!) alternatives.

Prices are fundamental to rationing scarce resources, especially during an emergency. Allowing prices to rapidly rise has three salutary effects (as explained by Professor Michael Munger in his terrific twitter thread):

  1. Consumers ration how much they really need;
  2. Producers respond to the rising prices by ramping up supply and distributors make more available; and
  3. Entrepreneurs find new substitutes in order to innovate around bottlenecks in the supply chain. 

Despite the distaste with which the public often treats “price gouging,” officials should take care to ensure that they don’t prevent these three necessary responses from occurring. 

Rationing by consumers

During a crisis, if prices for goods that are in high demand but short supply are forced to stay at pre-crisis levels, the informational signal of a shortage isn’t given — at least by the market directly. This encourages consumers to buy more than is rationally justified under the circumstances. This stockpiling leads to shortages. 

Companies respond by rationing in various ways, like instituting shorter hours or placing limits on how much of certain high-demand goods can be bought by any one consumer. Lines (and unavailability), instead of price, become the primary cost borne by consumers trying to obtain the scarce but underpriced goods. 

If, instead, prices rise in light of the short supply and high demand, price-elastic consumers will buy less, freeing up supply for others. And, critically, price-inelastic consumers (i.e. those who most need the good) will be provided a better shot at purchase.

According to the New York Times story on Mr. Colvin, he focused on buying out the hand sanitizer in rural areas of Tennessee and Kentucky, since the major metro areas were already cleaned out. His goal was to then sell these hand sanitizers (and other high-demand goods) online at market prices. He was essentially acting as a speculator and bringing information to the market (much like an insider trader). If successful, he would be coordinating supply and demand between geographical areas by successfully arbitraging. This often occurs when emergencies are localized, like post-Katrina New Orleans or post-Irma Florida. In those cases, higher prices induced suppliers to shift goods and services from around the country to the affected areas. Similarly, here Mr. Colvin was arguably providing a beneficial service, by shifting the supply of high-demand goods from low-demand rural areas to consumers facing localized shortages. 

For those who object to Mr. Colvin’s bulk purchasing-for-resale scheme, the answer is similar to those who object to ticket resellers: the retailer should raise the price. If the Walmarts, Targets, and Dollar Trees raised prices or rationed supply like the supermarket in Denmark, Mr. Colvin would not have been able to afford nearly as much hand sanitizer. (Of course, it’s also possible — had those outlets raised prices — that Mr. Colvin would not have been able to profitably re-route the excess local supply to those in other parts of the country most in need.)

The role of “price gouging” laws and social norms

A common retort, of course, is that Colvin was able to profit from the pandemic precisely because he was able to purchase a large amount of stock at normal retail prices, even after the pandemic began. Thus, he was not a producer who happened to have a restricted amount of supply in the face of new demand, but a mere reseller who exacerbated the supply shortage problems.

But such an observation truncates the analysis and misses the crucial role that social norms against “price gouging” and state “price gouging” laws play in facilitating shortages during a crisis.

Under these laws, typically retailers may raise prices by at most 10% during a declared state of emergency. But even without such laws, brick-and-mortar businesses are tied to a location in which they are repeat players, and they may not want to take a reputational hit by raising prices during an emergency and violating the “price gouging” norm. By contrast, individual sellers, especially pseudonymous third-party sellers using online platforms, do not rely on repeat interactions to the same degree, and may be harder to track down for prosecution. 

Thus, the social norms and laws exacerbate the conditions that create the need for emergency pricing, and lead to outsized arbitrage opportunities for those willing to violate norms and the law. But, critically, this violation is only a symptom of the larger problem that social norms and laws stand in the way, in the first instance, of retailers using emergency pricing to ration scarce supplies.

Normally, third-party sales sites have much more dynamic pricing than brick and mortar outlets, which just tend to run out of underpriced goods for a period of time rather than raise prices. This explains why Mr. Colvin was able to sell hand sanitizer for prices much higher than retail on Amazon before the site suspended his ability to do so. On the other hand, in response to public criticism, Amazon, Walmart, eBay, and other platforms continue to crack down on third party “price-gouging” on their sites

But even PR-centric anti-gouging campaigns are not ultimately immune to the laws of supply and demand. Even Amazon.com, as a first party seller, ends up needing to raise prices, ostensibly as the pricing feedback mechanisms respond to cost increases up and down the supply chain. 

But without a willingness to allow retailers and producers to use the informational signal of higher prices, there will continue to be more extreme shortages as consumers rush to stockpile underpriced resources.

The desire to help the poor who cannot afford higher priced essentials is what drives the policy responses, but in reality no one benefits from shortages. Those who stockpile the in-demand goods are unlikely to be poor because doing so entails a significant upfront cost. And if they are poor, then the potential for resale at a higher price would be a benefit.

Increased production and distribution

During a crisis, it is imperative that spiking demand is met by increased production. Prices are feedback mechanisms that provide realistic estimates of demand to producers. Even if good-hearted producers forswearing the profit motive want to increase production as an act of charity, they still need to understand consumer demand in order to produce the correct amount. 

Of course, prices are not the only source of information. Producers reading the news that there is a shortage undoubtedly can ramp up their production. But even still, in order to optimize production (i.e., not just blindly increase output and hope they get it right), they need a feedback mechanism. Prices are the most efficient mechanism available for quickly translating the amount of social need (demand) for a given product to guarantee that producers do not undersupply the product  (leaving more people without than need the good), or oversupply the product (consuming more resources than necessary in a time of crisis). Prices, when allowed to adjust to actual demand, thus allow society to avoid exacerbating shortages and misallocating resources.

The opportunity to earn more profit incentivizes distributors all along the supply chain. Amazon is hiring 100,000 workers to help ship all the products which are being ordered right now. Grocers and retailers are doing their best to line the shelves with more in-demand food and supplies

Distributors rely on more than just price signals alone, obviously, such as information about how quickly goods are selling out. But even as retail prices stay low for consumers for many goods, distributors often are paying more to producers in order to keep the shelves full, as in the case of eggs. These are the relevant price signals for producers to increase production to meet demand.

For instance, hand sanitizer companies like GOJO and EO Products are ramping up production in response to known demand (so much that the price of isopropyl alcohol is jumping sharply). Farmers are trying to produce as much as is necessary to meet the increased orders (and prices) they are receiving. Even previously low-demand goods like beans are facing a boom time. These instances are likely caused by a mix of anticipatory response based on general news, as well as the slightly laggier price signals flowing through the supply chain. But, even with an “early warning” from the media, the manufacturers still need to ultimately shape their behavior with more precise information. This comes in the form of orders from retailers at increased frequencies and prices, which are both rising because of insufficient supply. In search of the most important price signal, profits, manufacturers and farmers are increasing production.

These responses to higher prices have the salutary effect of making available more of the products consumers need the most during a crisis. 

Entrepreneurs innovate around bottlenecks 

But the most interesting thing that occurs when prices rise is that entrepreneurs create new substitutes for in-demand products. For instance, distillers have started creating their own hand sanitizers

Unfortunately, however, government regulations on sales of distilled products and concerns about licensing have led distillers to give away those products rather than charge for them. Thus, beneficial as this may be, without the ability to efficiently price such products, not nearly as much will be produced as would otherwise be. The non-emergency price of zero effectively guarantees continued shortages because the demand for these free alternatives will far outstrip supply.

Another example is car companies in the US are now producing ventilators. The FDA waived regulations on the production of new ventilators after General Motors, Ford, and Tesla announced they would be willing to use idle production capacity for the production of ventilators.

As consumers demand more toilet paper, bottled water, and staple foods than can be produced quickly, entrepreneurs respond by refocusing current capabilities on these goods. Examples abound:

Without price signals, entrepreneurs would have far less incentive to shift production and distribution to the highest valued use. 

Conclusion

While stories like that of Mr. Colvin buying all of the hand sanitizer in Tennessee understandably bother people, government efforts to prevent prices from adjusting only impede the information sharing processes inherent in markets. 

If the concern is to help the poor, it would be better to pursue less distortionary public policy than arbitrarily capping prices. The US government, for instance, is currently considering a progressively tiered one-time payment to lower income individuals. 

Moves to create new and enforce existing “price-gouging” laws are likely to become more prevalent the longer shortages persist. Platforms will likely continue to receive pressure to remove “price-gougers,” as well. These policies should be resisted. Not only will these moves not prevent shortages, they will exacerbate them and push the sale of high-demand goods into grey markets where prices will likely be even higher. 

Prices are an important source of information not only for consumers, but for producers, distributors, and entrepreneurs. Short circuiting this signal will only be to the detriment of society.  

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Corbin Barthold, (Senior Litigation Counsel, Washington Legal Foundation).]

The pandemic is serious. COVID-19 will overwhelm our hospitals. It might break our entire healthcare system. To keep the number of deaths in the low hundreds of thousands, a study from Imperial College London finds, we will have to shutter much of our economy for months. Small wonder the markets have lost a third of their value in a relentless three-week plunge. Grievous and cruel will be the struggle to come.

“All men of sense will agree,” Hamilton wrote in Federalist No. 70, “in the necessity of an energetic Executive.” In an emergency, certainly, that is largely true. In the midst of this crisis even a staunch libertarian can applaud the government’s efforts to maintain liquidity, and can understand its urge to start dispersing helicopter money. By at least acting like it knows what it’s doing, the state can lessen many citizens’ sense of panic. Some of the emergency measures might even work.

Of course, many of them won’t. Even a trillion-dollar stimulus package might be too small, and too slowly dispersed, to do much good. What’s worse, that pernicious line, “Don’t let a crisis go to waste,” is in the air. Much as price gougers are trying to arbitrage Purell, political gougers, such as Senator Elizabeth Warren, are trying to cram woke diktats into disaster-relief bills. Even now, especially now, it is well to remember that government is not very good at what it does.

But dreams of dirigisme die hard, especially at the New York Times. “During the Great Depression,” Farhad Manjoo writes, “Franklin D. Roosevelt assembled a mighty apparatus to rebuild a broken economy.” Government was great at what it does, in Manjoo’s view, until neoliberalism arrived in the 1980s and ruined everything. “The incompetence we see now is by design. Over the last 40 years, America has been deliberately stripped of governmental expertise.” Manjoo implores us to restore the expansive state of yesteryear—“the sort of government that promised unprecedented achievement, and delivered.”

This is nonsense. Our government is not incompetent because Grover Norquist tried (and mostly failed) to strangle it. Our government is incompetent because, generally speaking, government is incompetent. The keystone of the New Deal, the National Industrial Recovery Act of 1933, was an incoherent mess. Its stated goals were at once to “reduce and relieve unemployment,” “improve standards of labor,” “avoid undue restriction of production,” “induce and maintain united action of labor and management,” “organiz[e] . . . co-operative action among trade groups,” and “otherwise rehabilitate industry.” The law empowered trade groups to create their own “codes of unfair competition,” a privilege they quite predictably used to form anticompetitive cartels.

At no point in American history has the state, with all its “governmental expertise,” been adept at spending money, stimulus or otherwise. A law supplying funds for the Transcontinental Railroad offered to pay builders more for track laid in the mountains, but failed to specify where those mountains begin. Leland Stanford commissioned a study finding that, lo and behold, the Sierra Nevada begins deep in the Sacramento Valley. When “the federal Interior Department initially challenged [his] innovative geology,” reports the historian H.W. Brands, Stanford sent an agent directly to President Lincoln, a politician who “didn’t know much geology” but “preferred to keep his allies happy.” “My pertinacity and Abraham’s faith moved mountains,” the triumphant lobbyist quipped after the meeting.

The supposed golden age of expert government, the time between the rise of FDR and the fall of LBJ, was no better. At the height of the Apollo program, it occurred to a physics professor at Princeton that if there were a small glass reflector on the Moon, scientists could use lasers to calculate the distance between it and Earth with great accuracy. The professor built the reflector for $5,000 and approached the government. NASA loved the idea, but insisted on building the reflector itself. This it proceeded to do, through its standard contracting process, for $3 million.

When the pandemic at last subsides, the government will still be incapable of setting prices, predicting industry trends, or adjusting to changed circumstances. What F.A. Hayek called the knowledge problem—the fact that useful information is dispersed throughout society—will be as entrenched and insurmountable as ever. Innovation will still have to come, if it is to come at all, overwhelmingly from extensive, vigorous, undirected trial and error in the private sector.

When New York Times columnists are not pining for the great government of the past, they are surmising that widespread trauma will bring about the great government of the future. “The outbreak,” Jamelle Bouie proposes in an article entitled “The Era of Small Government is Over,” has “made our mutual interdependence clear. This, in turn, has made it a powerful, real-life argument for the broadest forms of social insurance.” The pandemic is “an opportunity,” Bouie declares, to “embrace direct state action as a powerful tool.”

It’s a bit rich for someone to write about the coming sense of “mutual interdependence” in the pages of a publication so devoted to sowing grievance and discord. The New York Times is a totem of our divisions. When one of its progressive columnists uses the word “unity,” what he means is “submission to my goals.”

In any event, disunity in America is not a new, or even necessarily a bad, thing. We are a fractious, almost ungovernable people. The colonists rebelled against the British government because they didn’t want to pay it back for defending them from the French during the Seven Years’ War. When Hamilton, champion of the “energetic Executive,” pushed through a duty on liquor, the frontier settlers of western Pennsylvania tarred and feathered the tax collectors. In the Astor Place Riot of 1849, dozens of New Yorkers died in a brawl over which of two men was the better Shakespearean actor. Americans are not housetrained.

True enough, if the virus takes us to the kind of depths not seen in these parts since the Great Depression, all bets are off. Short of that, however, no one should lightly assume that Americans will long tolerate a statist revolution imposed on their fears. And thank goodness for that. Our unruliness, our unwillingness to do what we’re told, is part of what makes our society so dynamic and prosperous.

COVID-19 will shake the world. When it has gone, a new scene will open. We can say very little now about what is going to change. But we can hope that Americans will remain a creative, opinionated, fiercely independent lot. And we can be confident that, come what may, planned administration will remain a source of problems, while unplanned free enterprise will remain the surest source of solutions.


Today the European Commission launched its latest salvo against Google, issuing a decision in its three-year antitrust investigation into the company’s agreements for distribution of the Android mobile operating system. The massive fine levied by the Commission will dominate the headlines, but the underlying legal theory and proposed remedies are just as notable — and just as problematic.

The nirvana fallacy

It is sometimes said that the most important question in all of economics is “compared to what?” UCLA economist Harold Demsetz — one of the most important regulatory economists of the past century — coined the term “nirvana fallacy” to critique would-be regulators’ tendency to compare messy, real-world economic circumstances to idealized alternatives, and to justify policies on the basis of the discrepancy between them. Wishful thinking, in other words.

The Commission’s Android decision falls prey to the nirvana fallacy. It conjures a world in which Google offers its Android operating system on unrealistic terms, prohibits it from doing otherwise, and neglects the actual consequences of such a demand.

The idea at the core of the Commission’s decision is that by making its own services (especially Google Search and Google Play Store) easier to access than competing services on Android devices, Google has effectively foreclosed rivals from effective competition. In order to correct that claimed defect, the Commission demands that Google refrain from engaging in practices that favor its own products in its Android licensing agreements:

At a minimum, Google has to stop and to not re-engage in any of the three types of practices. The decision also requires Google to refrain from any measure that has the same or an equivalent object or effect as these practices.

The basic theory is straightforward enough, but its application here reflects a troubling departure from the underlying economics and a romanticized embrace of industrial policy that is unsupported by the realities of the market.

In a recent interview, European Commission competition chief, Margrethe Vestager, offered a revealing insight into her thinking about her oversight of digital platforms, and perhaps the economy in general: “My concern is more about whether we get the right choices,” she said. Asked about Facebook, for example, she specified exactly what she thinks the “right” choice looks like: “I would like to have a Facebook in which I pay a fee each month, but I would have no tracking and advertising and the full benefits of privacy.”

Some consumers may well be sympathetic with her preference (and even share her specific vision of what Facebook should offer them). But what if competition doesn’t result in our — or, more to the point, Margrethe Vestager’s — prefered outcomes? Should competition policy nevertheless enact the idiosyncratic consumer preferences of a particular regulator? What if offering consumers the “right” choices comes at the expense of other things they value, like innovation, product quality, or price? And, if so, can antitrust enforcers actually engineer a better world built around these preferences?

Android’s alleged foreclosure… that doesn’t really foreclose anything

The Commission’s primary concern is with the terms of Google’s deal: In exchange for royalty-free access to Android and a set of core, Android-specific applications and services (like Google Search and Google Maps) Google imposes a few contractual conditions.

Google allows manufacturers to use the Android platform — in which the company has invested (and continues to invest) billions of dollars — for free. It does not require device makers to include any of its core, Google-branded features. But if a manufacturer does decide to use any of them, it must include all of them, and make Google Search the device default. In another (much smaller) set of agreements, Google also offers device makers a small share of its revenue from Search if they agree to pre-install only Google Search on their devices (although users remain free to download and install any competing services they wish).

Essentially, that’s it. Google doesn’t allow device makers to pick and choose between parts of the ecosystem of Google products, free-riding on Google’s brand and investments. But manufacturers are free to use the Android platform and to develop their own competing brand built upon Google’s technology.

Other apps may be installed in addition to Google’s core apps. Google Search need not be the exclusive search service, but it must be offered out of the box as the default. Google Play and Chrome must be made available to users, but other app stores and browsers may be pre-installed and even offered as the default. And device makers who choose to do so may share in Search revenue by pre-installing Google Search exclusively — but users can and do install a different search service.

Alternatives to all of Google’s services (including Search) abound on the Android platform. It’s trivial both to install them and to set them as the default. Meanwhile, device makers regularly choose to offer these apps alongside Google’s services, and some, like Samsung, have developed entire customized app suites of their own. Still others, like Amazon, pre-install no Google apps and use Android without any of these constraints (and whose Google-free tablets are regularly ranked as the best-rated and most popular in Europe).

By contrast, Apple bundles its operating system with its devices, bypasses third-party device makers entirely, and offers consumers access to its operating system only if they pay (lavishly) for one of the very limited number of devices the company offers, as well. It is perhaps not surprising — although it is enlightening — that Apple earns more revenue in an average quarter from iPhone sales than Google is reported to have earned in total from Android since it began offering it in 2008.

Reality — and the limits it imposes on efforts to manufacture nirvana

The logic behind Google’s approach to Android is obvious: It is the extension of Google’s “advertisers pay” platform strategy to mobile. Rather than charging device makers (and thus consumers) directly for its services, Google earns its revenue by charging advertisers for targeted access to users via Search. Remove Search from mobile devices and you remove the mechanism by which Google gets paid.

It’s true that most device makers opt to offer Google’s suite of services to European users, and that most users opt to keep Google Search as the default on their devices — that is, indeed, the hoped-for effect, and necessary to ensure that Google earns a return on its investment.

That users often choose to keep using Google services instead of installing alternatives, and that device makers typically choose to engineer their products around the Google ecosystem, isn’t primarily the result of a Google-imposed mandate; it’s the result of consumer preferences for Google’s offerings in lieu of readily available alternatives.

The EU decision against Google appears to imagine a world in which Google will continue to develop Android and allow device makers to use the platform and Google’s services for free, even if the likelihood of recouping its investment is diminished.

The Commission also assessed in detail Google’s arguments that the tying of the Google Search app and Chrome browser were necessary, in particular to allow Google to monetise its investment in Android, and concluded that these arguments were not well founded. Google achieves billions of dollars in annual revenues with the Google Play Store alone, it collects a lot of data that is valuable to Google’s search and advertising business from Android devices, and it would still have benefitted from a significant stream of revenue from search advertising without the restrictions.

For the Commission, Google’s earned enough [trust me: you should follow the link. It’s my favorite joke…].

But that world in which Google won’t alter its investment decisions based on a government-mandated reduction in its allowable return on investment doesn’t exist; it’s a fanciful Nirvana.

Google’s real alternatives to the status quo are charging for the use of Android, closing the Android platform and distributing it (like Apple) only on a fully integrated basis, or discontinuing Android.

In reality, and compared to these actual alternatives, Google’s restrictions are trivial. Remember, Google doesn’t insist that Google Search be exclusive, only that it benefit from a “leg up” by being pre-installed as the default. And on this thin reed Google finances the development and maintenance of the (free) Android operating system and all of the other (free) apps from which Google otherwise earns little or no revenue.

It’s hard to see how consumers, device makers, or app developers would be made better off without Google’s restrictions, but in the real world in which the alternative is one of the three manifestly less desirable options mentioned above.

Missing the real competition for the trees

What’s more, while ostensibly aimed at increasing competition, the Commission’s proposed remedy — like the conduct it addresses — doesn’t relate to Google’s most significant competitors at all.

Facebook, Instagram, Firefox, Amazon, Spotify, Yelp, and Yahoo, among many others, are some of the most popular apps on Android phones, including in Europe. They aren’t foreclosed by Google’s Android distribution terms, and it’s even hard to imagine that they would be more popular if only Android phones didn’t come with, say, Google Search pre-installed.

It’s a strange anticompetitive story that has Google allegedly foreclosing insignificant competitors while apparently ignoring its most substantial threats.

The primary challenges Google now faces are from Facebook drawing away the most valuable advertising and Amazon drawing away the most valuable product searches (and increasingly advertising, as well). The fact that Google’s challenged conduct has never shifted in order to target these competitors as their threat emerged, and has had no apparent effect on these competitive dynamics, says all one needs to know about the merits of the Commission’s decision and the value of its proposed remedy.

In reality, as Demsetz suggested, Nirvana cannot be designed by politicians, especially in complex, modern technology markets. Consumers’ best hope for something close — continued innovation, low prices, and voluminous choice — lies in the evolution of markets spurred by consumer demand, not regulators’ efforts to engineer them.

Ours is not an age of nuance.  It’s an age of tribalism, of teams—“Yer either fer us or agin’ us!”  Perhaps I should have been less surprised, then, when I read the unfavorable review of my book How to Regulate in, of all places, the Federalist Society Review.

I had expected some positive feedback from reviewer J. Kennerly Davis, a contributor to the Federalist Society’s Regulatory Transparency Project.  The “About” section of the Project’s website states:

In the ultra-complex and interconnected digital age in which we live, government must issue and enforce regulations to protect public health and safety.  However, despite the best of intentions, government regulation can fail, stifle innovation, foreclose opportunity, and harm the most vulnerable among us.  It is for precisely these reasons that we must be diligent in reviewing how our policies either succeed or fail us, and think about how we might improve them.

I might not have expressed these sentiments in such pro-regulation terms.  For example, I don’t think government should regulate, even “to protect public health and safety,” absent (1) a market failure and (2) confidence that systematic governmental failures won’t cause the cure to be worse than the disease.  I agree, though, that regulation is sometimes appropriate, that government interventions often fail (in systematic ways), and that regulatory policies should regularly be reviewed with an eye toward reducing the combined costs of market and government failures.

Those are, in fact, the central themes of How to Regulate.  The book sets forth an overarching goal for regulation (minimize the sum of error and decision costs) and then catalogues, for six oft-cited bases for regulating, what regulatory tools are available to policymakers and how each may misfire.  For every possible intervention, the book considers the potential for failure from two sources—the knowledge problem identified by F.A. Hayek and public choice concerns (rent-seeking, regulatory capture, etc.).  It ends up arguing:

  • for property rights-based approaches to environmental protection (versus the command-and-control status quo);
  • for increased reliance on the private sector to produce public goods;
  • that recognizing property rights, rather than allocating usage, is the best way to address the tragedy of the commons;
  • that market-based mechanisms, not shareholder suits and mandatory structural rules like those imposed by Sarbanes-Oxley and Dodd-Frank, are the best way to constrain agency costs in the corporate context;
  • that insider trading restrictions should be left to corporations themselves;
  • that antitrust law should continue to evolve in the consumer welfare-focused direction Robert Bork recommended;
  • against the FCC’s recently abrogated net neutrality rules;
  • that occupational licensure is primarily about rent-seeking and should be avoided;
  • that incentives for voluntary disclosure will usually obviate the need for mandatory disclosure to correct information asymmetry;
  • that the claims of behavioral economics do not justify paternalistic policies to protect people from themselves; and
  • that “libertarian-paternalism” is largely a ruse that tends to morph into hard paternalism.

Given the congruence of my book’s prescriptions with the purported aims of the Regulatory Transparency Project—not to mention the laundry list of specific market-oriented policies the book advocates—I had expected a generally positive review from Mr. Davis (whom I sincerely thank for reading and reviewing the book; book reviews are a ton of work).

I didn’t get what I’d expected.  Instead, Mr. Davis denounced my book for perpetuating “progressive assumptions about state and society” (“wrongheaded” assumptions, the editor’s introduction notes).  He responded to my proposed methodology with a “meh,” noting that it “is not clearly better than the status quo.”  His one compliment, which I’ll gladly accept, was that my discussion of economic theory was “generally accessible.”

Following are a few thoughts on Mr. Davis’s critiques.

Are My Assumptions Progressive?

According to Mr. Davis, my book endorses three progressive concepts:

(i) the idea that market based arrangements among private parties routinely misallocate resources, (ii) the idea that government policymakers are capable of formulating executive directives that can correct private ordering market failures and optimize the allocation of resources, and (iii) the idea that the welfare of society is actually something that exists separate and apart from the individual welfare of each of the members of society.

I agree with Mr. Davis that these are progressive ideas.  If my book embraced them, it might be fair to label it “progressive.”  But it doesn’t.  Not one of them.

  1. Market Failure

Nothing in my book suggests that “market based arrangements among private parties routinely misallocate resources.”  I do say that “markets sometimes fail to work well,” and I explain how, in narrow sets of circumstances, market failures may emerge.  Understanding exactly what may happen in those narrow sets of circumstances helps to identify the least restrictive option for addressing problems and would thus would seem a pre-requisite to effective policymaking for a conservative or libertarian.  My mere invocation of the term “market failure,” however, was enough for Mr. Davis to kick me off the team.

Mr. Davis ignored altogether the many points where I explain how private ordering fixes situations that could lead to poor market performance.  At the end of the information asymmetry chapter, for example, I write,

This chapter has described information asymmetry as a problem, and indeed it is one.  But it can also present an opportunity for profit.  Entrepreneurs have long sought to make money—and create social value—by developing ways to correct informational imbalances and thereby facilitate transactions that wouldn’t otherwise occur.

I then describe the advent of companies like Carfax, AirBnb, and Uber, all of which offer privately ordered solutions to instances of information asymmetry that might otherwise create lemons problems.  I conclude:

These businesses thrive precisely because of information asymmetry.  By offering privately ordered solutions to the problem, they allow previously under-utilized assets to generate heretofore unrealized value.  And they enrich the people who created and financed them.  It’s a marvelous thing.

That theme—that potential market failures invite privately ordered solutions that often obviate the need for any governmental fix—permeates the book.  In the public goods chapter, I spend a great deal of time explaining how privately ordered devices like assurance contracts facilitate the production of amenities that are non-rivalrous and non-excludable.  In discussing the tragedy of the commons, I highlight Elinor Ostrom’s work showing how “groups of individuals have displayed a remarkable ability to manage commons goods effectively without either privatizing them or relying on government intervention.”  In the chapter on externalities, I spend a full seven pages explaining why Coasean bargains are more likely than most people think to prevent inefficiencies from negative externalities.  In the chapter on agency costs, I explain why privately ordered solutions like the market for corporate control would, if not precluded by some ill-conceived regulations, constrain agency costs better than structural rules from the government.

Disregarding all this, Mr. Davis chides me for assuming that “markets routinely fail.”  And, for good measure, he explains that government interventions are often a bigger source of failure, a point I repeatedly acknowledge, as it is a—perhaps the—central theme of the book.

  1. Trust in Experts

In what may be the strangest (and certainly the most misleading) part of his review, Mr. Davis criticizes me for placing too much confidence in experts by giving short shrift to the Hayekian knowledge problem and the insights of public choice.

          a.  The Knowledge Problem

According to Mr. Davis, the approach I advocate “is centered around fully functioning experts.”  He continues:

This progressive trust in experts is misplaced.  It is simply false to suppose that government policymakers are capable of formulating executive directives that effectively improve upon private arrangements and optimize the allocation of resources.  Friedrich Hayek and other classical liberals have persuasively argued, and everyday experience has repeatedly confirmed, that the information needed to allocate resources efficiently is voluminous and complex and widely dispersed.  So much so that government experts acting through top down directives can never hope to match the efficiency of resource allocation made through countless voluntary market transactions among private parties who actually possess the information needed to allocate the resources most efficiently.

Amen and hallelujah!  I couldn’t agree more!  Indeed, I said something similar when I came to the first regulatory tool my book examines (and criticizes), command-and-control pollution rules.  I wrote:

The difficulty here is an instance of a problem that afflicts regulation generally.  At the end of the day, regulating involves centralized economic planning:  A regulating “planner” mandates that productive resources be allocated away from some uses and toward others.  That requires the planner to know the relative value of different resource uses.  But such information, in the words of Nobel laureate F.A. Hayek, “is not given to anyone in its totality.”  The personal preferences of thousands or millions of individuals—preferences only they know—determine whether there should be more widgets and fewer gidgets, or vice-versa.  As Hayek observed, voluntary trading among resource owners in a free market generates prices that signal how resources should be allocated (i.e., toward the uses for which resource owners may command the highest prices).  But centralized economic planners—including regulators—don’t allocate resources on the basis of relative prices.  Regulators, in fact, generally assume that prices are wrong due to the market failure the regulators are seeking to address.  Thus, the so-called knowledge problem that afflicts regulation generally is particularly acute for command-and-control approaches that require regulators to make refined judgments on the basis of information about relative costs and benefits.

That was just the first of many times I invoked the knowledge problem to argue against top-down directives and in favor of market-oriented policies that would enable individuals to harness local knowledge to which regulators would not be privy.  The index to the book includes a “knowledge problem” entry with no fewer than nine sub-entries (e.g., “with licensure regimes,” “with Pigouvian taxes,” “with mandatory disclosure regimes”).  There are undoubtedly more mentions of the knowledge problem than those listed in the index, for the book assesses the degree to which the knowledge problem creates difficulties for every regulatory approach it considers.

Mr. Davis does mention one time where I “acknowledge[] the work of Hayek” and “recognize[] that context specific information is vitally important,” but he says I miss the point:

Having conceded these critical points [about the importance of context-specific information], Professor Lambert fails to follow them to the logical conclusion that private ordering arrangements are best for regulating resources efficiently.  Instead, he stops one step short, suggesting that policymakers defer to the regulator most familiar with the regulated party when they need context-specific information for their analysis.  Professor Lambert is mistaken.  The best information for resource allocation is not to be found in the regional office of the regulator.  It resides with the persons who have long been controlled and directed by the progressive regulatory system.  These are the ones to whom policymakers should defer.

I was initially puzzled by Mr. Davis’s description of how my approach would address the knowledge problem.  It’s inconsistent with the way I described the problem (the “regional office of the regulator” wouldn’t know people’s personal preferences, etc.), and I couldn’t remember ever suggesting that regulatory devolution—delegating decisions down toward local regulators—was the solution to the knowledge problem.

When I checked the citation in the sentences just quoted, I realized that Mr. Davis had misunderstood the point I was making in the passage he cited (my own fault, no doubt, not his).  The cited passage was at the very end of the book, where I was summarizing the book’s contributions.  I claimed to have set forth a plan for selecting regulatory approaches that would minimize the sum of error and decision costs.  I wanted to acknowledge, though, the irony of promulgating a generally applicable plan for regulating in a book that, time and again, decries top-down imposition of one-size-fits-all rules.  Thus, I wrote:

A central theme of this book is that Hayek’s knowledge problem—the fact that no central planner can possess and process all the information needed to allocate resources so as to unlock their greatest possible value—applies to regulation, which is ultimately a set of centralized decisions about resource allocation.  The very knowledge problem besetting regulators’ decisions about what others should do similarly afflicts pointy-headed academics’ efforts to set forth ex ante rules about what regulators should do.  Context-specific information to which only the “regulator on the spot” is privy may call for occasional departures from the regulatory plan proposed here.

As should be obvious, my point was not that the knowledge problem can generally be fixed by regulatory devolution.  Rather, I was acknowledging that the general regulatory approach I had set forth—i.e., the rules policymakers should follow in selecting among regulatory approaches—may occasionally misfire and should thus be implemented flexibly.

           b.  Public Choice Concerns

A second problem with my purported trust in experts, Mr. Davis explains, stems from the insights of public choice:

Actual policymakers simply don’t live up to [Woodrow] Wilson’s ideal of the disinterested, objective, apolitical, expert technocrat.  To the contrary, a vast amount of research related to public choice theory has convincingly demonstrated that decisions of regulatory agencies are frequently shaped by politics, institutional self-interest and the influence of the entities the agencies regulate.

Again, huzzah!  Those words could have been lifted straight out of the three full pages of discussion I devoted to public choice concerns with the very first regulatory intervention the book considered.  A snippet from that discussion:

While one might initially expect regulators pursuing the public interest to resist efforts to manipulate regulation for private gain, that assumes that government officials are not themselves rational, self-interest maximizers.  As scholars associated with the “public choice” economic tradition have demonstrated, government officials do not shed their self-interested nature when they step into the public square.  They are often receptive to lobbying in favor of questionable rules, especially since they benefit from regulatory expansions, which tend to enhance their job status and often their incomes.  They also tend to become “captured” by powerful regulatees who may shower them with personal benefits and potentially employ them after their stints in government have ended.

That’s just a slice.  Elsewhere in those three pages, I explain (1) how the dynamic of concentrated benefits and diffuse costs allows inefficient protectionist policies to persist, (2) how firms that benefit from protectionist regulation are often assisted by “pro-social” groups that will make a public interest case for the rules (Bruce Yandle’s Bootleggers and Baptists syndrome), and (3) the “[t]wo types of losses [that] result from the sort of interest-group manipulation public choice predicts.”  And that’s just the book’s initial foray into public choice.  The entry for “public choice concerns” in the book’s index includes eight sub-entries.  As with the knowledge problem, I addressed the public choice issues that could arise from every major regulatory approach the book considered.

For Mr. Davis, though, that was not enough to keep me out of the camp of Wilsonian progressives.  He explains:

Professor Lambert devotes a good deal of attention to the problem of “agency capture” by regulated entities.  However, he fails to acknowledge that a symbiotic relationship between regulators and regulated is not a bug in the regulatory system, but an inherent feature of a system defined by extensive and continuing government involvement in the allocation of resources.

To be honest, I’m not sure what that last sentence means.  Apparently, I didn’t recite some talismanic incantation that would indicate that I really do believe public choice concerns are a big problem for regulation.  I did say this in one of the book’s many discussions of public choice:

A regulator that has both regular contact with its regulatees and significant discretionary authority over them is particularly susceptible to capture.  The regulator’s discretionary authority provides regulatees with a strong motive to win over the regulator, which has the power to hobble the regulatee’s potential rivals and protect its revenue stream.  The regular contact between the regulator and the regulatee provides the regulatee with better access to those in power than that available to parties with opposing interests.  Moreover, the regulatee’s preferred course of action is likely (1) to create concentrated benefits (to the regulatee) and diffuse costs (to consumers generally), and (2) to involve an expansion of the regulator’s authority.  The upshot is that that those who bear the cost of the preferred policy are less likely to organize against it, and regulators, who benefit from turf expansion, are more likely to prefer it.  Rate-of-return regulation thus involves the precise combination that leads to regulatory expansion at consumer expense: broad and discretionary government power, close contact between regulators and regulatees, decisions that generally involve concentrated benefits and diffuse costs, and regular opportunities to expand regulators’ power and prestige.

In light of this combination of features, it should come as no surprise that the history of rate-of-return regulation is littered with instances of agency capture and regulatory expansion.

Even that was not enough to convince Mr. Davis that I reject the Wilsonian assumption of “disinterested, objective, apolitical, expert technocrat[s].”  I don’t know what more I could have said.

  1. Social Welfare

Mr. Davis is right when he says, “Professor Lambert’s ultimate goal for his book is to provide policymakers with a resource that will enable them to make regulatory decisions that produce greater social welfare.”  But nowhere in my book do I suggest, as he says I do, “that the welfare of society is actually something that exists separate and apart from the individual welfare of each of the members of society.”  What I mean by “social welfare” is the aggregate welfare of all the individuals in a society.  And I’m careful to point out that only they know what makes them better off.  (At one point, for example, I write that “[g]overnment planners have no way of knowing how much pleasure regulatees derive from banned activities…or how much displeasure they experience when they must comply with an affirmative command…. [W]ith many paternalistic policies and proposals…government planners are really just guessing about welfare effects.”)

I agree with Mr. Davis that “[t]here is no single generally accepted methodology that anyone can use to determine objectively how and to what extent the welfare of society will be affected by a particular regulatory directive.”  For that reason, nowhere in the book do I suggest any sort of “metes and bounds” measurement of social welfare.  (I certainly do not endorse the use of GDP, which Mr. Davis rightly criticizes; that term appears nowhere in the book.)

Rather than prescribing any sort of precise measurement of social welfare, my book operates at the level of general principles:  We have reasons to believe that inefficiencies may arise when conditions are thus; there is a range of potential government responses to this situation—from doing nothing, to facilitating a privately ordered solution, to mandating various actions; based on our experience with these different interventions, the likely downsides of each (stemming from, for example, the knowledge problem and public choice concerns) are so-and-so; all things considered, the aggregate welfare of the individuals within this group will probably be greatest with policy x.

It is true that the thrust of the book is consequentialist, not deontological.  But it’s a book about policy, not ethics.  And its version of consequentialism is rule, not act, utilitarianism.  Is a consequentialist approach to policymaking enough to render one a progressive?  Should we excise John Stuart Mill’s On Liberty from the classical liberal canon?  I surely hope not.

Is My Proposed Approach an Improvement?

Mr. Davis’s second major criticism of my book—that what it proposes is “just the status quo”—has more bite.  By that, I mean two things.  First, it’s a more painful criticism to receive.  It’s easier for an author to hear “you’re saying something wrong” than “you’re not saying anything new.”

Second, there may be more merit to this criticism.  As Mr. Davis observes, I noted in the book’s introduction that “[a]t times during the drafting, I … wondered whether th[e] book was ‘original’ enough.”  I ultimately concluded that it was because it “br[ought] together insights of legal theorists and economists of various stripes…and systematize[d] their ideas into a unified, practical approach to regulating.”  Mr. Davis thinks I’ve overstated the book’s value, and he may be right.

The current regulatory landscape would suggest, though, that my book’s approach to selecting among potential regulatory policies isn’t “just the status quo.”  The approach I recommend would generate the specific policies catalogued at the outset of this response (in the bullet points).  The fact that those policies haven’t been implemented under the existing regulatory approach suggests that what I’m recommending must be something different than the status quo.

Mr. Davis observes—and I acknowledge—that my recommended approach resembles the review required of major executive agency regulations under Executive Order 12866, President Clinton’s revised version of President Reagan’s Executive Order 12291.  But that order is quite limited in its scope.  It doesn’t cover “minor” executive agency rules (those with expected costs of less than $100 million) or rules from independent agencies or from Congress or from courts or at the state or local level.  Moreover, I understand from talking to a former administrator of the Office of Information and Regulatory Affairs, which is charged with implementing the order, that it has actually generated little serious consideration of less restrictive alternatives, something my approach emphasizes.

What my book proposes is not some sort of governmental procedure; indeed, I emphasize in the conclusion that the book “has not addressed … how existing regulatory institutions should be reformed to encourage the sort of analysis th[e] book recommends.”  Instead, I propose a way to think through specific areas of regulation, one that is informed by a great deal of learning about both market and government failures.  The best audience for the book is probably law students who will someday find themselves influencing public policy as lawyers, legislators, regulators, or judges.  I am thus heartened that the book is being used as a text at several law schools.  My guess is that few law students receive significant exposure to Hayek, public choice, etc.

So, who knows?  Perhaps the book will make a difference at the margin.  Or perhaps it will amount to sound and fury, signifying nothing.  But I don’t think a classical liberal could fairly say that the analysis it counsels “is not clearly better than the status quo.”

A Truly Better Approach to Regulating

Mr. Davis ends his review with a stirring call to revamp the administrative state to bring it “in complete and consistent compliance with the fundamental law of our republic embodied in the Constitution, with its provisions interpreted to faithfully conform to their original public meaning.”  Among other things, he calls for restoring the separation of powers, which has been erased in agencies that combine legislative, executive, and judicial functions, and for eliminating unchecked government power, which results when the legislature delegates broad rulemaking and adjudicatory authority to politically unaccountable bureaucrats.

Once again, I concur.  There are major problems—constitutional and otherwise—with the current state of administrative law and procedure.  I’d be happy to tear down the existing administrative state and begin again on a constitutionally constrained tabula rasa.

But that’s not what my book was about.  I deliberately set out to write a book about the substance of regulation, not the process by which rules should be imposed.  I took that tack for two reasons.  First, there are numerous articles and books, by scholars far more expert than I, on the structure of the administrative state.  I could add little value on administrative process.

Second, the less-addressed substantive question—what, as a substantive matter, should a policy addressing x do?—would exist even if Mr. Davis’s constitutionally constrained regulatory process were implemented.  Suppose that we got rid of independent agencies, curtailed delegations of rulemaking authority to the executive branch, and returned to a system in which Congress wrote all rules, the executive branch enforced them, and the courts resolved any disputes.  Someone would still have to write the rule, and that someone (or group of people) should have some sense of the pros and cons of one approach over another.  That is what my book seeks to provide.

A hard core Hayekian—one who had immersed himself in Law, Legislation, and Liberty—might respond that no one should design regulation (purposive rules that Hayek would call thesis) and that efficient, “purpose-independent” laws (what Hayek called nomos) will just emerge as disputes arise.  But that is not Mr. Davis’s view.  He writes:

A system of governance or regulation based on the rule of law attains its policy objectives by proscribing actions that are inconsistent with those objectives.  For example, this type of regulation would prohibit a regulated party from discharging a pollutant in any amount greater than the limiting amount specified in the regulation.  Under this proscriptive approach to regulation, any and all actions not specifically prohibited are permitted.

Mr. Davis has thus contemplated a purposive rule, crafted by someone.  That someone should know the various policy options and the upsides and downsides of each.  How to Regulate could help.

Conclusion

I’m not sure why Mr. Davis viewed my book as no more than dressed-up progressivism.  Maybe he was triggered by the book’s cover art, which he says “is faithful to the progressive tradition,” resembling “the walls of public buildings from San Francisco to Stalingrad.”  Maybe it was a case of Sunstein Derangement Syndrome.  (Progressive legal scholar Cass Sunstein had nice things to say about the book, despite its criticisms of a number of his ideas.)  Or perhaps it was that I used the term “market failure.”  Many conservatives and libertarians fear, with good reason, that conceding the existence of market failures invites all sorts of government meddling.

At the end of the day, though, I believe we classical liberals should stop pretending that market outcomes are always perfect, that pure private ordering is always and everywhere the best policy.  We should certainly sing markets’ praises; they usually work so well that people don’t even notice them, and we should point that out.  We should continually remind people that government interventions also fail—and in systematic ways (e.g., the knowledge problem and public choice concerns).  We should insist that a market failure is never a sufficient condition for a governmental fix; one must always consider whether the cure will be worse than the disease.  In short, we should take and promote the view that government should operate “under a presumption of error.”

That view, economist Aaron Director famously observed, is the essence of laissez faire.  It’s implicit in the purpose statement of the Federalist Society’s Regulatory Transparency Project.  And it’s the central point of How to Regulate.

So let’s go easy on the friendly fire.

Today would have been Henry Manne’s 90th birthday. When he passed away in 2015 he left behind an immense and impressive legacy. In 1991, at the inaugural meeting of the American Law & Economics Association (ALEA), Manne was named a Life Member of ALEA and, along with Nobel Laureate Ronald Coase, and federal appeals court judges Richard Posner and Guido Calabresi, one of the four Founders of Law and Economics. The organization I founded, the International Center for Law & Economics is dedicated to his memory, along with that of his great friend and mentor, UCLA economist Armen Alchian.

Manne is best known for his work in corporate governance and securities law and regulation, of course. But sometimes forgotten is that his work on the market for corporate control was motivated by concerns about analytical flaws in merger enforcement. As former FTC commissioners Maureen Ohlhausen and Joshua Wright noted in a 2015 dissenting statement:

The notion that the threat of takeover would induce current managers to improve firm performance to the benefit of shareholders was first developed by Henry Manne. Manne’s pathbreaking work on the market for corporate control arose out of a concern that antitrust constraints on horizontal mergers would distort its functioning. See Henry G. Manne, Mergers and the Market for Corporate Control, 73 J. POL. ECON. 110 (1965).

But Manne’s focus on antitrust didn’t end in 1965. Moreover, throughout his life he was a staunch critic of misguided efforts to expand the power of government, especially when these efforts claimed to have their roots in economic reasoning — which, invariably, was hopelessly flawed. As his obituary notes:

In his teaching, his academic writing, his frequent op-eds and essays, and his work with organizations like the Cato Institute, the Liberty Fund, the Institute for Humane Studies, and the Mont Pèlerin Society, among others, Manne advocated tirelessly for a clearer understanding of the power of markets and competition and the importance of limited government and economically sensible regulation.

Thus it came to be, in 1974, that Manne was called to testify before the Senate Judiciary Committee, Subcommittee on Antitrust and Monopoly, on Michigan Senator Philip A. Hart’s proposed Industrial Reorganization Act. His testimony is a tour de force, and a prescient rejoinder to the faddish advocates of today’s “hipster antitrust”— many of whom hearken longingly back to the antitrust of the 1960s and its misguided “gurus.”

Henry Manne’s trenchant testimony critiquing the Industrial Reorganization Act and its (ostensible) underpinnings is reprinted in full in this newly released ICLE white paper (with introductory material by Geoffrey Manne):

Henry G. Manne: Testimony on the Proposed Industrial Reorganization Act of 1973 — What’s Hip (in Antitrust) Today Should Stay Passé

Sen. Hart proposed the Industrial Reorganization Act in order to address perceived problems arising from industrial concentration. The bill was rooted in the belief that industry concentration led inexorably to monopoly power; that monopoly power, however obtained, posed an inexorable threat to freedom and prosperity; and that the antitrust laws (i.e., the Sherman and Clayton Acts) were insufficient to address the purported problems.

That sentiment — rooted in the reflexive application of the (largely-discredited structure-conduct-performance (SCP) paradigm) — had already become largely passé among economists in the 70s, but it has resurfaced today as the asserted justification for similar (although less onerous) antitrust reform legislation and the general approach to antitrust analysis commonly known as “hipster antitrust.”

The critiques leveled against the asserted economic underpinnings of efforts like the Industrial Reorganization Act are as relevant today as they were then. As Henry Manne notes in his testimony:

To be successful in this stated aim [“getting the government out of the market”] the following dreams would have to come true: The members of both the special commission and the court established by the bill would have to be satisfied merely to complete their assigned task and then abdicate their tremendous power and authority; they would have to know how to satisfactorily define and identify the limits of the industries to be restructured; the Government’s regulation would not sacrifice significant efficiencies or economies of scale; and the incentive for new firms to enter an industry would not be diminished by the threat of a punitive response to success.

The lessons of history, economic theory, and practical politics argue overwhelmingly against every one of these assumptions.

Both the subject matter of and impetus for the proposed bill (as well as Manne’s testimony explaining its economic and political failings) are eerily familiar. The preamble to the Industrial Reorganization Act asserts that

competition… preserves a democratic society, and provides an opportunity for a more equitable distribution of wealth while avoiding the undue concentration of economic, social, and political power; [and] the decline of competition in industries with oligopoly or monopoly power has contributed to unemployment, inflation, inefficiency, an underutilization of economic capacity, and the decline of exports….

The echoes in today’s efforts to rein in corporate power by adopting structural presumptions are unmistakable. Compare, for example, this language from Sen. Klobuchar’s Consolidation Prevention and Competition Promotion Act of 2017:

[C]oncentration that leads to market power and anticompetitive conduct makes it more difficult for people in the United States to start their own businesses, depresses wages, and increases economic inequality;

undue market concentration also contributes to the consolidation of political power, undermining the health of democracy in the United States; [and]

the anticompetitive effects of market power created by concentration include higher prices, lower quality, significantly less choice, reduced innovation, foreclosure of competitors, increased entry barriers, and monopsony power.

Remarkably, Sen. Hart introduced his bill as “an alternative to government regulation and control.” Somehow, it was the antithesis of “government control” to introduce legislation that, in Sen. Hart’s words,

involves changing the life styles of many of our largest corporations, even to the point of restructuring whole industries. It involves positive government action, not to control industry but to restore competition and freedom of enterprise in the economy

Like today’s advocates of increased government intervention to design the structure of the economy, Sen. Hart sought — without a trace of irony — to “cure” the problem of politicized, ineffective enforcement by doubling down on the power of the enforcers.

Henry Manne was having none of it. As he pointedly notes in his testimony, the worst problems of monopoly power are of the government’s own making. The real threat to democracy, freedom, and prosperity is the political power amassed in the bureaucratic apparatus that frequently confers monopoly, at least as much as the monopoly power it spawns:

[I]t takes two to make that bargain [political protection and subsidies in exchange for lobbying]. And as we look around at various industries we are constrained to ask who has not done this. And more to the point, who has not succeeded?

It is unhappily almost impossible to name a significant industry in the United States that has not gained some degree of protection from the rigors of competition from Federal, State or local governments.

* * *

But the solution to inefficiencies created by Government controls cannot lie in still more controls. The politically responsible task ahead for Congress is to dismantle our existing regulatory monster before it strangles us.

We have spawned a gigantic bureaucracy whose own political power threatens the democratic legitimacy of government.

We are rapidly moving toward the worst features of a centrally planned economy with none of the redeeming political, economic, or ethical features usually claimed for such systems.

The new white paper includes Manne’s testimony in full, including his exchange with Sen. Hart and committee staffers following his prepared remarks.

It is, sadly, nearly as germane today as it was then.

One final note: The subtitle for the paper is a reference to the song “What Is Hip?” by Tower of Power. Its lyrics are decidedly apt:

You done went and found you a guru,

In your effort to find you a new you,

And maybe even managed

To raise your conscious level.

While you’re striving to find the right road,

There’s one thing you should know:

What’s hip today

Might become passé.

— Tower of Power, What Is Hip? (Emilio Castillo, John David Garibaldi & Stephen M. Kupka, What Is Hip? (Bob-A-Lew Songs 1973), from the album TOWER OF POWER (Warner Bros. 1973))

And here’s the song, in all its glory:

 

This week the FCC will vote on Chairman Ajit Pai’s Restoring Internet Freedom Order. Once implemented, the Order will rescind the 2015 Open Internet Order and return antitrust and consumer protection enforcement to primacy in Internet access regulation in the U.S.

In anticipation of that, earlier this week the FCC and FTC entered into a Memorandum of Understanding delineating how the agencies will work together to police ISPs. Under the MOU, the FCC will review informal complaints regarding ISPs’ disclosures about their blocking, throttling, paid prioritization, and congestion management practices. Where an ISP fails to make the proper disclosures, the FCC will take enforcement action. The FTC, for its part, will investigate and, where warranted, take enforcement action against ISPs for unfair, deceptive, or otherwise unlawful acts.

Critics of Chairman Pai’s plan contend (among other things) that the reversion to antitrust-agency oversight of competition and consumer protection in telecom markets (and the Internet access market particularly) would be an aberration — that the US will become the only place in the world to move backward away from net neutrality rules and toward antitrust law.

But this characterization has it exactly wrong. In fact, much of the world has been moving toward an antitrust-based approach to telecom regulation. The aberration was the telecom-specific, common-carrier regulation of the 2015 Open Internet Order.

The longstanding, global transition from telecom regulation to antitrust enforcement

The decade-old discussion around net neutrality has morphed, perhaps inevitably, to join the larger conversation about competition in the telecom sector and the proper role of antitrust law in addressing telecom-related competition issues. Today, with the latest net neutrality rules in the US on the chopping block, the discussion has grown more fervent (and even sometimes inordinately violent).

On the one hand, opponents of the 2015 rules express strong dissatisfaction with traditional, utility-style telecom regulation of innovative services, and view the 2015 rules as a meritless usurpation of antitrust principles in guiding the regulation of the Internet access market. On the other hand, proponents of the 2015 rules voice skepticism that antitrust can actually provide a way to control competitive harms in the tech and telecom sectors, and see the heavy hand of Title II, common-carrier regulation as a necessary corrective.

While the evidence seems clear that an early-20th-century approach to telecom regulation is indeed inappropriate for the modern Internet (see our lengthy discussions on this point, e.g., here and here, as well as Thom Lambert’s recent post), it is perhaps less clear whether antitrust, with its constantly evolving, common-law foundation, is up to the task.

To answer that question, it is important to understand that for decades, the arc of telecom regulation globally has been sweeping in the direction of ex post competition enforcement, and away from ex ante, sector-specific regulation.

Howard Shelanski, who served as President Obama’s OIRA Administrator from 2013-17, Director of the Bureau of Economics at the FTC from 2012-2013, and Chief Economist at the FCC from 1999-2000, noted in 2002, for instance, that

[i]n many countries, the first transition has been from a government monopoly to a privatizing entity controlled by an independent regulator. The next transformation on the horizon is away from the independent regulator and towards regulation through general competition law.

Globally, nowhere perhaps has this transition been more clearly stated than in the EU’s telecom regulatory framework which asserts:

The aim is to progressively reduce ex ante sector-specific regulation progressively as competition in markets develops and, ultimately, for electronic communications [i.e., telecommunications] to be governed by competition law only. (Emphasis added.)

To facilitate the transition and quash regulatory inconsistencies among member states, the EC identified certain markets for national regulators to decide, consistent with EC guidelines on market analysis, whether ex ante obligations were necessary in their respective countries due to an operator holding “significant market power.” In 2003 the EC identified 18 such markets. After observing technological and market changes over the next four years, the EC reduced that number to seven in 2007 and, in 2014, the number was further reduced to four markets, all wholesale markets, that could potentially require ex ante regulation.

It is important to highlight that this framework is not uniquely achievable in Europe because of some special trait in its markets, regulatory structure, or antitrust framework. Determining the right balance of regulatory rules and competition law, whether enforced by a telecom regulator, antitrust regulator, or multi-purpose authority (i.e., with authority over both competition and telecom) means choosing from a menu of options that should be periodically assessed to move toward better performance and practice. There is nothing jurisdiction-specific about this; it is simply a matter of good governance.

And since the early 2000s, scholars have highlighted that the US is in an intriguing position to transition to a merged regulator because, for example, it has both a “highly liberalized telecommunications sector and a well-established body of antitrust law.” For Shelanski, among others, the US has been ready to make the transition since 2007.

Far from being an aberrant move away from sound telecom regulation, the FCC’s Restoring Internet Freedom Order is actually a step in the direction of sensible, antitrust-based telecom regulation — one that many parts of the world have long since undertaken.

How antitrust oversight of telecom markets has been implemented around the globe

In implementing the EU’s shift toward antitrust oversight of the telecom sector since 2003, agencies have adopted a number of different organizational reforms.

Some telecom regulators assumed new duties over competition — e.g., Ofcom in the UK. Other non-European countries, including, e.g., Mexico have also followed this model.

Other European Member States have eliminated their telecom regulator altogether. In a useful case study, Roslyn Layton and Joe Kane outline Denmark’s approach, which includes disbanding its telecom regulator and passing the regulation of the sector to various executive agencies.

Meanwhile, the Netherlands and Spain each elected to merge its telecom regulator into its competition authority. New Zealand has similarly adopted this framework.

A few brief case studies will illuminate these and other reforms:

The Netherlands

In 2013, the Netherlands merged its telecom, consumer protection, and competition regulators to form the Netherlands Authority for Consumers and Markets (ACM). The ACM’s structure streamlines decision-making on pending industry mergers and acquisitions at the managerial level, eliminating the challenges arising from overlapping agency reviews and cross-agency coordination. The reform also unified key regulatory methodologies, such as creating a consistent calculation method for the weighted average cost of capital (WACC).

The Netherlands also claims that the ACM’s ex post approach is better able to adapt to “technological developments, dynamic markets, and market trends”:

The combination of strength and flexibility allows for a problem-based approach where the authority first engages in a dialogue with a particular market player in order to discuss market behaviour and ensure the well-functioning of the market.

The Netherlands also cited a significant reduction in the risk of regulatory capture as staff no longer remain in positions for long tenures but rather rotate on a project-by-project basis from a regulatory to a competition department or vice versa. Moving staff from team to team has also added value in terms of knowledge transfer among the staff. Finally, while combining the cultures of each regulator was less difficult than expected, the government reported that the largest cause of consternation in the process was agreeing on a single IT system for the ACM.

Spain

In 2013, Spain created the National Authority for Markets and Competition (CNMC), merging the National Competition Authority with several sectoral regulators, including the telecom regulator, to “guarantee cohesion between competition rulings and sectoral regulation.” In a report to the OECD, Spain stated that moving to the new model was necessary because of increasing competition and technological convergence in the sector (i.e., the ability for different technologies to offer the substitute services (like fixed and wireless Internet access)). It added that integrating its telecom regulator with its competition regulator ensures

a predictable business environment and legal certainty [i.e., removing “any threat of arbitrariness”] for the firms. These two conditions are indispensable for network industries — where huge investments are required — but also for the rest of the business community if investment and innovation are to be promoted.

Like in the Netherlands, additional benefits include significantly lowering the risk of regulatory capture by “preventing the alignment of the authority’s performance with sectoral interests.”

Denmark

In 2011, the Danish government unexpectedly dismantled the National IT and Telecom Agency and split its duties between four regulators. While the move came as a surprise, it did not engender national debate — vitriolic or otherwise — nor did it receive much attention in the press.

Since the dismantlement scholars have observed less politicization of telecom regulation. And even though the competition authority didn’t take over telecom regulatory duties, the Ministry of Business and Growth implemented a light touch regime, which, as Layton and Kane note, has helped to turn Denmark into one of the “top digital nations” according to the International Telecommunication Union’s Measuring the Information Society Report.

New Zealand

The New Zealand Commerce Commission (NZCC) is responsible for antitrust enforcement, economic regulation, consumer protection, and certain sectoral regulations, including telecommunications. By combining functions into a single regulator New Zealand asserts that it can more cost-effectively administer government operations. Combining regulatory functions also created spillover benefits as, for example, competition analysis is a prerequisite for sectoral regulation, and merger analysis in regulated sectors (like telecom) can leverage staff with detailed and valuable knowledge. Similar to the other countries, New Zealand also noted that the possibility of regulatory capture “by the industries they regulate is reduced in an agency that regulates multiple sectors or also has competition and consumer law functions.”

Advantages identified by other organizations

The GSMA, a mobile industry association, notes in its 2016 report, Resetting Competition Policy Frameworks for the Digital Ecosystem, that merging the sector regulator into the competition regulator also mitigates regulatory creep by eliminating the prodding required to induce a sector regulator to roll back regulation as technological evolution requires it, as well as by curbing the sector regulator’s temptation to expand its authority. After all, regulators exist to regulate.

At the same time, it’s worth noting that eliminating the telecom regulator has not gone off without a hitch in every case (most notably, in Spain). It’s important to understand, however, that the difficulties that have arisen in specific contexts aren’t endemic to the nature of competition versus telecom regulation. Nothing about these cases suggests that economic-based telecom regulations are inherently essential, or that replacing sector-specific oversight with antitrust oversight can’t work.

Contrasting approaches to net neutrality in the EU and New Zealand

Unfortunately, adopting a proper framework and implementing sweeping organizational reform is no guarantee of consistent decisionmaking in its implementation. Thus, in 2015, the European Parliament and Council of the EU went against two decades of telecommunications best practices by implementing ex ante net neutrality regulations without hard evidence of widespread harm and absent any competition analysis to justify its decision. The EU placed net neutrality under the universal service and user’s rights prong of the regulatory framework, and the resulting rules lack coherence and economic rigor.

BEREC’s net neutrality guidelines, meant to clarify the EU regulations, offered an ambiguous, multi-factored standard to evaluate ISP practices like free data programs. And, as mentioned in a previous TOTM post, whether or not they allow the practice, regulators (e.g., Norway’s Nkom and the UK’s Ofcom) have lamented the lack of regulatory certainty surrounding free data programs.

Notably, while BEREC has not provided clear guidance, a 2017 report commissioned by the EU’s Directorate-General for Competition weighing competitive benefits and harms of zero rating concluded “there appears to be little reason to believe that zero-rating gives rise to competition concerns.”

The report also provides an ex post framework for analyzing such deals in the context of a two-sided market by assessing a deal’s impact on competition between ISPs and between content and application providers.

The EU example demonstrates that where a telecom regulator perceives a novel problem, competition law, grounded in economic principles, brings a clear framework to bear.

In New Zealand, if a net neutrality issue were to arise, the ISP’s behavior would be examined under the context of existing antitrust law, including a determination of whether the ISP is exercising market power, and by the Telecommunications Commissioner, who monitors competition and the development of telecom markets for the NZCC.

Currently, there is broad consensus among stakeholders, including a local content providers and networking equipment manufacturers, that there is no need for ex ante regulation of net neutrality. Wholesale ISP, Chorus, states, for example, that “in any event, the United States’ transparency and non-interference requirements [from the 2015 OIO] are arguably covered by the TCF Code disclosure rules and the provisions of the Commerce Act.”

The TCF Code is a mandatory code of practice establishing requirements concerning the information ISPs are required to disclose to consumers about their services. For example, ISPs must disclose any arrangements that prioritize certain traffic. Regarding traffic management, complaints of unfair contract terms — when not resolved by a process administered by an independent industry group — may be referred to the NZCC for an investigation in accordance with the Fair Trading Act. Under the Commerce Act, the NZCC can prohibit anticompetitive mergers, or practices that substantially lessen competition or that constitute price fixing or abuse of market power.

In addition, the NZCC has been active in patrolling vertical agreements between ISPs and content providers — precisely the types of agreements bemoaned by Title II net neutrality proponents.

In February 2017, the NZCC blocked Vodafone New Zealand’s proposed merger with Sky Network (combining Sky’s content and pay TV business with Vodafone’s broadband and mobile services) because the Commission concluded that the deal would substantially lessen competition in relevant broadband and mobile services markets. The NZCC was

unable to exclude the real chance that the merged entity would use its market power over premium live sports rights to effectively foreclose a substantial share of telecommunications customers from rival telecommunications services providers (TSPs), resulting in a substantial lessening of competition in broadband and mobile services markets.

Such foreclosure would result, the NZCC argued, from exclusive content and integrated bundles with features such as “zero rated Sky Sport viewing over mobile.” In addition, Vodafone would have the ability to prevent rivals from creating bundles using Sky Sport.

The substance of the Vodafone/Sky decision notwithstanding, the NZCC’s intervention is further evidence that antitrust isn’t a mere smokescreen for regulators to do nothing, and that regulators don’t need to design novel tools (such as the Internet conduct rule in the 2015 OIO) to regulate something neither they nor anyone else knows very much about: “not just the sprawling Internet of today, but also the unknowable Internet of tomorrow.” Instead, with ex post competition enforcement, regulators can allow dynamic innovation and competition to develop, and are perfectly capable of intervening — when and if identifiable harm emerges.

Conclusion

Unfortunately for Title II proponents — who have spent a decade at the FCC lobbying for net neutrality rules despite a lack of actionable evidence — the FCC is not acting without precedent by enabling the FTC’s antitrust and consumer protection enforcement to police conduct in Internet access markets. For two decades, the object of telecommunications regulation globally has been to transition away from sector-specific ex ante regulation to ex post competition review and enforcement. It’s high time the U.S. got on board.

The populists are on the march, and as the 2018 campaign season gets rolling we’re witnessing more examples of political opportunism bolstered by economic illiteracy aimed at increasingly unpopular big tech firms.

The latest example comes in the form of a new investigation of Google opened by Missouri’s Attorney General, Josh Hawley. Mr. Hawley — a Republican who, not coincidentally, is running for Senate in 2018alleges various consumer protection violations and unfair competition practices.

But while Hawley’s investigation may jump start his campaign and help a few vocal Google rivals intent on mobilizing the machinery of the state against the company, it is unlikely to enhance consumer welfare — in Missouri or anywhere else.  

According to the press release issued by the AG’s office:

[T]he investigation will seek to determine if Google has violated the Missouri Merchandising Practices Act—Missouri’s principal consumer-protection statute—and Missouri’s antitrust laws.  

The business practices in question are Google’s collection, use, and disclosure of information about Google users and their online activities; Google’s alleged misappropriation of online content from the websites of its competitors; and Google’s alleged manipulation of search results to preference websites owned by Google and to demote websites that compete with Google.

Mr. Hawley’s justification for his investigation is a flourish of populist rhetoric:

We should not just accept the word of these corporate giants that they have our best interests at heart. We need to make sure that they are actually following the law, we need to make sure that consumers are protected, and we need to hold them accountable.

But Hawley’s “strong” concern is based on tired retreads of the same faulty arguments that Google’s competitors (Yelp chief among them), have been plying for the better part of a decade. In fact, all of his apparent grievances against Google were exhaustively scrutinized by the FTC and ultimately rejected or settled in separate federal investigations in 2012 and 2013.

The antitrust issues

To begin with, AG Hawley references the EU antitrust investigation as evidence that

this is not the first-time Google’s business practices have come into question. In June, the European Union issued Google a record $2.7 billion antitrust fine.

True enough — and yet, misleadingly incomplete. Missing from Hawley’s recitation of Google’s antitrust rap sheet are the following investigations, which were closed without any finding of liability related to Google Search, Android, Google’s advertising practices, etc.:

  • United States FTC, 2013. The FTC found no basis to pursue a case after a two-year investigation: “Challenging Google’s product design decisions in this case would require the Commission — or a court — to second-guess a firm’s product design decisions where plausible procompetitive justifications have been offered, and where those justifications are supported by ample evidence.” The investigation did result in a consent order regarding patent licensing unrelated in any way to search and a voluntary commitment by Google not to engage in certain search-advertising-related conduct.
  • South Korea FTC, 2013. The KFTC cleared Google after a two-year investigation. It opened a new investigation in 2016, but, as I have discussed, “[i]f anything, the economic conditions supporting [the KFTC’s 2013] conclusion have only gotten stronger since.”
  • Canada Competition Bureau, 2016. The CCB closed a three-year long investigation into Google’s search practices without taking any action.

Similar investigations have been closed without findings of liability (or simply lie fallow) in a handful of other countries (e.g., Taiwan and Brazil) and even several states (e.g., Ohio and Texas). In fact, of all the jurisdictions that have investigated Google, only the EU and Russia have actually assessed liability.

As Beth Wilkinson, outside counsel to the FTC during the Google antitrust investigation, noted upon closing the case:

Undoubtedly, Google took aggressive actions to gain advantage over rival search providers. However, the FTC’s mission is to protect competition, and not individual competitors. The evidence did not demonstrate that Google’s actions in this area stifled competition in violation of U.S. law.

The CCB was similarly unequivocal in its dismissal of the very same antitrust claims Missouri’s AG seems intent on pursuing against Google:

The Bureau sought evidence of the harm allegedly caused to market participants in Canada as a result of any alleged preferential treatment of Google’s services. The Bureau did not find adequate evidence to support the conclusion that this conduct has had an exclusionary effect on rivals, or that it has resulted in a substantial lessening or prevention of competition in a market.

Unfortunately, rather than follow the lead of these agencies, Missouri’s investigation appears to have more in common with Russia’s effort to prop up a favored competitor (Yandex) at the expense of consumer welfare.

The Yelp Claim

Take Mr. Hawley’s focus on “Google’s alleged misappropriation of online content from the websites of its competitors,” for example, which cleaves closely to what should become known henceforth as “The Yelp Claim.”

While the sordid history of Yelp’s regulatory crusade against Google is too long to canvas in its entirety here, the primary elements are these:

Once upon a time (in 2005), Google licensed Yelp’s content for inclusion in its local search results. In 2007 Yelp ended the deal. By 2010, and without a license from Yelp (asserting fair use), Google displayed small snippets of Yelp’s reviews that, if clicked on, led to Yelp’s site. Even though Yelp received more user traffic from those links as a result, Yelp complained, and Google removed Yelp snippets from its local results.

In its 2013 agreement with the FTC, Google guaranteed that Yelp could opt-out of having even snippets displayed in local search results by committing Google to:

make available a web-based notice form that provides website owners with the option to opt out from display on Google’s Covered Webpages of content from their website that has been crawled by Google. When a website owner exercises this option, Google will cease displaying crawled content from the domain name designated by the website owner….

The commitments also ensured that websites (like Yelp) that opt out would nevertheless remain in Google’s general index.

Ironically, Yelp now claims in a recent study that Google should show not only snippets of Yelp reviews, but even more of Yelp’s content. (For those interested, my colleagues and I have a paper explaining why the study’s claims are spurious).

The key bit here, of course, is that Google stopped pulling content from Yelp’s pages to use in its local search results, and that it implemented a simple mechanism for any other site wishing to opt out of the practice to do so.

It’s difficult to imagine why Missouri’s citizens might require more than this to redress alleged anticompetitive harms arising from the practice.

Perhaps AG Hawley thinks consumers would be better served by an opt-in mechanism? Of course, this is absurd, particularly if any of Missouri’s citizens — and their businesses — have websites. Most websites want at least some of their content to appear on Google’s search results pages as prominently as possible — see this and this, for example — and making this information more accessible to users is why Google exists.

To be sure, some websites may take issue with how much of their content Google features and where it places that content. But the easy opt out enables them to prevent Google from showing their content in a manner they disapprove of. Yelp is an outlier in this regard because it views Google as a direct competitor, especially to the extent it enables users to read some of Yelp’s reviews without visiting Yelp’s pages.

For Yelp and a few similarly situated companies the opt out suffices. But for almost everyone else the opt out is presumably rarely exercised, and any more-burdensome requirement would just impose unnecessary costs, harming instead of helping their websites.

The privacy issues

The Missouri investigation also applies to “Google’s collection, use, and disclosure of information about Google users and their online activities.” More pointedly, Hawley claims that “Google may be collecting more information from users than the company was telling consumers….”

Presumably this would come as news to the FTC, which, with a much larger staff and far greater expertise, currently has Google under a 20 year consent order (with some 15 years left to go) governing its privacy disclosures and information-sharing practices, thus ensuring that the agency engages in continual — and well-informed — oversight of precisely these issues.

The FTC’s consent order with Google (the result of an investigation into conduct involving Google’s short-lived Buzz social network, allegedly in violation of Google’s privacy policies), requires the company to:

  • “[N]ot misrepresent in any manner, expressly or by implication… the extent to which respondent maintains and protects the privacy and confidentiality of any [user] information…”;
  • “Obtain express affirmative consent from” users “prior to any new or additional sharing… of the Google user’s identified information with any third party” if doing so would in any way deviate from previously disclosed practices;
  • “[E]stablish and implement, and thereafter maintain, a comprehensive privacy program that is reasonably designed to [] address privacy risks related to the development and management of new and existing products and services for consumers, and (2) protect the privacy and confidentiality of [users’] information”; and
  • Along with a laundry list of other reporting requirements, “[submit] biennial assessments and reports [] from a qualified, objective, independent third-party professional…, approved by the [FTC] Associate Director for Enforcement, Bureau of Consumer Protection… in his or her sole discretion.”

What, beyond the incredibly broad scope of the FTC’s consent order, could the Missouri AG’s office possibly hope to obtain from an investigation?

Google is already expressly required to provide privacy reports to the FTC every two years. It must provide several of the items Hawley demands in his CID to the FTC; others are required to be made available to the FTC upon demand. What materials could the Missouri AG collect beyond those the FTC already receives, or has the authority to demand, under its consent order?

And what manpower and expertise could Hawley apply to those materials that would even begin to equal, let alone exceed, those of the FTC?

Lest anyone think the FTC is falling down on the job, a year after it issued that original consent order the Commission fined Google $22.5 million for violating the order in a questionable decision that was signed on to by all of the FTC’s Commissioners (both Republican and Democrat) — except the one who thought it didn’t go far enough.

That penalty is of undeniable import, not only for its amount (at the time it was the largest in FTC history) and for stemming from alleged problems completely unrelated to the issue underlying the initial action, but also because it was so easy to obtain. Having put Google under a 20-year consent order, the FTC need only prove (or threaten to prove) contempt of the consent order, rather than the specific elements of a new violation of the FTC Act, to bring the company to heel. The former is far easier to prove, and comes with the ability to impose (significant) damages.

So what’s really going on in Jefferson City?

While states are, of course, free to enforce their own consumer protection laws to protect their citizens, there is little to be gained — other than cold hard cash, perhaps — from pursuing cases that, at best, duplicate enforcement efforts already undertaken by the federal government (to say nothing of innumerable other jurisdictions).

To take just one relevant example, in 2013 — almost a year to the day following the court’s approval of the settlement in the FTC’s case alleging Google’s violation of the Buzz consent order — 37 states plus DC (not including Missouri) settled their own, follow-on litigation against Google on the same facts. Significantly, the terms of the settlement did not impose upon Google any obligation not already a part of the Buzz consent order or the subsequent FTC settlement — but it did require Google to fork over an additional $17 million.  

Not only is there little to be gained from yet another ill-conceived antitrust campaign, there is much to be lost. Such massive investigations require substantial resources to conduct, and the opportunity cost of doing so may mean real consumer issues go unaddressed. The Consumer Protection Section of the Missouri AG’s office says it receives some 100,000 consumer complaints a year. How many of those will have to be put on the back burner to accommodate an investigation like this one?

Even when not politically motivated, state enforcement of CPAs is not an unalloyed good. In fact, empirical studies of state consumer protection actions like the one contemplated by Mr. Hawley have shown that such actions tend toward overreach — good for lawyers, perhaps, but expensive for taxpayers and often detrimental to consumers. According to a recent study by economists James Cooper and Joanna Shepherd:

[I]n recent decades, this thoughtful balance [between protecting consumers and preventing the proliferation of lawsuits that harm both consumers and businesses] has yielded to damaging legislative and judicial overcorrections at the state level with a common theoretical mistake: the assumption that more CPA litigation automatically yields more consumer protection…. [C]ourts and legislatures gradually have abolished many of the procedural and remedial protections designed to cabin state CPAs to their original purpose: providing consumers with redress for actual harm in instances where tort and contract law may provide insufficient remedies. The result has been an explosion in consumer protection litigation, which serves no social function and for which consumers pay indirectly through higher prices and reduced innovation.

AG Hawley’s investigation seems almost tailored to duplicate the FTC’s extensive efforts — and to score political points. Or perhaps Mr. Hawley is just perturbed that Missouri missed out its share of the $17 million multistate settlement in 2013.

Which raises the spectre of a further problem with the Missouri case: “rent extraction.”

It’s no coincidence that Mr. Hawley’s investigation follows closely on the heels of Yelp’s recent letter to the FTC and every state AG (as well as four members of Congress and the EU’s chief competition enforcer, for good measure) alleging that Google had re-started scraping Yelp’s content, thus violating the terms of its voluntary commitments to the FTC.

It’s also no coincidence that Yelp “notified” Google of the problem only by lodging a complaint with every regulator who might listen rather than by actually notifying Google. But an action like the one Missouri is undertaking — not resolution of the issue — is almost certainly exactly what Yelp intended, and AG Hawley is playing right into Yelp’s hands.  

Google, for its part, strongly disputes Yelp’s allegation, and, indeed, has — even according to Yelp — complied fully with Yelp’s request to keep its content off Google Local and other “vertical” search pages since 18 months before Google entered into its commitments with the FTC. Google claims that the recent scraping was inadvertent, and that it would happily have rectified the problem if only Yelp had actually bothered to inform Google.

Indeed, Yelp’s allegations don’t really pass the smell test: That Google would suddenly change its practices now, in violation of its commitments to the FTC and at a time of extraordinarily heightened scrutiny by the media, politicians of all stripes, competitors like Yelp, the FTC, the EU, and a host of other antitrust or consumer protection authorities, strains belief.

But, again, identifying and resolving an actual commercial dispute was likely never the goal. As a recent, fawning New York Times article on “Yelp’s Six-Year Grudge Against Google” highlights (focusing in particular on Luther Lowe, now Yelp’s VP of Public Policy and the author of the letter):

Yelp elevated Mr. Lowe to the new position of director of government affairs, a job that more or less entails flying around the world trying to sic antitrust regulators on Google. Over the next few years, Yelp hired its first lobbyist and started a political action committee. Recently, it has started filing complaints in Brazil.

Missouri, in other words, may just be carrying Yelp’s water.

The one clear lesson of the decades-long Microsoft antitrust saga is that companies that struggle to compete in the market can profitably tax their rivals by instigating antitrust actions against them. As Milton Friedman admonished, decrying “the business community’s suicidal impulse” to invite regulation:

As a believer in the pursuit of self-interest in a competitive capitalist system, I can’t blame a businessman who goes to Washington [or is it Jefferson City?] and tries to get special privileges for his company.… Blame the rest of us for being so foolish as to let him get away with it.

Taking a tough line on Silicon Valley firms in the midst of today’s anti-tech-company populist resurgence may help with the electioneering in Mr. Hawley’s upcoming bid for a US Senate seat and serve Yelp, but it doesn’t offer any clear, actual benefits to Missourians. As I’ve wondered before: “Exactly when will regulators be a little more skeptical of competitors trying to game the antitrust laws for their own advantage?”