Archives For COVID-19

In the wake of its departure from the European Union, the United Kingdom will have the opportunity to enter into new free trade agreements (FTAs) with its international trading partners that lower existing tariff and non-tariff barriers. Achieving major welfare-enhancing reductions in trade restrictions will not be easy. Trade negotiations pose significant political sensitivities, such as those arising from the high levels of protection historically granted certain industry sectors, particularly agriculture.

Nevertheless, the political economy of protectionism suggests that, given deepening globalization and the sudden change in U.K. trade relations wrought by Brexit, the outlook for substantial liberalization of U.K. trade has become much brighter. Below, I address some of the key challenges facing U.K. trade negotiators as they seek welfare-enhancing improvements in trade relations and offer a proposal to deal with novel trade distortions in the least protectionist manner.

Two New Challenges Affecting Trade Liberalization

In addition to traditional trade issues, such as tariff levels and industry sector-specific details, U.K, trade negotiators—indeed, trade negotiators from all nations—will have to confront two relatively new and major challenges that are creating several frictions.

First, behind-the-border anticompetitive market distortions (ACMDs) have largely replaced tariffs as the preferred means of protection in many areas. As I explained in a previous post on this site (citing an article by trade-law scholar Shanker Singham and me), existing trade and competition law have not been designed to address the ACMD problem:

[I]nternational trade agreements simply do not reach a variety of anticompetitive welfare-reducing government measures that create de facto trade barriers by favoring domestic interests over foreign competitors. Moreover, many of these restraints are not in place to discriminate against foreign entities, but rather exist to promote certain favored firms. We dub these restrictions “anticompetitive market distortions” or “ACMDs,” in that they involve government actions that empower certain private interests to obtain or retain artificial competitive advantages over their rivals, be they foreign or domestic. ACMDs are often a manifestation of cronyism, by which politically-connected enterprises successfully pressure government to shield them from effective competition, to the detriment of overall economic growth and welfare. …

As we emphasize in our article, existing international trade rules have been able to reach ACMDs, which include: (1) governmental restraints that distort markets and lessen competition; and (2) anticompetitive private arrangements that are backed by government actions, have substantial effects on trade outside the jurisdiction that imposes the restrictions, and are not readily susceptible to domestic competition law challenge. Among the most pernicious ACMDs are those that artificially alter the cost-base as between competing firms. Such cost changes will have large and immediate effects on market shares, and therefore on international trade flows.

Second, in recent years, the trade remit has expanded to include “nontraditional” issues such as labor, the environment, and now climate change. These concerns have generated support for novel tariffs that could help promote protectionism and harmful trade distortions. As explained in a recent article by the Special Trade Commission advisory group (former senior trade and antitrust officials who have provided independent policy advice to the U.K. government):

[The rise of nontraditional trade issues] has renewed calls for border tax adjustments or dual tariffs on an ex-ante basis. This is in sharp tension with the W[orld Trade Organization’s] long-standing principle of technological neutrality, and focus on outcomes as opposed to discriminating on the basis of the manner of production of the product. The problem is that it is too easy to hide protectionist impulses into concerns about the manner of production, and once a different tariff applies, it will be very difficult to remove. The result will be to significantly damage the liberalisation process itself leading to severe harm to the global economy at a critical time as we recover from Covid-19. The potentially damaging effects of ex ante tariffs will be visited most significantly in developing countries.

Dealing with New Trade Challenges in the Least Protectionist Manner

A broad approach to U.K. trade liberalization that also addresses the two new trade challenges is advanced in a March 2 report by the U.K. government’s Trade and Agricultural Commission (TAC, an independent advisory agency established in 2020). Although addressed primarily to agricultural trade, the TAC report enunciates principles applicable to U.K. trade policy in general, considering the impact of ACMDs and nontraditional issues. Key aspects of the TAC report are summarized in an article by Shanker Singham (the scholar who organized and convened the Special Trade Commission and who also served as a TAC commissioner):

The heart of the TAC report’s import policy contains an innovative proposal that attempts to simultaneously promote a trade liberalising agenda in agriculture, while at the same time protecting the UK’s high standards in food production and ensuring the UK fully complies with WTO rules on animal and plant health, as well as technical regulations that apply to food trade.

This proposal includes a mechanism to deal with some of the most difficult issues in agricultural trade which relate to animal welfare, environment and labour rules. The heart of this mechanism is the potential for the application of a tariff in cases where an aggrieved party can show that a trading partner is violating agreed standards in an FTA.

The result of the mechanism is a tariff based on the scale of the distortion which operates like a trade remedy. The mechanism can also be used offensively where a country is preventing market access by the UK as a result of the market distortion, or defensively where a distortion in a foreign market leads to excess exports from that market. …

[T]he tariff would be calibrated to the scale of the distortion and would apply only to the product category in which the distortion is occurring. The advantage of this over a more conventional trade remedy is that it is based on cost as opposed to price and is designed to remove the effects of the distorting activity. It would not be applied on a retaliatory basis in other unrelated sectors.

In exchange for this mechanism, the UK commits to trade liberalisation and, within a reasonable timeframe, zero tariffs and zero quotas. This in turn will make the UK’s advocacy of higher standards in international organisations much more credible, another core TAC proposal.

The TAC report also notes that behind the border barriers and anti-competitive market distortions (“ACMDs”) have the capacity to damage UK exports and therefore suggests a similar mechanism or set of disciplines could be used offensively. Certainly, where the ACMD is being used to protect a particular domestic industry, using the ACMD mechanism to apply a tariff for the exports of that industry would help, but this may not apply where the purpose is protective, and the industry does not export much.

I would argue that in this case, it would be important to ensure that UK FTAs include disciplines on these ACMDs which if breached could lead to dispute settlement and the potential for retaliatory tariffs for sectors in the UK’s FTA partner that do export. This is certainly normal WTO-sanctioned practice, and could be used here to encourage compliance. It is clear from the experience in dealing with countries that engage in ACMDs for trade or competition advantage that unless there are robust disciplines, mere hortatory language would accomplish little or nothing.

But this sort of mechanism with its concomitant commitment to freer trade has much wider potential application than just UK agricultural trade policy. It could also be used to solve a number of long standing trade disputes such as the US-China dispute, and indeed the most vexed questions in trade involving environment and climate change in ways that do not undermine the international trading system itself.

This is because the mechanism is based on an ex post tariff as opposed to an ex ante one which contains within it the potential for protectionism, and is prone to abuse. Because the tariff is actually calibrated to the cost advantage which is secured as a result of the violation of agreed international standards, it is much more likely that it will be simply limited to removing this cost advantage as opposed to becoming a punitive measure that curbs ordinary trade flows.

It is precisely this type of problem solving and innovative thinking that the international trading system needs as it faces a range of challenges that threaten liberalisation itself and the hard-won gains of the post war GATT/WTO system itself. The TAC report represents UK leadership that has been sought after since the decision to leave the EU. It has much to commend it.

Assessment and Conclusion

Even when administered by committed free traders, real-world trade liberalization is an exercise in welfare optimization, subject to constraints imposed by the actions of organized interest groups expressed through the political process. The rise of new coalitions (such as organizations committed to specified environmental goals, including limiting global warming) and the proliferation of ADMCs further complicates the trade negotiation calculus.

Fortunately, recognizing the “reform moment” created by Brexit, free trade-oriented experts (in particular, the TAC, supported by the Special Trade Commission) have recommended that the United Kingdom pursue a bold move toward zero tariffs and quotas. Narrow exceptions to this policy would involve after-the-fact tariffications to offset (1) the distortive effects of ACMDs and (2) derogation from rules embodying nontraditional concerns, such as environmental commitments. Such tariffications would be limited and cost-based, and, as such, welfare-superior to ex ante tariffs calibrated to price.

While the details need to be worked out, the general outlines of this approach represent a thoughtful and commendable market-oriented effort to secure substantial U.K. trade liberalization, subject to unavoidable constraints. More generally, one would hope that other jurisdictions (including the United States) take favorable note of this development as they generate their own trade negotiation policies. Stay tuned.

[TOTM: The following is part of a digital symposium by TOTM guests and authors on the legal and regulatory issues that arose during Ajit Pai’s tenure as chairman of the Federal Communications Commission. The entire series of posts is available here.

Joshua D. Wright is university professor and executive director of the Global Antitrust Institute at George Mason University’s Scalia Law School. He served as a commissioner of the Federal Trade Commission from 2013 through 2015.]

Much of this symposium celebrates Ajit’s contributions as chairman of the Federal Communications Commission and his accomplishments and leadership in that role. And rightly so. But Commissioner Pai, not just Chairman Pai, should also be recognized.

I first met Ajit when we were both minority commissioners at our respective agencies: the FCC and Federal Trade Commission. Ajit had started several months before I was confirmed. I watched his performance in the minority with great admiration. He reached new heights when he shifted from minority commissioner to chairman, and the accolades he will receive for that work are quite appropriate. But I want to touch on his time as a minority commissioner at the FCC and how that should inform the retrospective of his tenure.

Let me not bury the lead: Ajit Pai has been, in my view, the most successful, impactful minority commissioner in the history of the modern regulatory state. And it is that success that has led him to become the most successful and impactful chairman, too.

I must admit all of this success makes me insanely jealous. My tenure as a minority commissioner ran in parallel with Ajit. We joked together about our fierce duel to be the reigning king of regulatory dissents. We worked together fighting against net neutrality. We compared notes on dissenting statements and opinions. I tried to win our friendly competition. I tried pretty hard. And I lost; worse than I care to admit. But we had fun. And I very much admired the combination of analytical rigor, clarity of exposition, and intellectual honesty in his work. Anyway, the jealousy would be all too much if he weren’t also a remarkable person and friend.

The life of a minority commissioner can be a frustrating one. Like Sisyphus, the minority commissioner often wakes up each day to roll the regulatory (well, in this case, deregulatory) boulder up the hill, only to watch it roll down. And then do it again. And again. At times, it is an exhausting series of jousting matches with the windmills of Washington bureaucracy. It is not often that a minority commissioner has as much success as Commissioner Pai did: dissenting opinions ultimately vindicated by judicial review; substantive victories on critical policy issues; paving the way for institutional and procedural reforms.

It is one thing to write a raging dissent about how the majority has lost all principles. Fire and brimstone come cheap when there aren’t too many consequences to what you have to say. Measure a man after he has been granted power and a chance to use it, and only then will you have a true test of character. Ajit passes that test like few in government ever have.

This is part of what makes Ajit Pai so impressive. I have seen his work firsthand. The multitude of successes Ajit achieved as Chairman Pai were predictable, precisely because Commissioner Pai told the world exactly where he stood on important telecommunications policy issues, the reasons why he stood there, and then, well, he did what he said he would. The Pai regime was much more like a Le’Veon Bell run, between the tackles, than a no-look pass from Patrick Mahomes to Tyreek Hill. Commissioner Pai shared his playbook with the world; he told us exactly where he was going to run the ball. And then Chairman Pai did exactly that. And neither bureaucratic red tape nor political pressure—or even physical threat—could stop him.

Here is a small sampling of his contributions, many of them building on groundwork he laid in the minority:

Focus on Economic Analysis

One of Chairman Pai’s most important contributions to the FCC is his work to systematically incorporate economic analysis into FCC decision-making. The triumph of this effort was establishing the Office of Economic Analysis (OEA) in 2018. The OEA focus on conducting economic analyses of the costs, benefits, and economic impacts of the commission’s proposed rules will be a critical part of agency decision-making from here on out. This act alone would form a legacy any agency head could easily rest their laurels on. The OEA’s work will shape the agency for decades and ensure that agency decisions are made with the oversight economics provides.

This is a hard thing to do; just hiring economists is not enough. Structure matters. How economists get information to decision-makers determines if it will be taken seriously. To this end, Ajit has taken all the lessons from what has made the economists at the FTC so successful—and the lessons from the structural failures at other agencies—and applied them at the FCC.

Structural independence looks like “involving economists on cross-functional teams at the outset and allowing the economics division to make its own, independent recommendations to decision-makers.”[1] And it is necessary for economics to be taken seriously within an agency structure. Ajit has assured that FCC decision-making will benefit from economic analysis for years to come.

Narrowing the Digital Divide

Chairman Pai made helping the disadvantaged get connected to the internet and narrowing the digital divide the top priorities during his tenure. And Commissioner Pai was fighting for this long before the pandemic started.

As businesses, schools, work, and even health care have moved online, the need to get Americans connected with high-speed broadband has never been greater. Under Pai’s leadership, the FCC has removed bureaucratic barriers[2] and provided billions in funding[3] to facilitate rural broadband buildout. We are talking about connections to some 700,000 rural homes and businesses in 45 states, many of whom are gaining access to high-speed internet for the first time.

Ajit has also made sure to keep an eye out for the little guy, and communities that have been historically left behind. Tribal communities,[4] particularly in the rural West, have been a keen focus of his, as he knows all-too-well the difficulties and increased costs associated with servicing those lands. He established programs to rebuild and expand networks in the Virgin Islands and Puerto Rico[5] in an effort to bring the islands to parity with citizens living on the mainland.

You need not take my word for it; he really does talk about this all the time. As he said in a speech at the National Tribal Broadband Summit: “Since my first day in this job, I’ve said that closing the digital divide was my top priority. And as this audience knows all too well, nowhere is that divide more pronounced than on Tribal lands.“ That work is not done; it is beyond any one person. But Ajit should be recognized for his work bridging the divide and laying the foundation for future gains.

And again, this work started as minority commissioner. Before he was chairman, Pai proposed projects for rural broadband development; he frequently toured underserved states and communities; and he proposed legislation to offer the 21st century promise to economically depressed areas of the country. Looking at Chairman Pai is only half the picture.

Keeping Americans Connected

One would not think that the head of the Federal Communications Commission would be a leader on important health-care issues, but Ajit has made a real difference here too. One of his major initiatives has been the development of telemedicine solutions to expand access to care in critical communities.

Beyond encouraging buildout of networks in less-connected areas, Pai’s FCC has also worked to allocate funding for health-care providers and educational institutions who were navigating the transition to remote services. He ensured that health-care providers’ telecommunications and information services were funded. He worked with the U.S. Department of Education to direct funds for education stabilization and allowed schools to purchase additional bandwidth. And he granted temporary additional spectrum usage to broadband providers to meet the increased demand upon our nation’s networks. Oh, and his Keep Americans Connected Pledge gathered commitment from more than 800 companies to ensure that Americans would not lose their connectivity due to pandemic-related circumstances. As if the list were not long enough, Congress’ January coronavirus relief package will ensure that these and other programs, like Rip and Replace, will remain funded for the foreseeable future.

I might sound like I am beating a dead horse here, but the seeds of this, too, were laid in his work in the minority. Here he is describing his work in a 2015 interview, as a minority commissioner:

My own father is a physician in rural Kansas, and I remember him heading out in his car to visit the small towns that lay 40 miles or more from home. When he was there, he could provide care for people who would otherwise never see a specialist at all. I sometimes wonder, back in the 1970s and 1980s, how much easier it would have been on patients, and him, if broadband had been available so he could provide healthcare online.

Agency Transparency and Democratization

Many minority commissioners like to harp on agency transparency. Some take a different view when they are in charge. But Ajit made good on his complaints about agency transparency when he became Chairman Pai. He did this through circulating draft items well in advance of monthly open meetings, giving people the opportunity to know what the agency was voting on.

You used to need a direct connection with the FCC to even be aware of what orders were being discussed—the worst of the D.C. swamp—but now anyone can read about the working items, in clear language.

These moves toward a more transparent, accessible FCC dispel the impression that the agency is run by Washington insiders who are disconnected from the average person. The meetings may well be dry and technical—they really are—but Chairman Pai’s statements are not only good-natured and humorous, but informative and substantive. The public has been well-served by his efforts here.

Incentivizing Innovation and Next-Generation Technologies

Chairman Pai will be remembered for his encouragement of innovation. Under his chairmanship, the FCC discontinued rules that unnecessarily required carriers to maintain costly older, lower-speed networks and legacy voice services. It streamlined the discontinuance process for lower-speed services if the carrier is already providing higher-speed service or if no customers are using the service. It also okayed streamlined notice following force majeure events like hurricanes to encourage investment and deployment of newer, faster infrastructure and services following destruction of networks. The FCC also approved requests by companies to provide high-speed broadband through non-geostationary orbit satellite constellations and created a streamlined licensing process for small satellites to encourage faster deployment.

This is what happens when you get a tech nerd at the head of an agency he loves and cares for. A serious commitment to good policy with an eye toward the future.

Restoring Internet Freedom

This is a pretty sensitive one for me. You hear less about it now, other than some murmurs from the Biden administration about changing it, but the debate over net neutrality got nasty and apocalyptic.

It was everywhere; people saying Chairman Pai would end the internet as we know it. The whole web blacked out for a day in protest. People mocked up memes showing a 25 cent-per-Google-search charge. And as a result of this over-the-top rhetoric, my friend, and his family, received death threats.

That is truly beyond the pale. One could not blame anyone for leaving public service in such an environment. I cannot begin to imagine what I would have done in Ajit’s place. But Ajit took the threats on his life with grace and dignity, never lost his sense of humor, and continued to serve the public dutifully with remarkable courage. I think that says a lot about him. And the American public is lucky to have benefited from his leadership.

Now, for the policy stuff. Though it should go without saying, the light-touch framework Chairman Pai returned us to—as opposed to the public utility one—will ensure that the United States maintains its leading position on technological innovation in 5G networks and services. The fact that we have endured COVID—and the massive strain on the internet it has caused—with little to no noticeable impact on internet services is all the evidence you need he made the right choice. Ajit has rightfully earned the title of the “5G Chairman.”

Conclusion

I cannot give Ajit all the praise he truly deserves without sounding sycophantic, or bribed. There are any number of windows into his character, but one rises above the rest for me. And I wanted to take the extra time to thank Ajit for it.

Every year, without question, no matter what was going on—even as chairman—Ajit would come to my classes and talk to my students. At length. In detail. And about any subject they wished. He stayed until he answered all of their questions. If I didn’t politely shove him out of the class to let him go do his real job, I’m sure he would have stayed until the last student left. And if you know anything about how to judge a person’s character, that will tell you all you need to know. 

Congratulations, Chairman Pai.


[1] Jerry Ellig & Catherine Konieczny, The Organization of Economists in Regulatory Agencies: Does Structure Matter?

[2] Rural Digital Opportunity Fund, Fed. Commc’ns Comm’n, https://www.fcc.gov/auction/904.

[3] Press Release, Connect America Fund Auction to Expand Broadband to Over 700,000 Rural Homes and Businesses: Auction Allocates $1.488 Billion to Close the Digital Divide, Fed. Commc’ns Comm’n, https://docs.fcc.gov/public/attachments/DOC-353840A1.pdf.

[4] Press Release, FCC Provides Relief for Carriers Serving Tribal Lands, Fed. Commc’ns Comm’n, https://www.fcc.gov/document/fcc-provides-relief-carriers-serving-tribal-lands.

[5] Press Release, FCC Approves $950 Million to Harden, Improve, and Expand Broadband Networks in Puerto Rico and U.S. Virgin Islands, Fed. Commc’ns Comm’n, https://docs.fcc.gov/public/attachments/DOC-359891A1.pdf.

[TOTM: The following is part of a digital symposium by TOTM guests and authors on the legal and regulatory issues that arose during Ajit Pai’s tenure as chairman of the Federal Communications Commission. The entire series of posts is available here.

Robert McDowell is a partner with Cooley LLP and a former commissioner of the Federal Communications Commission.]

Many thanks to Geoffrey Manne for this opportunity to memorialize a few thoughts I have about Ajit’s service on the Federal Communications Commission. My remarks will be more about Ajit as a person rather than the substance and long laundry list of his accomplishments as chair. Others will do that, I’m sure.

The first memory I have of meeting Ajit V. Pai reaches back to 2007, after I had served on the commission for about a year. In one of my regular meetings with then-FCC General Counsel Sam Feder, Sam was very proud to introduce me to his new hire. I saw before me an eager and polite young man with a million-watt smile. After reviewing his resume, I immediately recognized that he was already quite accomplished, despite his tender young age: the son of immigrants; hailing from the heart of America as the native of a small town in Kansas; Harvard undergrad with academic distinction; a J.D. from the University of Chicago – also with academic distinction; public service in all three branches of the federal government; and much more.

Wow! “This kid has a very bright future,” I thought. And history proved that, for once, I was right. In fact, Ajit’s appointment to the FCC was one key reason why I decided to step down from the commission before the expiration of my term. But more on that later. As I got to know Ajit more over the years, I learned that he was super bright (not everyone from Harvard is, by the way), exudes a sunny personality and is a principled, common-sense, and compassionate conservative who was dedicated to the rule of law, respecting the wisdom of markets, and serving the public interest.

Like my own Forrest Gump dumb luck in getting to the FCC, Ajit’s path to a seat on the commission came about in part by happenstance. With Commissioner Meredith Attwell Baker’s surprise departure in the spring of 2011, a rare opportunity was suddenly created. Also, like my journey to the commission, a blizzard of names swirled about regarding who might be appointed to that seat by President Barack Obama. Ajit’s name was among the least-known when compared to higher-profile candidates. But once he was nominated, I was excited to reach out to him and offer briefings and anything else he needed to help him prepare for the gauntlet of the Senate confirmation process. It was inspiring to attend his confirmation hearing and to see his immigrant parents smiling so proudly at their talented and accomplished son. Little did either one of us know that his confirmation would be held by senators due to an FCC proceeding that had nothing to do with him. (There’s some irony regarding which proceeding that was, but I digress. Ajit will understand.)

So many months passed by while he waited and waited…and waited for the holds to be lifted so he could be confirmed. In fact, his confirmation lingered for so long it was unclear if he would ever be confirmed. I know that was incredibly frustrating for him and his beautiful family. But eventually, providence smiled upon him and he became my colleague on the commission. Largely ignored by the media, Ajit made history by becoming the first Indian-American appointed to the FCC. In fact, he may be the first, or one of very few, commissioners who was a first-generation American. This wonderful accomplishment should have been celebrated more. But I sense the silence regarding the positive ground-breaking that Ajit achieved in this regard bothers me more than him. And that tells you a lot about his virtues; virtues which would serve him well after becoming chairman.

I always ran to work when I was a commissioner for seven years. I loved that job and I licked the plate clean every day. Upon his swearing-in as my colleague, I could tell instantly that Ajit loved his job as much as I loved mine. Not all commissioners love being commissioners, which I could never understand. With how many jobs are you truly independent and able to touch and improve the daily lives of every American? Ajit understood the value of the gift of being a commissioner right away. While he and I were in the minority on the FCC during the Obama administration, the public should know that the majority of FCC votes back then were bipartisan. But there are a few very important votes which are not unanimous, and those of us in the minority have a sacred role to play: that of respectful but passionate dissenter to help inform the public, the appellate courts, Congress, the White House, and future FCCs about the better path as we saw it.

It was clear that “The Kid,” as I once thought of him, could write fantastic dissents. After a few months of witnessing his talents, and after the 2012 elections, I began to think: “The role of Loyal Opposition will be in fine hands if I step down after nearly seven years. Maybe it is time to let ‘The Kid’ write these dang dissents for the next four years, and then I can be released back into my natural habitat: the private sector.” And so, my thought process evolved. Accordingly, May 17, 2013, the day I left office, Ajit V. Pai became the “senior Republican on the FCC.” Little did either one of us know at the time that that move, combined with a surprise election result in 2016, would pave the path for him to become chairman of the FCC.

Ajit and his team accomplished so much in his four years as chairman. I’ll let others enumerate those accomplishments, but I am delighted to see the eye-popping, jaw-dropping and record-smashing success of the C-Band auction serve as a VERY LOUD and beautiful exclamation point on his legacy. Keep in mind that many of the “best and brightest,” including U.S. Senators and two of his FCC colleagues, said the C-Band auction should either never happen or would be more successful if it had been shaped their way. But the markets have spoken, and the C-Band auction has broken a record of success that may not be surpassed for many years. Ajit, his colleagues Mike O’Rielly and Brendan Carr, and his entire team should be very proud of their handiwork.

In closing, I want to take readers briefly backstage with this still-young man. The wind in his sails is his beautiful bride, Janine. That’s Dr. Janine Van Lancker, a highly accomplished physician. Together with their two beautiful children, they have been Ajit’s Rock of Gibraltar, especially in the most trying of times. I won’t dignify the criminals who threatened their lives by going into detail, but no family of a public servant should ever have to endure what they did. Ever. But the trauma that came with serving did not diminish Ajit’s and Janine’s natural inclination to think of others. While I was on my erstwhile COVID-deathbed last March, Ajit graciously texted me, asking about my condition and offering the help and support of his personal physician, his bride Janine. If you remember nothing else about this blog post, please remember that.

Well done, “Kid from Kansans.” Well done. And thank you.

With the COVID-19 vaccine made by Moderna joining the one from Pfizer and BioNTech in gaining approval from the U.S. Food and Drug Administration, it should be time to celebrate the U.S. system of pharmaceutical development. The system’s incentives—notably granting patent rights to firms that invest in new and novel discoveries—have worked to an astonishing degree, producing not just one but as many as three or four effective approaches to end a viral pandemic that, just a year ago, was completely unknown.

Alas, it appears not all observers agree. Now that we have the vaccines, some advocate suspending or limiting patent rights—for example, by imposing a compulsory licensing scheme—with the argument that this is the only way for the vaccines to be produced in mass quantities worldwide. Some critics even assert that abolishing or diminishing property rights in pharmaceuticals is needed to end the pandemic.

In truth, we can effectively and efficiently distribute the vaccines while still maintaining the integrity of our patent system. 

What the false framing ignores are the important commercialization and distribution functions that patents provide, as well as the deep, long-term incentives the patent system provides to create medical innovations and develop a robust pharmaceutical supply chain. Unless we are sure this is the last pandemic we will ever face, repealing intellectual property rights now would be a catastrophic mistake.

The supply chains necessary to adequately scale drug production are incredibly complex, and do not appear overnight. The coordination and technical expertise needed to support worldwide distribution of medicines depends on an ongoing pipeline of a wide variety of pharmaceuticals to keep the entire operation viable. Public-spirited officials may in some cases be able to piece together facilities sufficient to produce and distribute a single medicine in the short term, but over the long term, global health depends on profit motives to guarantee the commercialization pipeline remains healthy. 

But the real challenge is in maintaining proper incentives to develop new drugs. It has long been understood that information goods like intellectual property will be undersupplied without sufficient legal protections. Innovators and those that commercialize innovations—like researchers and pharmaceutical companies—have less incentive to discover and market new medicines as the likelihood that they will be able to realize a return for their efforts diminishes. Without those returns, it’s far less certain the COVID vaccines would have been produced so quickly, or at all. The same holds for the vaccines we will need for the next crisis or badly needed treatments for other deadly diseases.

Patents are not the only way to structure incentives, as can be seen with the current vaccines. Pharmaceutical companies also took financial incentives from various governments in the form of direct payment or in purchase guarantees. But this enhances, rather than diminishes, the larger argument. There needs to be adequate returns for those who engage in large, risky undertakings like creating a new drug. 

Some critics would prefer to limit pharmaceutical companies’ returns solely to those early government investments, but there are problems with this approach. It is difficult for governments to know beforehand what level of profit is needed to properly incentivize firms to engage in producing these innovations.  To the extent that direct government investment is useful, it often will be as an additional inducement that encourages new entry by multiple firms who might each pursue different technologies. 

Thus, in the case of coronavirus vaccines, government subsidies may have enticed more competitors to enter more quickly, or not to drop out as quickly, in hopes that they would still realize a profit, notwithstanding the risks. Where there might have been only one or two vaccines produced in the United States, it appears likely we will see as many as four.

But there will always be necessary trade-offs. Governments cannot know how to set proper incentives to encourage development of every possible medicine for every possible condition by every possible producer.  Not only do we not know which diseases and which firms to prioritize, but we have no idea how to determine which treatment approaches to encourage. 

The COVID-19 vaccines provide a clear illustration of this problem. We have seen development of both traditional vaccines and experimental mRNA treatments to combat the virus. Thankfully, both have shown positive results, but there was no way to know that in March. In this perennial state of ignorance,t markets generally have provided the best—though still imperfect—way to make decisions. 

The patent system’s critics sometimes claim that prizes would offer a better way to encourage discovery. But if we relied solely on government-directed prizes, we might never have had the needed research into the technology that underlies mRNA. As one recent report put it, “before messenger RNA was a multibillion-dollar idea, it was a scientific backwater.” Simply put, without patent rights as the backstop to purely academic or government-led innovation and commercialization, it is far less likely that we would have seen successful COVID vaccines developed as quickly.

It is difficult for governments to be prepared for the unknown. Abolishing or diminishing pharmaceutical patents would leave us even less prepared for the next medical crisis. That would only add to the lasting damage that the COVID-19 pandemic has already wrought on the world.

This image has an empty alt attribute; its file name is covid-image-1024x683.jpg

[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)

(Ed. Note: the following is an excerpt from a piece published by the Chicago Tribune on Oct. 16, 2020. Click here to read the full piece)

No matter your Twitter feed, “vaccines have been one of the greatest public health tools to prevent disease,” as The New York Times explained in January…

Many are terrified that the Food and Drug Administration may hastily authorize injections into hundreds of millions. The FDA and drugmakers are trying to assuage such concerns with enhanced commitments to safety. Nonetheless, fears have been stoked by President Donald Trump’s infomercial-style endorsement of hydroxychloroquine as a COVID-19 remedy, his foolhardy disdain for face masks and campaign rally boasts of a preelection cure.

Yes, politics. But the opposing political push — the demand that new vaccines must be safe at all costs — is itself a dangerous meme, and the strange bedfellow of anti-vaxxer protesters.

Pulitzer Prize-winning journalist Laurie Garrett inadvertently quantifies the problem. In a Sept. 3 article in Foreign Policy, she cited the H1N1 (swine flu) episode in 2009 as “the last mad rush to vaccinate.” Warning that those shots “caused Guillain-Barr (GBS) paralysis in … 6.2 per 10 million patients who received the vaccine,” she argues that phase 3 trials for COVID-19 vaccines, typically involving just 30,000 people, provide little protection. “There’s no way … we can spot a safety hazard that’s in 1 out of a million, much less 1 out of 10 million, vaccine recipients.” The “safety side,” she told a TV interviewer, “looks insane.”

But, in fact, the “insanity” here is not found in the push for speed or in Garrett’s skepticism about Operation Warp Speed. It lies in a lack of balance between the two. An insufficiently vetted vaccine may cost innocent lives, but so will delaying a vaccine that, on net, saves them…

When promising therapies appear, reducing time to market is often worth the risk — as reflected in a raft of pre-COVID-19 policies, including the FDA’s “emergency use authorizations,” “fast track” drug approvals and “compassionate use” permissions for experimental drugs. In phase 3 trials, independent monitors observe results, and trials may be terminated when pre-specified benefits appear. Patients in the control group become eligible for the treatment instead of the placebo. Larger samples would enhance scientific knowledge, but as probabilities shift regulators act on the reality that the ideal can become the enemy of the good.

Read the full piece at the Chicago Tribune.

This guest post is by Corbin K. Barthold, Senior Litigation Counsel at Washington Legal Foundation.

A boy throws a brick through a bakeshop window. He flees and is never identified. The townspeople gather around the broken glass. “Well,” one of them says to the furious baker, “at least this will generate some business for the windowmaker!”

A reasonable statement? Not really. Although it is indeed a good day for the windowmaker, the money for the new window comes from the baker. Perhaps the baker was planning to use that money to buy a new suit. Now, instead of owning a window and a suit, he owns only a window. The windowmaker’s gain, meanwhile, is simply the tailor’s loss.

This parable of the broken window was conceived by Frédéric Bastiat, a nineteenth-century French economist. He wanted to alert the reader to the importance of opportunity costs—in his words, “that which is not seen.” Time and money spent on one activity cannot be spent on another.

Today Bastiat might tell the parable of the harassed technology company. A tech firm creates a revolutionary new product or service and grows very large. Rivals, lawyers, activists, and politicians call for an antitrust probe. Eventually they get their way. Millions of documents are produced, dozens of depositions are taken, and several hearings are held. In the end no concrete action is taken. “Well,” the critics say, “at least other companies could grow while the firm was sidetracked by the investigation!”

Consider the antitrust case against Microsoft twenty years ago. The case ultimately settled, and Microsoft agreed merely to modify minor aspects of how it sold its products. “It’s worth wondering,” writes Brian McCullough, a generally astute historian of the internet, “how much the flowering of the dot-com era was enabled by the fact that the most dominant, rapacious player in the industry was distracted while the new era was taking shape.” “It’s easy to see,” McCullough says, “that the antitrust trial hobbled Microsoft strategically, and maybe even creatively.”

Should we really be glad that an antitrust dispute “distracted” and “hobbled” Microsoft? What would a focused and unfettered Microsoft have achieved? Maybe nothing; incumbents often grow complacent. Then again, Microsoft might have developed a great search engine or social-media platform. Or it might have invented something that, thanks to the lawsuit, remains absent to this day. What Microsoft would have created in the early 2000s, had it not had to fight the government, is that which is not seen.

But doesn’t obstructing the most successful companies create “room” for new competitors? David Cicilline, the chairman of the House’s antitrust subcommittee, argues that “just pursuing the [Microsoft] enforcement action itself” made “space for an enormous amount of additional innovation and competition.” He contends that the large tech firms seek to buy promising startups before they become full-grown threats, and that such purchases must be blocked.

It’s easy stuff to say. It’s not at all clear that it’s true or that it makes sense. Hindsight bias is rampant. In 2012, for example, Facebook bought Instagram for $1 billion, a purchase that is now cited as a quintessential “killer acquisition.” At the time of the sale, however, Instagram had 27 million users and $0 in revenue. Today it has around a billion users, it is estimated to generate $7 billion in revenue each quarter, and it is worth perhaps $100 billion. It is presumptuous to declare that Instagram, which had only 13 employees in 2012, could have achieved this success on its own.

If distraction is an end in itself, last week’s Big Tech hearing before Cicilline and his subcommittee was a smashing success. Presumably Jeff Bezos, Tim Cook, Sundar Pichai, and Mark Zuckerberg would like to spend the balance of their time developing the next big innovations and staying ahead of smart, capable, ruthless competitors, starting with each other and including foreign firms such as ByteDance and Huawei. Last week they had to put their aspirations aside to prepare for and attend five hours of political theater.

The most common form of exchange at the hearing ran as follows. A representative asks a slanted question. The witness begins to articulate a response. The representative cuts the witness off. The representative gives a prepared speech about how the witness’s answer proved her point.

Lucy Kay McBath, a first-term congresswoman from Georgia, began one such drill with the claim that Facebook’s privacy policy from 2004, when Zuckerberg was 20 and Facebook had under a million users, applies in perpetuity. “We do not and will not use cookies to collect private information from any users,” it said. Has Facebook broken its “promise,” McBath asked, not to use cookies to collect private information? No, Zuckerberg explained (letting the question’s shaky premise slide), Facebook uses only standard log-in cookies.

“So once again, you do not use cookies? Yes or no?” McBath interjected. Having now asked a completely different question, and gotten a response resembling what she wanted—“Yes, we use cookies [on log-in features]”—McBath could launch into her canned condemnation. “The bottom line here,” she said, reading from her page, “is that you broke a commitment to your users. And who can say whether you may or may not do that again in the future?” The representative pressed on with her performance, not noticing or not caring that the person she was pretending to engage with had upset her script.

Many of the antitrust subcommittee’s queries had nothing to do with antitrust. One representative fixated on Amazon’s ties with the Southern Poverty Law Center. Another seemed to want Facebook to interrogate job applicants about their political beliefs. A third asked Zuckerberg to answer for the conduct of Twitter. One representative demanded that social-media posts about unproven Covid-19 treatments be left up, another that they be taken down. Most of the questions that were at least vaguely on topic, meanwhile, were exceedingly weak. The representatives often mistook emails showing that tech CEOs play to win, that they seek to outcompete challengers and rivals, for evidence of anticompetitive harm to consumers. And the panel was often treated like a customer-service hotline. This app developer ran into a difficulty; what say you, Mr. Cook? That third-party seller has a gripe; why won’t you listen to her, Mr. Bezos?

In his opening remarks, Bezos cited a survey that ranked Amazon one of the country’s most trusted institutions. No surprise there. In many places one could have ordered a grocery delivery from Amazon as the hearing started and had the goods put away before it ended. Was Bezos taking a muted dig at Congress? He had every right to—it is one of America’s least trusted institutions. Pichai, for his part, noted that many users would be willing to pay thousands of dollars a year for Google’s free products. Is Congress providing people that kind of value?

The advance of technology will never be an unalloyed blessing. There are legitimate concerns, for instance, about how social-media platforms affect public discourse. “Human beings evolved to gossip, preen, manipulate, and ostracize,” psychologist Jonathan Haidt and technologist Tobias Rose-Stockwell observe. Social media exploits these tendencies, they contend, by rewarding those who trade in the glib put-down, the smug pronouncement, the theatrical smear. Speakers become “cruel and shallow”; “nuance and truth” become “casualties in [a] competition to gain the approval of [an] audience.”

Three things are true at once. First, Haidt and Rose-Stockwell have a point. Second, their point goes only so far. Social media does not force people to behave badly. Assuming otherwise lets individual humans off too easy. Indeed, it deprives them of agency. If you think it is within your power to display grace, love, and transcendence, you owe it to others to think it is within their power as well.

Third, if you really want to see adults act like children, watch a high-profile congressional hearing. A hearing for Attorney General William Barr, held the day before the Big Tech hearing and attended by many of the same representatives, was a classic of the format.

The tech hearing was not as shambolic as the Barr hearing. And the representatives act like sanctimonious halfwits in part to concoct the sick burns that attract clicks on the very platforms built, facilitated, and delivered by the tech companies. For these and other obvious reasons, no one should feel sorry for the four men who spent a Wednesday afternoon serving as props for demagogues. But that doesn’t mean the charade was a productive use of time. There is always that which is not seen.

[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 Oscar Súmar, Dean of the Law School of the Scientific University of the South (Peru)).]

Peru’s response to the pandemic has been one of the most radical in Latin America: Restrictions were imposed sooner, lasted longer and were among the strictest in the region. Peru went into lockdown on March 15 after only 71 cases had been reported.  Along with the usual restrictions (temporary restaurant and school closures), the Peruvian government took other measures such as bans on the use of private vehicles and the mandatory nightly curfews. For a time, there even were gender-based movement restrictions: men and women were allowed out on different days.

A few weeks into the lockdown, it became obvious that these measures were not flattening the curve of infections. But instead of reconsidering its strategy, the government insisted on the same path, with depressing results. Peru is one of the world’s worst hit countries by Covid-19, with 300k total cases by July 4th, 2020 and one of the countries with the highest “excess of deaths,” reaching 140%. Peru’s government has tried a rich country’s response, despite the fact that Peru lacks the institutions and wealth to make that possible.

The Peruvian response to coronavirus can be attributed to three factors. One, paternalism is popular in Peru and arguments for liberty are ignored. This is confirmed by the fact that President Vizcarra enjoys to this day a great deal of popularity thanks to this draconian lockdown even when the government has repeatedly blamed people’s negligence as the main cause of contagion. Two, government officials have socialistic tendencies. For instance, the Prime Minister – Mr. Zeballos – used to speak freely about price regulations and nationalization, even before the pandemic. And three, Peru’s health system is one of the worst in the region. It was foreseeable that our health system would be overwhelmed in the first few weeks, so our government decided to go into early lockdown.

Peru has also launched one of the most aggressive economic relief programs in the world, equivalent to 12% of its GDP. This program included a “universal bond” for poor families, as well as a loan program for small, medium and large businesses. The program was praised by the media around the world. Despite this programme, Peru has been one of the worst-hit countries in the world in economic terms. The World Bank predicts that Peru will be the country with the biggest GDP contraction in the region.

If anything, Peru played the crisis by the book. But Peru´s lack of strong, legitimate and honest institutions have made its policies ineffectual. Just few months prior to the beginning of the pandemic, President Vizcarra dissolved the Congress. And Peru has been engulfed in a far-reaching corruption scandal for years. Only two years ago, former president Pedro Pablo Kuczynski resigned the presidency being directly implicated in the scandal, and his vice president at the time, Martin Vizcarra, took over. Much of Peru’s political and business elite have also been implicated in this scandal, with members of the elite summoned daily to the criminal prosecutor’s office for questioning.

However, if we want to understand the lack of strong institutions in Peru – and how this affected our response to the pandemic – we need to go back even further. In the 1980s, after having lived through a socialist military dictatorship, a young candidate named Alan Garcia was democratically elected as president. But during Garcia´s presidency, Peru achieved a trillion-dollar foreign debt, record levels of inflation, and imposed price controls and nationalizations. Peru fought a losing war against an armed Marxist terrorist group. By 1990, Peru was on the edge of the abyss. In the 1990 presidential campaign, Peruvians had to decide between a celebrated libertarian intellectual with little political experience, the novelist Mario Vargas Llosa, and Alberto Fujimori, a political “outsider” with rather unknown ideas but an aura of pragmatism over his head. We chose the latter.

Fujimori’s two main goals were to end domestic terrorism and to stabilize Peru’s ruined economy. This second task was achieved by following the Washington Consensus receipt: changing the Constitution after a self-inflicted coup d’état. The Consensus has been deemed as a “neoliberal” group of policies, but was really the product of a decades-long consensus among World Bank experts about policies that almost all mainstream economists favor. The policies included were privatization, deregulation, free trade, monetary stability, control over borrowing, and a focusing of public spending on health, education and infrastructure. A secondary part of the recommendations was aimed at institutional reform, poverty alleviation and the reform of tax and labor laws.

The implementation of the Consensus by Fujimori and subsequent governments was a mix of the actual “structural adjustments” recommended by the Bank and systemic over-regulation, mercantilism, and corruption. Every Peruvian president since 1990 is either currently being investigated or has been charged with corruption.

Although Peru’s GDP increased by more than 5% per year for several years since 1990, and poverty numbers have shrunk more than 50% in the last decade, other problems have remained. People have no access to decent healthcare; basic education in Peru is one of the worst in the world; and, more than half of the population does not have access to clean drinking water. Also, informality remains one of our biggest problems since the tax and labor reforms didn’t take place. Our tax base is very small, and our labor legislation is among the costliest in Latin America.

In Peruvian eyes, this is what “neoliberalism” looks like. Peru was good at implementing many of the high-level reforms, but not the detailed and complex institutional ones. The Consensus assumed the coexistence of free market institutions and measures of social assistance. Peru had some of these, but not enough. Even the reforms that did take place weren´t legitimate or part of our actual social consensus.

Taking advantage of people´s discontent, now, some leftist politicians, journalists, academics and activists want nothing more than to return to our previous interventionist Constitution and to socialism. Peruvian people are crying out for change. If the current situation is partially explained by our implementation of the Washington Consensus and that Consensus is deemed “neoliberal”, it´s no surprise that “change” is understood as going back to a more interventionist regime. Our current situation could be seen as the result of people demanding more government intervention, with the government and Congress simply meeting that demand, with no institutional framework to resist this.

The health crisis we are currently experiencing highlights the cost of Peru’s lack of strong institutions. Peru had one of the most ill-prepared public healthcare systems in the World at the beginning of the pandemic, with just 100 intensive care units. But there is virtually no private alternative, because that is so heavily regulated, and what exists is mostly the preserve of the elite. So, instead of working to improve the public system or promote more competition in the private sector, the government threatened clinics with a takeover.

The Peruvian government was unable to deliver policies that matched the real conditions of its population. We have, in effect, the lockdown of a rich country with few of the conditions that have allowed them to work. Inner-city poverty and a large informal economy (at an estimated 70% of Peru’s economy) made the lockdown a health and economic trap for the majority of the population (this study of Norma Loayza is very illustrative).

Incapable of facing the truth about Peru’s ability to withstand a lockdown, government officials relied on regulation to try to reshape reality to their wishes. The result is 20-40 pages of “protocols” to be fulfilled by small companies, completely ignored by the informal 70% of the economy. In some cases, these regulations were obvious examples of rent-seeking as well. For example, only firms with 1 million soles (approximately 300,000 USD) in sales in the past year and with at least three physical branches were allowed to do business online during the lockdown.

Even after the lockdown has been officially terminated since July 1st, the government must approve every industry in order to operate again. At the same time, our Congress has passed legislation prohibiting toll collection (even when is a contractual agreement); it has criminalized “hoarding” and restated “speculation” as a felony crime; and a proposal to freeze all financial debts. Some economic commentators argue that in Peru the “populist virus” is even worse than Covid-19. Peru’s failure in dealing with the virus must be understood in light of its long history of interventionist governments that have let economic sclerosis set in through overregulation and done little to build up the kinds of institutions that would allow a pandemic response that suits Peru to work. Our lack of strong institutions, confidence in the market economy, and human capital in the public sector has put us in an extremely fragile position to fight the virus.

In the face of an unprecedented surge of demand for bandwidth as Americans responded to COVID-19, the nation’s Internet infrastructure delivered for urban and rural users alike. In fact, since the crisis began in March, there has been no appreciable degradation in either the quality or availability of service. That success story is as much about the network’s robust technical capabilities as it is about the competitive environment that made the enormous private infrastructure investments to build the network possible.

Yet, in spite of that success, calls to blind ISP pricing models to the bandwidth demands of users by preventing firms from employing “usage-based billing” (UBB) have again resurfaced. Today those demands are arriving in two waves: first, in the context of a petition by Charter Communications to employ the practice as the conditions of its merger with Time Warner Cable become ripe for review; and second in the form of complaints about ISPs re-imposing UBB following an end to the voluntary temporary halting of the practice during the first months of the COVID-19 pandemic — a move that was an expansion by ISPs of the Keep Americans Connected Pledge championed by FCC Chairman Ajit Pai.

In particular, critics believe they have found clear evidence to support their repeated claims that UBB isn’t necessary for network management purposes as (they assert) ISPs have long claimed.  Devin Coldewey of TechCrunch, for example, recently asserted that:

caps are completely unnecessary, existing only as a way to squeeze more money from subscribers. Data caps just don’t matter any more…. Think about it: If the internet provider can even temporarily lift the data caps, then there is definitively enough capacity for the network to be used without those caps. If there’s enough capacity, then why did the caps exist in the first place? Answer: Because they make money.

The thing is, though, ISPs did not claim that UBB was about the day-to-day “manage[ment of] network loads.” Indeed, the network management strawman has taken on a life of its own. It turns out that if you follow the thread of articles in an attempt to substantiate the claim (for instance: here, to here, to here, to here), it is just a long line of critics citing to each other’s criticisms of this purported claim by ISPs. But never do they cite to the ISPs themselves making this assertion — only to instances where ISPs offer completely different explanations, coupled with the critics’ claims that such examples show only that ISPs are now changing their tune. In reality, the imposition of usage-based billing is, and has always been, a basic business decision — as it is for every other company that uses it (which is to say: virtually all companies).

What’s UBB really about?

For critics, however, UBB is never just a “basic business decision.” Rather, the only conceivable explanations for UBB are network management and extraction of money. There is no room in this conception of the practice for perfectly straightforward pricing decisions that offer pricing that differs by customers’ usage of the services. Nor does this viewpoint recognize the importance of these pricing practices for long-term network cultivation in the form of investment in increasing capacity to meet the increased demands generated by users.

But to disregard these actual reasons for the use of UBB is to ignore what is economically self-evident.

In simple terms, UBB allows networks to charge heavy users more, thereby enabling them to recover more costs from these users and to keep prices lower for everyone else. In effect, UBB ensures that the few heaviest users subsidize the vast majority of other users, rather than the other way around.

A flat-rate pricing mandate wouldn’t allow pricing structures based on cost recovery. In such a world an ISP couldn’t simply offer a lower price to lighter users for a basic tier and rely on higher revenues from the heaviest users to cover the costs of network investment. Instead, it would have to finance its ability to improve its network to meet the needs of the most demanding users out of higher prices charged to all users, including the least demanding users that make up the vast majority of users on networks today (for example, according to Comcast, 95 percent of its  subscribers use less than 1.2 TB of data monthly).

On this basis, UBB is a sensible (and equitable, as some ISPs note) way to share the cost of building, maintaining, and upgrading the nation’s networks that simultaneously allows ISPs to react to demand changes in the market while enabling consumers to purchase a tier of service commensurate with their level of use. Indeed, charging customers based on the quality and/or amount of a product they use is a benign, even progressive, practice that insulates the majority of consumers from the obligation to cross-subsidize the most demanding customers.

Objections to the use of UBB fall generally into two categories. One stems from the sort of baseline policy misapprehension that it is needed to manage the network, but that fallacy is dispelled above. The other is borne of a simple lack of familiarity with the practice.

Consider that, in the context of Internet services, broadband customers are accustomed to the notion that access to greater data speed is more costly than the alternative, but are underexposed to the related notion of charging based upon broadband data consumption. Below, we’ll discuss the prevalence of UBB across sectors, how it works in the context of broadband Internet service, and the ultimate benefit associated with allowing for a diversity of pricing models among ISPs.

Usage-based pricing in other sectors

To nobody’s surprise, usage-based pricing is common across all sectors of the economy. Anything you buy by the unit, or by weight, is subject to “usage-based pricing.” Thus, this is how we buy apples from the grocery store and gasoline for our cars.

Usage-based pricing need not always be so linear, either. In the tech sector, for instance, when you hop in a ride-sharing service like Uber or Lyft, you’re charged a base fare, plus a rate that varies according to the distance of your trip. By the same token, cloud storage services like Dropbox and Box operate under a “freemium” model in which a basic amount of storage and services is offered for free, while access to higher storage tiers and enhanced services costs increasingly more. In each case the customer is effectively responsible (at least in part) for supporting the service to the extent of her use of its infrastructure.

Even in sectors in which virtually all consumers are obligated to purchase products and where regulatory scrutiny is profound — as is the case with utilities and insurance — non-linear and usage-based pricing are still common. That’s because customers who use more electricity or who drive their vehicles more use a larger fraction of shared infrastructure, whether physical conduits or a risk-sharing platform. The regulators of these sectors recognize that tremendous public good is associated with the persistence of utility and insurance products, and that fairly apportioning the costs of their operations requires differentiating between customers on the basis of their use. In point of fact (as we’ve known at least since Ronald Coase pointed it out in 1946), the most efficient and most equitable pricing structure for such products is a two-part tariff incorporating both a fixed, base rate, as well as a variable charge based on usage.  

Pricing models that don’t account for the extent of customer use are vanishingly rare. “All-inclusive” experiences like Club Med or the Golden Corral all-you-can-eat buffet are the exception and not the rule when it comes to consumer goods. And it is well-understood that such examples adopt effectively regressive pricing — charging everyone a high enough price to ensure that they earn sufficient return from the vast majority of light eaters to offset the occasional losses from the gorgers. For most eaters, in other words, a buffet lunch tends to cost more and deliver less than a menu-based lunch. 

All of which is to say that the typical ISP pricing model — in which charges are based on a generous, and historically growing, basic tier coupled with an additional charge that increases with data use that exceeds the basic allotment — is utterly unremarkable. Rather, the mandatory imposition of uniform or flat-fee pricing would be an aberration.

Aligning network costs with usage

Throughout its history, Internet usage has increased constantly and often dramatically. This ever-growing need has necessitated investment in US broadband infrastructure running into the tens of billions annually. Faced with the need for this investment, UBB is a tool that helps to equitably align network costs with different customers’ usage levels in a way that promotes both access and resilience.

As President Obama’s first FCC Chairman, Julius Genachowski, put it:

Our work has also demonstrated the importance of business innovation to promote network investment and efficient use of networks, including measures to match price to cost such as usage-based pricing.

Importantly, it is the marginal impact of the highest-usage customers that drives a great deal of those network investment costs. In the case of one ISP, a mere 5 percent of residential users make up over 20 percent of its network usage. Necessarily then, in the absence of UBB and given the constant need for capacity expansion, uniform pricing would typically act to disadvantage low-volume customers and benefit high-volume customers.

Even Tom Wheeler — President Obama’s second FCC Chairman and the architect of utility-style regulation of ISPs — recognized this fact and chose to reject proposals to ban UBB in the 2015 Open Internet Order, explaining that:

[P]rohibiting tiered or usage-based pricing and requiring all subscribers to pay the same amount for broadband service, regardless of the performance or usage of the service, would force lighter end users of the network to subsidize heavier end users. It would also foreclose practices that may appropriately align incentives to encourage efficient use of networks. (emphasis added)

When it comes to expanding Internet connectivity, the policy ramifications of uniform pricing are regressive. As such, they run counter to the stated goals of policymakers across the political spectrum insofar as they deter low-volume users — presumably, precisely the marginal users who may be disinclined to subscribe in the first place —  from subscribing by saddling them with higher prices than they would face with capacity pricing. Closing the digital divide means supporting the development of a network that is at once sustainable and equitable on the basis of its scope and use. Mandated uniform pricing accomplishes neither.

Of similarly profound importance is the need to ensure that Internet infrastructure is ready for demand shocks, as we saw with the COVID-19 crisis. Linking pricing to usage gives ISPs the incentive and wherewithal to build and maintain high-capacity networks to cater to the ever-growing expectations of high-volume users, while also encouraging the adoption of network efficiencies geared towards conserving capacity (e.g., caching, downloading at off-peak hours rather than streaming during peak periods).

Contrary to the claims of some that the success of ISPs’ networks during the COVID-19 crisis shows that UBB is unnecessary and extractive, the recent increases in network usage (which may well persist beyond the eventual end of the crisis) demonstrate the benefits of nonlinear pricing models like UBB. Indeed, the consistent efforts to build out the network to serve high-usage customers, funded in part by UBB, redounds not only to the advantage of abnormal users in regular times, but also to the advantage of regular users in abnormal times.

The need for greater capacity along with capacity-conserving efficiencies has been underscored by the scale of the demand shock among high-load users resulting from COVID-19. According to OpenVault, a data use tracking service, the number of “power users” and “extreme power users” utilizing 1TB/month or more and 2TB/month or more jumped 138 percent and 215 percent respectively. Meaning that now, in total, power users represent 10 percent of subscribers across the network, while extreme power users comprise 1.2 percent of subscribers.

Pricing plans predicated on load volume necessarily evolve along with network capacity, but at this moment the application of UBB for monthly loads above 1TB ensures that ISPs maintain an incentive to cater to power users and extreme power users alike. In doing so, ISPs are also ensuring that all users are protected when the Internet’s next abnormal — but, sadly, predictable — event arrives.

At the same time, UBB also helps to facilitate the sort of customer-side network efficiencies that may emerge as especially important during times of abnormally elevated demand. Customers’ usage need not be indifferent to the value of the data they use, and usage-based pricing helps to ensure that data usage aligns not only with costs but also with the data’s value to consumers. In this way the behavior of both ISPs and customers will better reflect the objective realities of the nations’ networks and their limits.

The case for pricing freedom

Finally, it must be noted that ISPs are not all alike, and that the market sustains a range of pricing models across ISPs according to what suits their particular business models, network characteristics, load capacity, and user types (among other things). Consider that even ISPs that utilize UBB almost always offer unlimited data products, while some ISPs choose to adopt uniform pricing to differentiate their offerings. In fact, at least one ISP has moved to uniform billing in light of COVID-19 to provide their customers with “certainty” about their bills.

The mistake isn’t in any given ISP electing a uniform billing structure or a usage-based billing structure; rather it is in proscribing the use of a single pricing structure for all ISPs. Claims that such price controls are necessary because consumers are harmed by UBB ignore its prevalence across the economy, its salutary effect on network access and resilience, and the manner in which it promotes affordability and a sensible allocation of cost recovery across consumers.

Moreover, network costs and traffic demand patterns are dynamic, and the availability of UBB — among other pricing schemes — also allows ISPs to tailor their offerings to those changing conditions in a manner that differentiates them from their competitors. In doing so, those offerings are optimized to be attractive in the moment, while still facilitating network maintenance and expansion in the future.

Where economically viable, more choice is always preferable. The notion that consumers will somehow be harmed if they get to choose Internet services based not only on speed, but also load, is a specious product of the confused and the unfamiliar. The sooner the stigma around UBB is overcome, the better-off the majority of US broadband customers will be.

[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).]

While much of the world of competition policy has focused on mergers in the COVID-19 era. Some observers see mergers as one way of saving distressed but valuable firms. Others have called for a merger moratorium out of fear that more mergers will lead to increased concentration and market power. In the meantime, there has been a growing push for increased nationalization of a wide range of businesses and industries.

In most cases, the call for a government takeover is not a reaction to the public health and economic crises associated with coronavirus. Instead, COVID-19 is a convenient excuse to pursue long sought after policies.

Last year, well before the pandemic, New York mayor Bill de Blasio called for a government takeover of electrical grid operator ConEd because he was upset over blackouts during a heatwave. Earlier that year, he threatened to confiscate housing units from private landlords, “we will seize their buildings, and we will put them in the hands of a community nonprofit that will treat tenants with the respect they deserve.”

With that sort of track record, it should come as no surprise the mayor proposed a government takeover of key industries to address COVID-19: “This is a case for a nationalization, literally a nationalization, of crucial factories and industries that could produce the medical supplies to prepare this country for what we need.” Dana Brown, director of The Next System Project at The Democracy Collaborative, agrees, “We should nationalize what remains of the American vaccine industry now, thereby assuring that any coronavirus vaccines produced can be made as widely available and as inexpensive soon as possible.” 

Dan Sullivan in the American Prospect suggests the U.S. should nationalize all the airlines. Some have gone so far as calling for nationalization of the U.S. oil industry.

On the one hand, it’s clear that de Blasio and Brown have no confidence in the price system to efficiently allocate resources. Alternatively, they may have overconfidence in the political/bureaucratic system to efficiently, and “equitably,” distribute resources. On the other hand, as Daniel Takash points out in an earlier post, both pharmaceuticals and oil are relatively unpopular industries with many Americans, in which case the threat of a government takeover has a big dose of populist score settling:

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. 

In the early days of the pandemic, France’s finance minister Bruno Le Maire promised to protect “big French companies.” The minister identified a range of actions under consideration: “That can be done by recapitalization, that can be done by taking a stake, I can even use the term nationalization if necessary.” While he did not mention any specific companies, it’s been speculated Air France KLM may be a target.

The Italian government is expected to nationalize Alitalia soon. The airline has been in state administration since May 2017, and the Italian government will have 100% control of the airline by June. Last week, the German government took a 20% stake in Lufthansa, in what has been characterized as a “temporary partial nationalization.” In Canada, Prime Minister Justin Trudeau has been coy about speculation that the government might nationalize Air Canada. 

Obviously, these takeovers have “bailout” written all over them, and bailouts have their own anticompetitive consequences that can be worse than those associated with mergers. For example, RyanAir announced it will contest the aid package for Lufthansa. RyanAir chief executive Michael O’Leary claims the aid will allow Lufthansa to “engage in below-cost selling” and make it harder for RyanAir and its rival low-cost carrier EasyJet to compete. 

There is also a bit of a “national champion” aspect to the takeovers. Each of the potential targets are (or were) considered their nation’s flagship airline. World Bank economists Tanja Goodwin and Georgiana Pop highlight the risk of nationalization harming competition: 

These [sic] should avoid rescuing firms that were already failing. …  But governments should also refrain from engaging in production or service delivery in industries that can be served by the private sector. The role of SOEs [state owned enterprises] should be assessed in order to ensure that bailout packages are not exclusively and unnecessarily favoring a dominant SOE.

To be sure, COVID-19 related mergers could raise the specter of increased market power post-pandemic. But, this risk must be balanced against the risks posed by a merger moratorium. These include the risk of widespread bankruptcies (that’s another post) and/or the possibility of nationalization of firms and industries. Either option can reduce competition which can bring harm to consumers, employees, and suppliers.

[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 Dirk Auer, (Senior Researcher, Liege Competition & Innovation Institute; Senior Fellow, ICLE).]

Privacy absolutism is the misguided belief that protecting citizens’ privacy supersedes all other policy goals, especially economic ones. This is a mistake. Privacy is one value among many, not an end in itself. Unfortunately, the absolutist worldview has filtered into policymaking and is beginning to have very real consequences. Readers need look no further than contact tracing applications and the fight against Covid-19.

Covid-19 has presented the world with a privacy conundrum worthy of the big screen. In fact, it’s a plotline we’ve seen before. Moviegoers will recall that, in the wildly popular film “The Dark Knight”, Batman has to decide between preserving the privacy of Gotham’s citizens or resorting to mass surveillance in order to defeat the Joker. Ultimately, the caped crusader begrudgingly chooses the latter. Before the Covid-19 outbreak, this might have seemed like an unrealistic plot twist. Fast forward a couple of months, and it neatly illustrates the difficult decision that most western societies urgently need to make as they consider the use of contract tracing apps to fight Covid-19.

Contact tracing is often cited as one of the most promising tools to safely reopen Covid-19-hit economies. Unfortunately, its adoption has been severely undermined by a barrage of overblown privacy fears.

Take the contact tracing API and App co-developed by Apple and Google. While these firms’ efforts to rapidly introduce contact tracing tools are laudable, it is hard to shake the feeling that they have been holding back slightly. 

In an overt attempt to protect users’ privacy, Apple and Google’s joint offering does not collect any location data (a move that has irked some states). Similarly, both firms have repeatedly stressed that users will have to opt-in to their contact tracing solution (as opposed to the API functioning by default). And, of course, all the data will be anonymous – even for healthcare authorities. 

This is a missed opportunity. Google and Apple’s networks include billions of devices. That puts them in a unique position to rapidly achieve the scale required to successfully enable the tracing of Covid-19 infections. Contact tracing applications need to reach a critical mass of users to be effective. For instance, some experts have argued that an adoption rate of at least 60% is necessary. Unfortunately, existing apps – notably in Singapore, Australia, Norway and Iceland – have struggled to get anywhere near this number. Forcing users to opt-out of Google and Apple’s services could go a long way towards inverting this trend. Businesses could also boost these numbers by making them mandatory for their employees and consumers.

However, it is hard to blame Google or Apple for not pushing the envelope a little bit further. For the best part of a decade, they and other firms have repeatedly faced specious accusations of “surveillance capitalism”. This has notably resulted in heavy-handed regulation (including the GDPR, in the EU, and the CCPA, in California), as well as significant fines and settlements

Those chickens have now come home to roost. The firms that are probably best-placed to implement an effective contact tracing solution simply cannot afford the privacy-related risks. This includes the risk associated with violating existing privacy law, but also potential reputational consequences. 

Matters have also been exacerbated by the overly cautious stance of many western governments, as well as their citizens: 

  • The European Data Protection Board cautioned governments and private sector actors to anonymize location data collected via contact tracing apps. The European Parliament made similar pronouncements.
  • A group of Democratic Senators pushed back against Apple and Google’s contact tracing solution, notably due to privacy considerations.
  • And public support for contact tracing is also critically low. Surveys in the US show that contact tracing is significantly less popular than more restrictive policies, such as business and school closures. Similarly, polls in the UK suggest that between 52% and 62% of Britons would consider using contact tracing applications.
  • Belgium’s initial plans for a contact tracing application were struck down by its data protection authority on account that they did not comply with the GDPR.
  • Finally, across the globe, there has been pushback against so-called “centralized” tracing apps, notably due to privacy fears.

In short, the West’s insistence on maximizing privacy protection is holding back its efforts to combat the joint threats posed by Covid-19 and the unfolding economic recession. 

But contrary to the mass surveillance portrayed in the Dark Knight, the privacy risks entailed by contact tracing are for the most part negligible. State surveillance is hardly a prospect in western democracies. And the risk of data breaches is no greater here than with many other apps and services that we all use daily. To wit, password, email, and identity theft are still, by far, the most common targets for cyber attackers. Put differently, cyber criminals appear to be more interested in stealing assets that can be readily monetized, rather than location data that is almost worthless. This suggests that contact tracing applications, whether centralized or not, are unlikely to be an important target for cyberattackers.

The meagre risks entailed by contact tracing – regardless of how it is ultimately implemented – are thus a tiny price to pay if they enable some return to normalcy. At the time of writing, at least 5,8 million human beings have been infected with Covid-19, causing an estimated 358,000 deaths worldwide. Both Covid-19 and the measures destined to combat it have resulted in a collapse of the global economy – what the IMF has called “the worst economic downturn since the great depression”. Freedoms that the west had taken for granted have suddenly evaporated: the freedom to work, to travel, to see loved ones, etc. Can anyone honestly claim that is not worth temporarily sacrificing some privacy to partially regain these liberties?

More generally, it is not just contact tracing applications and the fight against Covid-19 that have suffered because of excessive privacy fears. The European GDPR offers another salient example. Whatever one thinks about the merits of privacy regulation, it is becoming increasingly clear that the EU overstepped the mark. For instance, an early empirical study found that the entry into force of the GDPR markedly decreased venture capital investments in Europe. Michal Gal aptly summarizes the implications of this emerging body of literature:

The price of data protection through the GDPR is much higher than previously recognized. The GDPR creates two main harmful effects on competition and innovation: it limits competition in data markets, creating more concentrated market structures and entrenching the market power of those who are already strong; and it limits data sharing between different data collectors, thereby preventing the realization of some data synergies which may lead to better data-based knowledge. […] The effects on competition and innovation identified may justify a reevaluation of the balance reached to ensure that overall welfare is increased. 

In short, just like the Dark Knight, policymakers, firms and citizens around the world need to think carefully about the tradeoff that exists between protecting privacy and other objectives, such as saving lives, promoting competition, and increasing innovation. As things stand, however, it seems that many have veered too far on the privacy end of the scale.

[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 Julian Morris, (Director of Innovation Policy, ICLE).]

Governments are beginning to lift the lockdowns they imposed to slow the spread of COVID-19. That is a good thing. But simply lifting the restrictions won’t immediately take us back to normality. For that to happen requires a massive investment in mechanisms that will rebuild trust.

Prior to COVID-19, people implicitly trusted that travelling on public transit, working in an office, attending a ball game, or going to a shopping mall would not subject them to the risk of infection by a potentially deadly virus (or any other terrible eventuality). In the wake of the pandemic, this implicit trust is gone. Many people are afraid of COVID-19 and will require reassurance. While governments likely contributed significantly to the loss of trust, they are likely not in the best position to rebuild that trust. The onus is thus on businesses and civic organizations to provide reassurance and rebuild trust. This post outlines two ways businesses can contribute to this effort.

Lockdowns and the Trust Deficit

As the incidence of COVID-19 began to rise dramatically in March, governments across the world imposed “lockdowns.” These curfew-like arrangements have gone well beyond the limits on public gatherings and other “social distancing” strategies deployed during previous major pandemics such as the Spanish ‘flu of 1918-19. Indeed, they are among the most far-reaching restrictions ever imposed on human activity during peacetime. Hundreds of millions of people have been cooped up at home for nearly two months, allowed out only briefly each day for exercise or to buy groceries. Millions of those now at home have also lost their main source of income.

Governments are now finally beginning to remove some of the most severe of these restrictions, allowing more businesses to operate. As they do so, businesses are trying to figure out what the post-lockdown economy is going to look like: Will employees come back to work in offices? Will customers shop in stores, eat at restaurants, visit movie theatres, and use rideshares, taxis, planes, and public transit?

Many people are fearful about the consequences of going back to work. A recent IPSOS-MORI poll for the Washington Post found that 74 percent of American adults want policymakers to, “keep trying to slow the spread of the coronavirus, even if that means keeping many businesses closed,” while just 25 percent prefer to, “open up businesses and get the economy going again, even if that means more people would get the coronavirus.” Meanwhile, in a recent survey in the UK, the TUC union found that 40% of workers were worried about the prospects of returning to crowded workplaces.  

The loss of trust is likely in part be due to conditioning: for the past two months we have been told by all and sundry to avoid other people (except over Zoom). Governments likely contributed to this through their promotion of scary predictions that millions could die if people didn’t “stay home, stay safe.” Partly, however, it is a natural reaction to the perceived threat posed by COVID-19.

For the elderly and those with underlying conditions more likely to be adversely affected by COVID-19, such anxiety is understandable. But even many people less likely to become seriously ill or die from COVID-19 are worried. This is also not surprising: They may have heard horror stories of young, otherwise healthy people who ended up on a ventilator and either died or suffered permanent lung damage. Or perhaps they read about the mysterious effects COVID-19 can have on other organs, ranging from the intestines to the brain. Or they may have a more vulnerable person in our household and are worried about the possibility that we might infect them. Or, as I am sure is the case with many, they just don’t know—and this is their reaction to uncertainty (fueled, in part by the now-discredited predictions of doom).

Regardless of why a person fears COVID-19, the fact is that many do. And one thing common to all of them is a trust deficit. Given widespread uncertainty regarding who has the virus, how can one trust that the business one works, shops, or dines at provides a safe environment free of COVID-19? This even extends to friends and colleagues: how can one individual trust another individual they might encounter while at work or at play? And it applies also to the use of taxis and rideshares; how can riders and drivers trust one another?

It might be argued that since governments were in no small part responsible for generating the trust deficit, through their well-intentioned but probably misguided efforts to lock down the economy and constant exhortations to avoid all human contact, they should now be trying to do what they can to rebuild trust. Unfortunately, however, they may not be in a very good position to do that. While governments are quite good at scaring people (“I’m from the government and I’m here to help”), they are less good at providing reassurance (“I’m from the government and I’m here to help”), or even data. In other words, governments aren’t much good at engaging in the kinds of “costly signalling” necessary to build trust between individuals and businesses. As a result, much of the responsibility for rebuilding trust will fall on businesses and civic organizations.

Businesses can do several things that would likely reduce this trust deficit and allay the fears of employees and customers. First, they can establish, communicate, and implement clear standards for employees and customers regarding the practices to be adopted to reduce infection risk. Second, and relatedly, where employees are likely to be working in close quarters with one another or with customers or suppliers, they can adopt mechanisms to establish the COVID-19 status of those employees, suppliers and customers (somewhat along the lines of the system implemented by Taiwan in February and subsequently elaborated by Hal Singer in his post in this series here). 

The following sections briefly consider how such systems might work.

CV19 Standards

Companies that have not been locked down are already implementing processes to limit the exposure of employees to potentially infected customers, suppliers, and other employees. For example, many supermarkets require staff to use masks and/or protective screens and gloves. Some stores also require customers to wear masks, limit how many people can be in the store, and impose distancing rules. Some have even built seemingly permanent screens in front of check-out clerks and imposed seemingly permanent rules for in-store movement.  Other stores and restaurants are currently limiting service to take-out and delivery.

At present, the approaches taken by businesses vary considerably. There is nothing inherently wrong with this; indeed, it is a healthy part of a market process in which companies develop different solutions to the same problem and allow consumers to pick and choose the ones that work best for them. Consumers can be aided in this process by reading reviews and ratings provided by other consumers; that model has worked well for goods and services purchased online. As Paul Seabright has noted, these systems are designed to enable users to build trusting relationships with suppliers. Survey data suggest that consumers find such systems more trustworthy than government regulations.

But when consumers are not well placed to evaluate the most effective solution, for example because it is difficult to observe the effectiveness of the solution directly, it can be helpful for third parties to evaluate the various solutions and either rank them or set out voluntary pass-fail standards. COVID-19 is just such a case: individual consumers and employees are unlikely to be in a good position to evaluate the relative effectiveness of different processes and technologies designed to limit the transmission of SARS-CoV-2. As such, pass-fail standards developed and/or validated by credible, independent third parties are likely to be the most effective way to help rebuild trust.

Standards will vary depending on the type of establishment and activity. For some businesses, such as theatres, gyms, and mass transit systems, the standards will likely be more onerous than others. Plausibly, such establishments could reduce transmission through such things as: mandatory masks, mandatory use of antiviral hand sanitizer on entry, regular cleaning, the use of HEPA filters (which remove the droplets on which the virus is spread), and other technologies. But given the very close proximity of people in such systems, often for extended periods (half an hour or more), the risk of significant viral load being transferred from one person to another, even if wearing basic masks, remains.

For standards to be effective as a means of regaining the trust of employees, suppliers, and consumers, it is important that they are communicated effectively through marketing campaigns, likely including advertising and signage. Standards will also likely change over time as understanding of the way the virus is transmitted, technologies that can prevent transmission, and hence best practices improve. The need for such standards will also likely change over time and once the virus is no longer a major threat there should be no need for such standards. For these reasons, standards should be both voluntary and developed privately. However, governments can play a role in encouraging the adoption of such standards by legislating that organizations that are compliant with a recognized standard will not be liable if an infection occurs on their property or through the actions of their employees.

In addition to other practices designed to reduce transmission of the SARS-CoV-2 virus, some businesses have begun testing employees for the virus, to determine who is and who is not currently infected, so that infected individuals can be isolated until they are no longer infectious (employees who are required to isolate continue to receive their salary). Some businesses are also considering testing for antibodies to the virus, to determine who has had the virus and likely has some immunity. By doing such testing, businesses are probably reducing transmission both among employees and between employees and customers to a greater extent than by merely implementing technologies, hygiene and distancing rules. But the tests are not perfect and given the potential for infection outside work, it is possible that an employee who tests negative on one day could then become infected and be infective a few days later. While daily testing might be an option for some firms, it is unrealistic for most—and will not solve the trust problem for most individuals.

CV19 Status Verification

This brings us to the second major thing that business can do to reduce the trust gap: status verification. The idea here is to enable parties to ascertain one another’s current COVID-19 status without the need to resort to constant testing. One possible approach is to use a smartphone-based app that combines various pieces of information (time stamped virus tests and antibody tests, anonymized information about contacts with people who subsequently tested positive, and self-reported health-relevant data) to offer the most accurate and up-to-date status of an individual.

In principle, such a status app could be used by employers to minimize the likelihood that their staff have COVID (and to require those that may be infected to self-isolate and obtain a test). But their potential application is far wider:

·       Universities, churches, theatres, restaurants, bars, and events might utilize the status app not only for employees but also to determine who may participate and/or what forms of PPE they should utilize and/or where participants may congregate.

·       Airlines might utilize status apps to determine who might fly and where passengers should be seated.

·       Jurisdictions might utilize status apps as a means of facilitating more rapid immigration – and to enable those who most likely do not have COVID-19 to avoid most quarantine requirements.

·       Public transit systems might utilize status apps to determine who can use the system.

·       Taxis and ridesharing services, such as Uber and Lyft, might utilize data from the status app to help match riders and drivers.

·       Personal services facilitators such as Thumbtack might utilize the app to help match service providers and customers.

·       Hotels, AirBnB and vacation rental facilitators such as vrbo might use status apps for both hosts (and their employees and contractors) and guests in order to minimize infection risk during a visit.

·       Online dating and matchmaking services such as Match and Tinder might utilize status apps to help facilitate virus-compatible matches. (While SARS-CoV-2/COVID-19 is not really comparable to HIV/AIDS, it is noteworthy that sites already exist that seek to match people who are HIV positive.)

How a CV19 Status App might Work

A basic schema for a CV19 status app would be:

·       Red = Has COVID-19 (e.g. recently tested positive for virus)

·       Red-Amber = May have COVID-19 (e.g. recently tested negative for virus but either has COVID-19 related symptoms or has been in contact with someone who tested positive).

·       Amber = Is susceptible: Has not had COVID-19 and likely does not have COVID-19 (e.g. recently tested negative for COVID-19, has no COVID-19 symptoms, and has had no recent known contact with someone who tested positive).

·       Green = Has had COVID-19 and is now presumed to be immune (either tested positive for CV19 and then tested negative for CV19, or tested negative for CV19 and also tested positive for Antibodies) (See below regarding immunity concerns.)

This schema is shown in the decision tree below

There are numerous technical issues relating to the operation of an app designed to establish a person’s CV19 status that must be addressed for it to function effectively. First, it will be necessary to ensure that the person using the app is the person whose status is being asserted. It should be possible to address this by storing the information from tests, contacts with infected people, and self-reported symptoms on an immutable digital ledger and use biometric identification both to record and to share status information. (Storing the status information on a person’s phone in this way also avoids the risk of hacking that plagues centralized databases.)

Next there is the question of authenticating test data recorded by the app. Ideally, this would be done by having a trusted third party—such as a doctor, nurse, or pharmacist—verify the data. If that is not feasible—for example because the test was carried out at home—then some other mechanism will be required to ensure the data is input correctly, such as rewards for accurate self-reports and/or penalties for inaccurate self-reports. (Self-reported data could also be treated within the system as less reliable, or simply as tentative—requiring verified test data to be added within a specified period.)

Beyond these verification issues, there remain problems with the specificity and sensitivity of tests—implying a likelihood of both false positive and false negatives. Although there are now both PCR and antibody tests that achieve very high levels of accuracy, even small numbers of false negative PCR tests and false positive antibody tests would clearly create problems for the effective functioning of the status app system. To address these problems, it may be necessary to undertake secondary testing for some portion of the tests.

The more challenging problem is that of infection after tests are conducted. As noted above, this can in principle be mitigated—but not eliminated—by incorporating contact tracing and/or self-reporting of symptoms. Related to this is the possibility that having COVID-19 confers only limited immunity (as has been suggested in relation to some people who have seemingly become reinfected). This obviously poses problems for the notion of a “Green” status; if reinfection is possible, then Green clearly would not be a permanent designation and would require regular testing. The evidence remains ambiguous, with news of five US sailors who had COVID then tested negative twice subsequently having new symptoms and testing positive again; on the other hand, a recent study suggests that people who test positive after recovery do not have a live (infectious) version of the virus.

Contact tracing apps have been used successfully in several locations as part of a strategy for containing COVID-19. However, the only really successful implementations so far have been those in China, South Korea and Hong Kong, which had a mandatory component and were highly centralized. By contrast, apps that required voluntary uptake have generally been less successful.

One reason for the lack of success of voluntary contact tracing apps is heightened concern regarding privacy (for example, the app used in Hong Kong enables anyone to find the gender, age, and precise locations of every person in the city who currently has COVID-19). Of course it is worth repeating Jane Bambauer’s observation in an earlier post that “Objections to surveillance lose their moral and logical bearings when the alternatives are out-of-control disease or mass lockdowns. Compared to those, mass surveillance is the most liberty-preserving option.” But assuming imprisonment is not the only alternative, concerns over privacy are not necessarily unmoored from logic or ethics (pace Christine Wilson’s earlier post). And to address these concerns, several groups have developed privacy-protecting systems. For example, the TCN coalition developed a system that shares anonymized tokens with other nearby phones over Bluetooth Low Energy. That system has now been adopted by Google and Apple in an API that is being made available to government health authorities (but not to other private app developers).

Another reason voluntary contact tracing apps have not been successful is the lack of incentives to adopt them. The main benefit of a contact tracing app is that it notifies the user when they have been in close contact with someone who subsequently tested positive. Logically, the people most likely voluntarily to adopt a contact tracing app are those who are most risk averse. But those people would also presumably be taking strong measures to avoid contracting COVID-19, so they would be less likely to become infected. By contrast, the people most likely to become infected are those who are least risk averse. But those people are least likely to be motivated to use the contact tracing app. In other words, even if there is relatively wide uptake of the app (say, 40% of the population, as in Iceland), it is likely to miss many of the people most likely to be spreading COVID-19 and so would not actually be very useful as a means of identifying and containing clusters.

Tying the contact tracing app to a CV19 Status App potentially overcomes this incentive compatibility problem, since anyone who wants to engage in an activity that requires use of the app would automatically participate in the contact tracing system. It could thus be quite effective at identifying instances of transmission that occur during activities that require the app to be used, which would also presumably be activities that put users at higher risk.

Nonetheless, for the app to be useful as a means of identifying clusters of COVID-19, either a significant proportion of common activities would have to require use of the app (e.g. public transit, rideshares, gyms, and shopping malls) or it would have to be used by at least some proportion of those not required to use it for access to activities.  

Adding a symptom monitoring component can help in two ways. First, by offering users a way to self-assess for early symptoms of COVID-19, it encourages more people to download and use the app.  More important, symptom monitoring can help identify additional potential COVID-19 infections, both among the individuals reporting symptoms and among their contacts. Thus, the combination of test data, symptom data and contact tracing become the information determining a person’s current status in a manner that is more reliable than relying on any one datum.

It should be noted that even combining these data will not make the status app 100% accurate. Some people with COVID-19 will likely slip through as Green or Orange and others will likely inadvertently be infected as a result. But the number of such instances is likely to be small and certainly much lower than would be the case without the use of the app. Moreover, widespread use of the app should dramatically reduce the infection rate throughout the population, with benefits to all.     

Conclusions

Both CV19 standards and CV19 status verification offer potential means by which to address the trust deficit that has emerged in the context of the continuing COVID-19 pandemic. A company that adopts both solutions would likely dramatically reduce the chances of their employees, suppliers and customers contracting the virus on their premises. That would also likely reduce the company’s liability, which could be rewarded by insurance providers offering discounts. Indeed, one could envisage a greater role for insurance companies in designing or certifying the standards and the status app.

However, the real benefits of these systems come not from one or a few companies adopting them but from widespread adoption, which has the potential dramatically to reduce the transmission of the virus both now and in the future (should there be a second wave). This leads to something of a paradox: Governments could mandate adoption, but such an approach may be counterproductive for two reasons. First, much knowledge is dispersed and tacit, so it is generally better to allow private actors to determine which standards to adopt (lest an inferior standard be the subject of a mandate). Second, if companies are genuinely concerned to address the trust deficit, then they will be willing to invest in standards and to limit access though status apps — both of which entail costs. By contrast, if governments mandate the use of standards and apps, they would effectively prevent firms from engaging in such costly signalling, so would undermine at least part of the effectiveness of such tools as trust-generative.

[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 Ian Adams, (Executive Director, International Center for Law & Economics).]

The COVID-19 crisis has recast virtually every contemporary policy debate in the context of public health, and digital privacy is no exception. Conversations that once focused on the value and manner of tracking to enable behavioral advertising have shifted. Congress, on the heels of years of false-starts and failed efforts to introduce nationwide standards, is now lurching toward framing privacy policy through the lens of  proposed responses to the virus.

To that end, two legislative vehicles, one from Senate Republicans and another from a bicameral group of Democrats, have been offered specifically in response to the hitherto unprecedented occasion that society has to embrace near-universally available technologies to identify, track, and remediate the virus. The bills present different visions of what it means to protect and promote the privacy of Americans in the COVID-19 era, both of which are flawed (though, to differing degrees) as a matter of principle and practice. 

Failure as a matter of principle

Privacy has always been one value among many, not an end in itself, but a consideration to be weighed in the pursuit of life’s many varied activities (a point explored in greater depth here). But while the value of privacy in the context of exigent circumstances has traditionally waned, it has typically done so to make room for otherwise intrusive state action

The COVID-19 crisis presents a different scenario. Now, private firms, not the state, are best positioned to undertake the steps necessary to blunt the virus’ impact and, as good fortune would have it, substantial room already exists within U.S. law for firms to deploy software that would empower people to remediate the virus. Indeed, existing U.S. law affords people the ability to weigh their privacy preferences directly with their level of public health concern.

Strangely, in this context, both political parties have seen fit to advance restrictive privacy visions specific to the COVID-19 crisis that would substantially limit the ability of individuals to use tools to make themselves, and their communities, safer. In other words, both parties have offered proposals that make it harder to achieve the public health outcomes they claim to be seeking at precisely the moment that governments (federal, state, and local) are taking unprecedented (and liberty restricting) steps to achieve exactly those outcomes.

Failure as a matter of practice

The dueling legislative proposals are structured in parallel (a complete breakdown is available here). Each includes provisions concerning the entities and data to be covered, the obligations placed upon entities interacting with covered data, and the scope, extent and power of enforcement measures. While the scope of the entities and data covered vary significantly, with the Democratic proposal encumbering far more of each, they share a provision requiring both “opt-in” consent for access and use of data and a requirement that a mechanism exist to revoke that consent. 

The bipartisan move to affirmative consent represents a significant change in the Congressional privacy conversation. Hitherto, sensitive data have elicited calls for context-dependent levels of privacy, but no previous GOP legislative proposal had suggested the use of an “opt-in” mechanism. The timing of this novel bipartisanship could not be worse because, in the context of COVID-19 response, using the FTC’s 2012 privacy report as a model, the privacy benefits of raising the bar for the adoption of tools to track the course of the virus are likely substantially outweighed by the benefits that don’t just accrue to the covered entity, but to society as a whole with firms relatively freer to experiment with COVID-19-tracking technologies. 

There is another way forward. Instead of introducing design restraints and thereby limiting the practical manner in which firms go about developing tools to address COVID-19, Congress should be moving to articulate discrete harms related to unintended or coerced uses of information that it would like to prevent. For instance: defining what would constitute a deceptive use of COVID-related health information, or clarifying what fraudulent inducement should involve for purposes of downloading a contract tracing app. At least with particularized harms in mind policymakers and the public will more readily be able to assess and balance the value of what is gained in terms of privacy versus what is lost in terms of public health capabilities.

Congress, and the broader public policy debate around privacy, has come to a strange place. The privacy rights that lawmakers are seeking to create, utterly independent of potential privacy harms, pose a substantial new regulatory burden to firms attempting to achieve the very public health outcomes for which society is clamoring. In the process, arguably far more significant impingements upon individual liberty, in the form of largely indiscriminate restrictions on movement, association and commerce, are necessary to achieve what elements of contract tracing promises. That’s not just getting privacy wrong – that’s getting privacy all wrong.