Coyote Blog

I had a dinner conversation last night with my Massachusetts mother-in-law.  She is pretty interesting to talk to because she is a pretty good bellwether for Democratic talking points on most issues.  She was opposed to the recent Supreme Court speech decision removing limits on third party advertising near an election  (I think she misunderstood the scope of that decision but that is not surprising given the shoddy reporting on it, up to and including Obama getting it wrong in his State of the Union).   She advocated strict campaign spending restrictions (both in terms of amount of money and length of the campaign season) combined with term limits.

We could have gone a lot of places with the discussion, but we ended up (before we terminated the conversation in the name of civility) discussing whether restrictions on money were equivalent to restrictions on speech.  She of course said they were not, and said under strict monetary controls I still had freedom of speech - weren't we still talking in the car?

It is hard to reach common ground when one person is arguing from a strict rights-based point of view while the other is arguing from a utilitarian point-of-view.   Essentially she knows in her heart that she is restricting speech, but wishes to do so to reach a better outcome.  I made a couple of utilitarian arguments, including:

• I pointed out that when the stakes of government are so high, money and influence never goes away.  Just as in any economy, when you ban money, a barter economy arises.  So if we ban large campaign spending, then the quid pro quo becomes grass roots efforts and voter mobilization.  Groups like the UAW become more powerful (we are seeing that already).  They are trading their member's votes for influence.  Connected companies like GE are doing the same thing, trading their support for legislation that is generally hostile to commerce for specific clauses in said legislation that exempts GE and/or makes the laws even more punishing on their competition.  The problem with all this activity is it is hard to see and totally unaccountable -- at least with advertisements we see people out in the open with their agendas.
• I observed that it was smart to add term limits to her plan, as otherwise her recommendations would be the great incumbent protection act.  But by limiting money, immediate advantage is given to people who already have name recognition and celebrity.  Think we have too many actors and athletes running for office?   Well be prepared for a flood with stricter campaign finance restrictions

However, I tend to shy away form utilitarian arguments.  The best arguments I have against the notion that money can be restricted without restricting speech are:

• Her comment that I still had freedom of speech (ie I am talking freely in the car) with strict campaign cash restrictions ignores the actual wording of the First Amendment, which reads "Congress shall make no law ... abridging the freedom of speech."  Her test, which is "Am I still able to speak in some forum even if I can't in others" is not a valid test for conformance to the First Amendment.  Otherwise, speech could be restricted at will as long as there was some narrow safe harbor where one could express his opinion.    The better test is whether the proposed law, ie a restriction on how much and when a person can spend money advertising his or her opinions, abridges or reduces freedom of speech.  And I think it is hard to deny that everyone has less freedom, in the form of fewer options and reduced scope, after such legislation.
• One interesting test is to broaden the question -- Does restricting spending on something (in this case speech) constitute a restriction on one's underlying right to the activity (e.g. speaking freely).  I was tempted to ask her (she is a strong and vocal abortion rights supporter) whether she would therefore consider the right to abortion to be untouched by Congress if a law were passed to limit each person's spending on abortion to $5 a year.   Abortion would still be entirely legal  -- all government would be doing is putting on some spending restrictions.   Obviously one's scope and options to get an abortion would be limited -- only those who happened to have a doctor in the family could perhaps get an abortion -- just as under her speech plan only those who had a large newspaper in the family could speak fully and freely before an election.

Timothy Carney has a really interesting deconstruction of the US Chamber of Commerce agenda, and it is a good reminder of the forces at work pushing this country towards a corporate state (similar to France and Germany).  When large corporations lobby via the Chamber of Commerce, it is apparently not for low taxes and free markets, but rather targeted interventions and subsidies.  The article does not have a money quote I could find, but this should give you an idea of what the author discovered in the Chamber of Commerce rankings of Congressmen:

On the House side, it's a similar picture. The Republican with the lowest Chamber score was [Ron] Paul.   Even Rep. Barney Frank, D-MA, who wants to regulate everything except Fannie Mae, scored 14 points higher than Paul on the Chamber's scorecard.

Suffice it to say a ranking system that has folks like Ron Paul last is not based on free markets and small government.  Apparently, the Chamber marks down Congressmen who did not vote for all the bailout and stimulus packages, did not vote for various alternative energy subsidies, and did not vote to expand college loan subsidies.

The victor of almost any new regulation or licensing program is typically incumbents, and particularly large incumbents.  In my own business, there have been a series of new government regulations added over the years, with the effect that an industry formerly dominated by hundreds of ma and pa operators has consolidated to barely four or five players.  No one else can afford the compliance costs.  Licensing is almost always incumbent protection, and the government even frequently turns over the approval process for new entrants to the current incumbents (e.g. medicine and law).  And subsidies are almost by definition support incumbents over potential new entrants.

Postscript: In terms of incumbent protection, keep an eye on carbon permits.  There will be a ton of pressure to give free or discounted permits to current incumbents, as was done in Europe.  This would be a huge structural barrier to competition, as incumbents can service their current market share for free but new entrants (or expansions of existing entrants) will require expensive new permits.

Readers of this blog know that I consider most campaign finance laws to in fact be carefully crafted incumbent protection acts.  Incumbents in major political offices get millions and millions of dollars in free advertising just from their day-to-day ability to get on the evening news.  This free publicity combined with strong name recognition means that upstarts often have to seriously outspend the incumbent to have a chance of defeating them.  So campaign finance laws act as a powerful protection device for these incumbents, limiting the amount upstarts can spend while in no way limiting the incumbents's ability to use their office (and taxpayer money) to shamelessly promote and publicize themselves.

And there is no one better at using elected office to shamelessly publicize himself than new NY Governor Eliot Spitzer.  So absolutely no one should be surprised at this:

Moving swiftly in his efforts to change the culture of
Albany, Governor-elect Eliot Spitzer said Thursday that he would
unilaterally stop accepting campaign contributions greater than
$10,000, which is less than a fifth of the $50,100 in individual
donations currently allowed by state law.

Mr. Spitzer also said that from now on he would refuse to take
advantage of several notorious loopholes in the state's campaign
finance laws that allow corporations and limited liability companies to
circumvent donation limits by contributing through subsidiaries and
other related entities.

Note that he only took these steps just days after he was elected governor the first time.  Spitzer knows that no one can probably offset the PR advantage he wields, but to be on the safe side, this is the opening shot to make sure that no future challenger is going to have the cash to threaten his position in office.

Generally, Eliot Spitzer irritates the hell out of me.  But I will say for one brief period in college, Spitzer, as the butt of a huge campus-wide joke, brought be great mirth.

I have had several readers email me asking my opinion on net neutrality, at least as embodied in the regulations passing through Congress.  I really haven't gotten worked up about it one way or the other, but here is where I am on it:

1. It seems to be solving a "problem" that doesn't exist, but is mostly hypothetical.  So the current benefit of the law is zero.  Which makes the law at best currently useless, and at worst a negative given inevitable unintended consequences.  It seems crafted out of general distrust of phone and cable companies than for any other reason.  Couldn't we at least have waited not just until some company was giving preferential access to certain sites, but until there was some demonstrable harm from the practice?
2. I dislike the precedent of the government increasing its regulation of the Internet.  I know folks want to argue to me that this law is just to "keep the Internet like it has always been" but that is the justification of half the regulations on the books -- locking the the status quo against new business models, technologies, and competitors
3. I can imagine situations where net neutrality might be bad.  I think in particular with fledgling wireless networks, that might want to put certain limits on high-bandwidth sites to try to reduce the load on their key nodes.
4. I know it is not a direct analog, but net neutrality smacks a bit of the awful "must carry" rules applied to cable and satellite.  These must-carry rules were crafted to force people like cable to carry every local TV station, worthy or not, on their cable and to force satellite providers to only bring the network feed to a city via its city's local affiliate.  Another government incumbent protection act, it basically said that incumbent terrestrial broadcasters got first call on cable bandwidth ahead of new entrants.   The sattelite rule has always irritated me - it means that to provide NBC to 60 cities, DirecTV has to carry 60 nearly identical feeds in its limited satellite bandwidth instead of just one, all to protect technologically dated but politically influential local TV businesses. 
5. Ironically, the same "progressives" pushing net neutrality also pushed, just 6 months ago, legislation to require cable TV to provide content a la carte rather than just one price for everything bundled.  Aren't these two initiatives effectively opposite of one another?  And why is either the government's business?

The other day, I posted on a NY Times editorial that attempted to make the point that a .

This aggressively ridiculous position is none-the-less repeated by statists every day in many contexts.  Today I will focus on a post by David Sirota on the Huffington Blog.  Its premise is that government ownership of commercial assets is more conducive to freedom that private ownership.  I could probably have found a more serious writer to Fisk, but I am bored this afternoon and needed some fun.  Besides, its fun to see someone actively channeling some of the minor characters in Atlas Shrugged.

First, to be fair, I have to start with a strong point of agreement with Mr. Sirota:  Both of us are frustrated with the corporate welfare, subsidies, eminent domain land grabs, new stadiums, and incumbent protection laws handed by all levels of government to various corporations.  Mr. Sirota cites the stadium example in particular, which has always been a pet peeve of mine as well:

Usually, government is in the business of handing over huge amounts of
our taxpayer money to corporations, so that the corporations can just
take all the profits, and charge whatever they want to the customers.
That's been the backbone of the recent spate of high-profile stadium
deals, whereby city and state governments just fork over cash to private pro sports teams,
while getting no share of the massive profits in return, and letting
those teams charge higher and higher ticket prices to the fans whose
tax dollars are supporting them.

I feel fairly well protected on the price angle by the fact that I can just choose to not go to the games, but he is right that the government is handing over stadium money with little to show for it in return.

But this is where he and I diverge.  My answer is to stop crony capitalism, and to stop using government money and regulatory authority to support favored businesses.  Mr. Sirota goes the other direction, which one might call "in for a penny, in for a pound", of having the government continue investing in businesses but to do so on the government's own account.

ordinary Americans are realizing that there's an alternative path,
whereby community ownership of certain economic institutions and
businesses are a pretty good deal. Instead of allowing Corporate
America to reap the windfalls of everything, more and more communities
are trying to get a piece of the action "“ all while making sure the
public is adequately served, and not abused.

The highest profile example of this is in municipal broadband, where city governments are developing taxpayer-owned high speed Internet networks.
Instead of allowing Verizon or other corporations to control Internet
access and rake in all the profits from it, these communities are
making Internet access a public utility and sharing in the profits.
These communities can make some money at it, while doing the public a
service by keeping rates low.

I will accept his chosen example of broadband networks. I will also, for today, give the author a break and not challenge the bizarre notion that replacing a private company like Verizon who has a 5-10% profit margin with an inefficient government bureaucracy can yield substantial cost savings for customers AND fat profits for the municipal government.  In fact, I will leave the obvious efficiency arguments behind entirely and only discuss the morality, the right and wrong involved in his proposition.

Ownership and Capital Investment
Corporations like Verizon are owned by communities of millions of ordinary people through a mechanism we call "stocks".  Even the few large shareholders of Verizon tend to be investment funds, which are really just vehicles for aggregating ownership of many many ordinary people via mutual funds and/or the pension obligations they back.  Owners of Verizon provide capital to the company through their stock investment in an uncoreced transaction and of their own free will.  Their ownership is evidenced by actual paper shares, and is portable, such that they retain ownership anywhere they live, even overseas.  Investors at any time, if they don't like the company's performance or prospects, are able to cash out at the market price, and companies routinely return a portion of their surplus to them in the form of dividends.  Investors elect a board of directors to steward their investment in the company, and can throw these directors out any year with a 51% vote.  The company they have invested in must provide them clear reports quarterly using GAAP accounting rules about how their investment is fairing.

Contrast this to a municipal-owned broadband network.  In some sense, all members of the municipality have an ownership interest in the network, but they receive no documented evidence or guarantee of this ownership.  Local citizens are required by law to contribute capital to the enterprise via their taxes.  Their investment is mandated by the state, is not optional, and non-investment (via non-payment of taxes) is met with a prison sentence.  Once their money is invested, they may not sell their interest or in any way recover their investment.  History has shown that surpluses in municipal owned business seldom exist, but when they do, they are never returned to the citizens, but are spent in other government functions at the whim of the local authorities.  If the citizen moves, he loses any benefit of his investment.  Municipal authorities seldom produce financial statements for these enterprises, and, when they do, they would never pass GAAP muster.  Since the author mentions Enron, I will say that Enron had cleaner financial statements than most government entities.

The author clearly prefers the latter.  Does someone who chooses the latter over the former really care about freedom and individual rights?

Competition and Evolution

A private company, particularly in an industry like broadband with rapid technology change, is constantly subject to getting beaten by a competitor with better technology or a lower cost position.  In the absence of government intervention, the private company has to constantly match competitive technology changes and cost improvements, or die.  Its interesting that the author would choose broadband, because the corpses of literally hundreds of failed broadband companies litter the American landscape.  Broadband has historically been a brutal business, with most companies failing to repay their investment in their infrastructure.  I will confess that many of the major communications players have been slow to move in this area, but in large part it has been government incumbent protection, not market incentives, that have slowed progress.  Wireless broadband providers and equipment producers have to move rapidly -- they have already migrated from proprietary designs to A to B to G and now to N in just five years or so.  A private company without government protection in this environment is faced with two choices:  constantly upgrade, or die.

Now, lets look at municipally-owned broadband company.  Like the private company, it will have to make a large start-up investment to get the infrastructure in place.  Also like the private company, repaying this investment (and thereby avoiding hitting their taxpayers with new charges each month for operations, ala Amtrak) will require putting a lot of volume on the network.  Finally, also like the private company, it will be facing new technologies and new potential competitors almost before the network is complete.  So what does it do?  It could begin to reinvest in the infrastructure, earning the ire of local citizens because it goes back for yet more taxes for the development.  It could cut prices and drive for market share, lengthening the time before it breaks even and eliminates the tax subsidy it will require. 

Or, it has a third option that the private company does not have:  It can use its government authority to block new entrants.  I will tell you right now - the government will use this third option every single time.  Take another large government network business: The Post Office.  The USPS tried like hell to get the government to block Fedex, and almost succeeded.  The government continues to block competition to the USPS for first class local mail.  Heck, the USPS has tried at various times to argue that it should have authority over email and the Internet.  The government blocks new cigarette manufacturers to protect the settlement money it gets from the old-line tobacco companies and it blocks usage of Love Field in Dallas to protect D/FW airport.  Bureaucracies never, ever let themeselves die, and there is no way a municipal broadband business will ever let itself be killed by a competitor - that competitor will be blocked, even if that likely means that local broadband consumers have to stick with higher costs and outdated technologies.

Gee, that sounds great, huh?

Pricing
My sense is that this is what gets the socialists and community ownership guys excited.  You can see from the quotes above, the author sees the world of private enterprise as this enormous price gouging domain, with no accountability on prices.  Though he does not say it explicitly, I am sure if asked he would say that private corporations have no accountability to the public (ie consumers)on pricing, whereas the local municipal government would.  This pricing issue is I think at the heart of his support for public over private ownership:

People know corporations right now have far too much power
and far too much leeway to rip off ordinary citizens - but there is a
feeling that that's "just a fact of life." The Community Ownership
movement shows it doesn't have to be a fact of life, and that there is
an alternative

The obvious response is that private companies have a tremendous accountability on price, from two directions.  First, consumers, if prices are too high, can choose not to buy.  Second, if prices remain "too high" for long, then competitors emerge to undercut them.  Like most socialists or "progressives", the author doesn't understand or trust these mechanisms - he prefers top down rather than bottom-up accountability.

In this sense, he prefers the comfort of the municipal business where elected officials that the consumer votes for set prices, and trusts these elections to provide more accountability than the market  (how ). Even forgetting that government inefficiency will make price savings impossible in such a thin margin business, how can anyone look at Congress or this administration and believe that electoral accountability is stronger than the market.  Do you really feel that you can do more about to affect government set rates like local sales tax rates than you can in response to say rising cell phone rates?  If I don't like my cell phone rate, I can switch plans, switch companies, or switch to other technologies (land lines, VOIP, etc).  If I don't like the sales tax rate, the best I can do is move to New Hampshire.

Conclusion

Wow, this piece really went on for a long time, and certainly far longer than Mr. Sirota's article deserved.  As a final comment on the author's grasp of reality, note this quote, where he refers to:

the out-of-touch confines of the Beltway where free market extremism reigns supreme

LOL.  I would love to find even a little bit of free market extremism inside the Beltway.  And if by free-market extremism he means crony capitalism of the sort I described at the top of the post, well, he should be more careful with his word choice. 

For too long, our side has rolled over and died when it comes to
questions about how to manage the free market so that it works for
ordinary people.

Here is a hint - if you want to participate in the profits of the free market just like the fat cats, try this.

California Governor Schwarzenegger pointed out in his state of the state address that out of 150+ state congressional districts in California, NONE changed party in the recent elections.  The Governator rightly called out gerrymandering as practiced in states like Texas and California for being a threat to democracy and an incumbent protection program.

This is great to hear, but I would give this a 0% chance of success for anyone but Ahnold.  The problem with doing anything about it is that your political support will almost by definition be coming from the minority party in the state.  That is not a winning political formula.  Even Kevin Drum, who seems to agree with Arnold's logic on this feels compelled to disagree to protect his party. However, Arnold is getting good at taking issues over the heads of legislators straight to the voters, so you never know.

By the way, as a libertarian who cares a lot more about the democratic process than either party, I would take Drum's proposed deal in a second.

(sign of the times:  my ieSpell program already has Schwarzenegger built into the dictionary)