An argument against Net Neutrality

First off, Comcast sucks. Seriously, screw those guys.

But let’s assume a can opener and see if that doesn’t help us find a deeper root problem. The can opener is competition in the ISP network. Let’s consider how the issue of Net Neutrality (NN) would play out in a world where your choice of ISP looked more like your choice of grocery store. Maybe a local district is set up to manage a basic grid and ISPs bid for usage of infrastructure (i.e. cities take a page out of the FCC’s playbook on spectrum rights). Maybe some technological advance makes it easy to set up decentralized wireless infrastructure. But let’s imagine that world.

Let me also assume a bit of regulation. The goal is to create some simple rules that make the market work a bit better. Two regulations that I’d like to see are 1) a requirement that ISPs have a public list of any websites they restrict access to*, and 2) a limitation on how complicated end user agreements can be. I’m not sure these things would be possible in my anarchist utopia, but in a second best world of governments I’m pretty comfortable with them

Let’s also create a default contracts for content providers with ISPs. “Unless otherwise agreed to, content providers (e.g. YouTube, my crazy uncle Larry, the cafe around the corner, etc.) relationship with ISPs is assumed to take the following form:…” An important clause would be “access/speed/etc. to your content will meet ______ specifications and cannot be negatively altered at the request of any third party.”

A similar default contract could be written for ISPs and end users. “Universal access under ____________ conditions will be provided and cannot be negatively altered at the request of any third party.”

Explicitly and publicly setting neutral defaults means we can get NN by default, but allow people the freedom to exchange their way out of it.

Do we need, or even want, mandated NN in that world? There are some clear potential gains to a non-neutral Internet. Bandwidth is a scarce resource, and some websites use an awful lot of it. YouTube and Netflix are great, but they’re like a fleet of delivery trucks creating traffic on the Information Super Highway. Letting them pay ISPs for preferred access is like creating a toll lane that can help finance increased capacity.

Replacing NN with genuine competition means that consumers who value Netflix can pay for faster streaming on that while (essentially) agreeing to use less of the net’s bandwidth for other stuff. We should encourage faster content, even if it means that some content gets that extra speed before the rest.

Competing ISPs would cater to the preferences and values of various niches. Some would seem benign: educational ISPs that provide streamlined access to content from the Smithsonian while mirroring Wikipedia content on their volunteer servers. Bandwidth for sites outside the network might come at some price per gigabyte, or it might be unlimited.

Other ISPs might be tailored for information junkies with absolutely every website made available at whatever speed you’re willing to pay for. Family friendly ISPs would refuse to allow porn on their part of the network (unsuccessfully, I suspect), but couldn’t stop other ISPs from anything. Obnoxious hate group ISPs would probably exist too.

There would be plenty of bad to go along with the good, just like there is in a neutral network.

I’m okay with allowing ISPs to restrict access to some content as long as they’re honest about it. The Internet might not provide a universal forum for all voices, but that’s already the case. If you can’t pay for server space and bandwidth, then your voice can only be heard on other people’s parts of the Internet. Some of those people will let you say whatever you want (like the YouTube comments section), but others are free to ban you.

Similarly, big companies will be in a better position to provide their content, but that’s already the case too. Currently they can spend more on advertising, or spend more on servers that are physically closer to their audience. A non-neutral net opens up one more margin of competition: paying for preferred treatment. This means less need to inefficiently invest physical resources for the same preferred treatment. (Hey, a non-neutral net is Green!)

There might be reason to still be somewhat worried about the free speech implications of a non-neutral net. As consumers, we might prefer networks that suppress dissident voices. And those dissident voices might (in the aggregate) be providing a public good that we’d be getting less of. (I think that’s a bit of a stretch, but I think plenty of smart people would take the point seriously.) If that’s the case, then let’s have the Postal Service branch out to provide modestly priced, moderate speed Internet access to whoever wants it. Not great if you want to do anything ambitious like play Counter Strike or create a major news network, but plenty fine for reading the news and checking controversial websites.

tl;dr: I can imagine a world without Net Neutrality that provides better Internet service and better economizes on the resources necessary to keep the Information Super Highway moving. But it’s not the world we currently live in. What’s missing is genuine market competition. To get there would require gutting much of the existing regulatory frameworks and replacing it with a much lighter touch.

What I’m talking about seems like a bit of a pipe dream from where we’re sitting. But if we could take the political moment of the Net Neutrality movement and redirect it, we could plausibly have a free and competitive Internet within a generation.

 


*Or maybe some description about how they filter out websites… something like a non-proprietary description of their parental filters for ISPs that (attempt to) refuse adult content access.

A Tax is Not a Price

Auto_stoped_highwayAccording to The Economist, the latest US federal budget includes incentives for “congestion pricing” of roads.

Ostensibly, this is about reducing congestion. But some municipalities like the idea of charging for roads because it represents a new revenue stream. This creates an incentive to charge a price above cost. When a firm does this, we call it a “monopoly price.”

But when a government monopoly forces you to pay a fee to use a good or service, do not call it a price. It is a fee that a government collects by fiat. In other words, it is a tax.

A price is a voluntary exchange of money for a good or service. The emphasis on voluntary is important, because it is this aspect of the price that enables economic calculation for what people really want.  Even a free market “monopolist” (however unlikely or conceptually vague it may be) engages in voluntary exchange.

On the other hand, a bureaucrat “playing market” by imposing fees on government-controlled goods and services will not have the same results as a market process. For starters, unlike a person making decisions on their own behalf, a government bureaucrat has to guess at costs. Under a voluntary system, a cost is the highest valued good or service you voluntarily give up in order to attain a goal. But the bureaucrat is dealing with other people’s money.

To “objectively” determine costs, in order to set “fair” prices, is a chimera. In the words of Ludwig von Mises, “[a] government can no more determine prices than a goose can lay hen’s eggs.”

On Borjas, Data and More Data

I see my craft as an economic historian as a dual mission. The first is to answer historical question by using economic theory (and in the process enliven economic theory through the use of history). The second relates to my obsessive-compulsive nature which can be observed by how much attention and care I give to getting the data right. My co-authors have often observed me “freaking out” over a possible improvement in data quality or be plagued by doubts over whether or not I had gone “one assumption too far” (pun on a bridge too far). Sometimes, I wish more economists would follow my historian-like freakouts over data quality. Why?

Because of this!

In that paper, Michael Clemens (whom I secretly admire – not so secretly now that I have written it on a blog) criticizes the recent paper produced by George Borjas showing the negative effect of immigration on wages for workers without a high school degree. Using the famous Mariel boatlift of 1980, Clemens basically shows that there were pressures on the US Census Bureau at the same time as the boatlift to add more black workers without high school degrees. This previously underrepresented group surged in importance within the survey data. However since that underrepresented group had lower wages than the average of the wider group of workers without high school degrees, there was an composition effect at play that caused wages to fall (in appearance). However, a composition effect is also a bias causing an artificial drop in wages and this drove the results produced by Borjas (and underestimated the conclusion made by David Card in his original paper to which Borjas was replying).

This is cautionary tale about the limits of econometrics. After all, a regression is only as good as the data it uses and suited to the question it seeks to answer. Sometimes, simple Ordinary Least Squares are excellent tools. When the question is broad and/or the data is excellent, an OLS can be a sufficient and necessary condition to a viable answer. However, the narrower the question (i.e. is there an effect of immigration only on unskilled and low-education workers), the better the method has to be. The problem is that the better methods often require better data as well. To obtain the latter, one must know the details of a data source. This is why I am nuts over data accuracy. Even small things matter – like a shift in the representation of blacks in survey data – in these cases. Otherwise, you end up with your results being reversed by very minor changes (see this paper in Journal of Economic Methodology for examples).

This is why I freak out over data. Maybe I can make two suggestions about sharing my freak-outs.

The first is to prefer a skewed ratio of data quality to advanced methods (i.e. simple methods with crazy-data). This reduces the chances of being criticized for relying on weak assumptions. The second is to take a leaf out of the book of the historians. While historians are often averse to advantaged data techniques (I remember a case when I had to explain panel data regressions to historians which ended terribly for me), they are very respectful of data sources. I have seen historians nurture datasets for years before being willing to present them. When published, they generally stand up to scrutiny because of the extensive wealth of details compiled.

That’s it folks.

 

Can we trust US interwar inequality figures?

This question is the one that me and Phil Magness have been asking for some time and we have now assembled our thoughts and measures in the first of a series of papers. In this paper, we take issue with the quality of the measurements that will be extracted from tax records during the interwar years (1918 to 1941).

More precisely, we point out that tax rates at the federal level fluctuated wildly and were at relatively high levels. Since most of our inequality measures are drawn from the federal tax data contained in the Statistics of Income, this is problematic. Indeed, high tax rates might deter honest reporting while rapidly changing rates will affect reporting behavior (causing artificial variations in the measure of market income). As such, both the level and the trend of inequality might be off.  That is our concern in very simple words.

To assess whether or not we are worrying for nothing, we went around to find different sources to assess the robustness of the inequality estimates based on the federal tax data. We found what we were looking for in Wisconsin whose tax rates were much lower (never above 7%) and less variable than those at the federal levels. As such, we found the perfect dataset to see if there are measurement problems in the data itself (through a varying selection bias).

From the Wisconsin data, we find that there are good reasons to be skeptical of the existing inequality measured based on federal tax data. The comparison of the IRS data for Wisconsin with the data from the state income tax shows a different pattern of evolution and a different level (especially when deductions are accounted for). First of all, the level is always inferior with the WTC data (Wisconsin Tax Commission). Secondly, the trend differs for the 1930s.

Table1 for Blog

I am not sure what it means in terms of the true level of inequality for the period. However, it suggests that we ought to be careful towards the estimations advanced if two data sources of a similar nature (tax data) with arguably minor conceptual differences (low and stable tax rates) tell dramatically different stories.  Maybe its time to try to further improve the pre-1945 series on inequality.

Empire effects : the case of shipping

I have been trying, for some time now, to circle an issue that we can consider to be a cousin of the emerging “state capacity” literature (see Mark Koyama’s amazing summary here). This cousin is the literature on “empire effects” (here and here for examples).

The core of the “empire effect” claim is that empires provide global order which we can consider as a public good. A colorful image would be the British Navy roaming the seas in the 19th century which meant increased protection for trade. This is why it is a parent of the state capacity argument in the sense that the latter concept refers (broadly) to the ability of a state to administer the realm within its boundaries. The empire effect is merely the extension of these boundaries.

I still have reservations about the nuances/limitations of state capacity as an argument to explain economic growth. After all, the true question is not how states consolidate, but how they create constraints on rulers to not abuse the consolidated powers (which in turn generates room for growth). But, it is easy to heavily question its parent: the empire effect.

This is what I am trying to do in a recent paper on the effects of empire on shipping productivity between 1760 and 1860.

Shipping is one of the industry that is most likely to be affected by large empires – positively or negatively. Indeed, the argument for empire effects is that they protect trade. As such, the British navy in the 19th century protected trade and probably helped the shipping industry become more productive. But, achieving empire comes at a cost. For example, the British navy needed to grow very large in size and it had to employ inputs from the private sector thus crowding-it out. In a way, if a security effect from empire emerged as a benefit, there must have been a cost. The cost we wish to highlight is the crowding-out one.

In the paper (written with Jari Eloranta of Appalachian State University and Vadim Kufenko of University of Hohenheim), I argue that, using the productivity of the Canadian shipping industry which was protected by the British Navy, the security effect from a large navy was smaller than the crowding-out from high-levels of expenditures on the navy.

While it is still a working paper which we are trying to expand and improve, our point is that what allowed the productivity of the Canadian shipping industry (which was protected by Britain) to soar was that the British Navy grew smaller in absolute terms. While the growth of the relative strength of the British Navy did bolster productivity in some of our tests, the fact that the navy was much smaller was the “thing in the mix that did the trick”.  In other words, the empire effect is just the effect of a ramping-down in military being presented as something else than it truly is (at least partly).

That’s our core point. We are still trying to improve it and (as such) comments are welcomed.

Some ideas to guide your thoughts on health care

This post is meant to help my non-economist friends think more clearly about how we pay for health care. I’ll talk about markets, but the truth is that the American system is built of deeply bastardized markets. If our car markets worked like our health markets, most of us would walk to work. I’m trying to focus on the essential logic of the situation which is going to sound Utopian because Congress isn’t going to give us any sort of logical policy any time soon. But we aren’t going to get a logical solution until we as voters understand the logic of health care finance.

I’ve got a few big points to make:

  1. Trying to health insurance also work like charity is bound to end poorly for everyone.
  2. A single-payer system has a lot of nice features for individuals, but a lot of systemic problems.
  3. It’s fundamentally impossible to insure pre-existing conditions. Insurance is about sharing risk, not unavoidable expenses.

(This post is longer than I’d like, so thanks for your patience!)

Markets and Charity

I’ve said it before, and I’ll say it again: we don’t have to ruin markets to do charity.

The essence of markets is that they aggregate knowledge about the relative costs and benefits of different goods based on the preferences of the real people involved in producing and consuming those goods.

The demand side of markets provide information by giving you (as a consumer) a choice between more of something you like and more money to spend on other stuff. On the supply side they give you (as a supplier–probably of your own labor) the choice between providing more of what people are willing to pay for or having less money to buy the stuff you want. Markets crowdsource cost-benefit analysis.

Prices also give suppliers an incentive to produce things that consumers want while trying to save resources (i.e. cut costs). In other words, a price is a signal wrapped up in an incentive.

So what about fairness? The bad news is that markets are a system of “from each according to their ability, to each according to how much other people are willing to pay for the product of their ability.” (Not very catchy!) It’s mostly fair for most of us, but doesn’t do much good for people who are just unlucky (e.g. kids born with genetic defects). Here’s the good news: we can use charity alongside markets.

We can debate how much role government should play in charity some other time. For now, let’s whole-ass one thing instead of half-assing two things. We have to appreciate that interfering with markets interferes with the ability of those markets to function as sources of reliable information. It doesn’t matter how good our intentions are, we face a trade off here… unless we do something to establish a functioning charity system parallel to the health care finance system.

Single Payer

Anecdotes about the merits of a single-payer health care system are powerful because they shed light on the biggest benefit to such a system: individual convenience.

Part of the appeal has to do with the general screwiness of the American system. It’s a cathedral built of band-aids. But even in an idealized market system, a single-payer system has the advantage of not making me go through the work of evaluating which plan best suits my needs.

A single-payer system is, from an individual perspective, about as ideal as having your parents pay for it. But we don’t really  want our parents buying our stuff for us.

Single payer system sacrifice the informational value of markets (probably even more so than America’s current system of quasi-price controls). Innovation would be harder as long as new treatments had to be approved by risk-averse bureaucrats (and again, we already face a version of this with Medicare billing codes and insurance companies).

Essentially, a single payer system creates a common pool problem: each of us gets the individual benefit of being able to be lazy. But then we’re left trusting bureaucrats, special interest groups, and think tanks to keep an eye on things. It could be an improvement over the current American system, but that’s like saying amputation is better than gangrene.

Insurance

Premium = expected cost + overhead

Consider two alternatives. In scenario A you start with $150, flip a coin, and if it comes up tails you lose $100. In scenario B you get $90. The expected value of A is $100, but most of us would still prefer the sure thing.

Here’s how insurance works: You start with $150, give $60 to the insurance company, then flip the coin. If it comes up tails, you lose $100, but the insurance company gives you back $40. You’ve just gotten the sure thing. And by taking on thousands of these bets the insurance company is able to make enough money to pay their employees.

But here’s the thing: the premium they charge is fundamentally tied to that expected value. Change the odds, or the costs (i.e. the claims they have to pay for) and you’ll change the premium.

(BTW, Tim Harford did a nice ~8 minute podcast episode on insurance that’s worth checking out.)

Pre-existing conditions are the equivalent of changing our thought experiment to a 100% chance of flipping tails. No amount of risk sharing that will get you to the $90 outcome you want. You can’t insure your car after you’ve been in an accident and you can’t insure a person against a loss they’ve already realized. If you’re Bill Gates, that’s no big deal, but for many people, this might mean depending on charity. That’s a bummer, but wishful thinking can’t undo that.

If we insist that insurance companies cover pre-existing conditions* the result can only be higher premiums. This is nice for people with these pre-existing conditions, but not so great for (currently) healthy poor people. Again, charity matters needs to be part of the debate, but it needs to be parallel to insurance markets.

Covering more contingencies also affects premiums. The more things a policy covers, the higher the expected cost, and therefore the higher the premium. We each have to decide what things are worth insuring and what risks we’re willing to face ourselves. Politics might not be the best way to navigate those choices.

High deductibles and catastrophic care

Actuaries think about the cost of insuring as a marginal cost. In other words, they know that the odds that you spend $100 in a year are much higher than the odds that you spend $1000. So the cost of insuring the first dollar of coverage is much higher than the cost of insuring the 5000th dollar. This is why high deductible plans are so much cheaper… they only pay out in the unlikely situation where something catastrophically bad happens to you. This is exactly why most of us want insurance. We aren’t afraid of the cost of band-aids and aspirin, we’re afraid of the cost of cancer treatment.

For those of us firmly in the middle class, what we really need is a high-deductible plan plus some money in the bank to cover routine care and smaller emergencies. (Personally, my version of this is a credit card.) Such a plan has the added benefit of encouraging us to be more cost conscious.

A big problem with our current system is that it’s set up like an all-you-can-eat buffet. You pay to get in (your premiums) but once you’re in the hospital, any expenses are the insurance company’s problem (read: everyone else on your health plan). The logic here is the same as with pollution. When I drive my car I get the benefits of a quick and comfortable commute but I also suffer a little bit more pollution. But I don’t have incentive to think about how that pollution affects you so I pollute more than would be ideal. Multiply that by millions of people and we can end up with smog.

tl;dr

If I were trying to put together a politically palatable alternative to our current system, I’d have an individual mandate with insurance vouchers for the poor (it’s not very libertarian, and it’s far from my Utopian ideal, but I think it would be a huge improvement over what we’ve got now). I would also expand the role of market competition by encouraging high deductibles plus flexible health savings accounts.

Reality is complicated, but I’m trying to get at the fundamental logic here. We don’t have a properly functioning market system. To get there we need competition, transparency, and a populace with the mental tools and mathematical literacy necessary to understand what their insurance can and can’t do. That’s a tall order, but it doesn’t mean we shouldn’t keep trying to move in that direction.

To have a fruitful debate we need to understand what we want from our healthcare system: help for the poor (charity), convenience, and efficiency from an individual and social perspective. By trying to lump all these things together we muddy the waters and make it harder to understand one another.


*I don’t know what the deal is with the idea that the AHCA will treat rape as a pre-existing condition. Some webpages give a bunch of random tweets as evidence of this, and others call bullshit. Let’s just leave it at this: in a competitive market this would be considered terrible marketing and savvy companies wouldn’t do it. The lesson then is to keep calling companies on bad marketing, and avoid protecting politically powerful companies from market competition.

On the paradox of poverty and good health in Cuba

One of the most interesting (in my opinion) paradox in modern policy debates relates to how Cuba, a very poor country, has been able to generate health outcomes close to the levels observed in rich countries. To be fair, academics have long known that there is only an imperfect relation between material living standards and biological living standards (full disclosure: I am inclined to agree, but with important caveats better discussed in a future post or article, but there is an example). The problem is that Cuba is really an outlier. I mean, according to the WHO statistics, its pretty close to the United States in spite of being far poorer.

In the wake of Castro’s death, I believed it necessary to assess why Cuba is an outlier and creates this apparent paradox. As such, I decided to move some other projects aside for the purposes of understanding Cuban economic history and I have recently finalized the working paper (which I am about to submit) on this paradox (paper here at SSRN).

The working paper, written with physician Gilbert Berdine (a pneumologist from Texas Tech University), makes four key arguments to explain why Cuba is an outlier (that we ought not try to replicate).

The level of health outcomes is overestimated, but the improvements are real

 Incentives matter, even in the construction of statistics and this is why we should be skeptical. Indeed, doctors are working under centrally designed targets of infant mortality that they must achieve and there are penalties if the targets are not reached. As such, physicians respond rationally and they use complex stratagems to reduce their reported levels. This includes the re-categorization of early neonatal deaths as late fetal deaths which deflates the infant mortality rate and the pressuring (sometimes coercing) of mothers with risky pregnancies to abort in order to avoid missing their targets. This overstates the level of health outcomes in Cuba since accounting for reclassification of deaths and a hypothetically low proportions of pressured/coerced abortions reduces Cuban life expectancy by close to two years (see figure below). Nonetheless, the improvements in Cuba since 1959 are real and impressive – this cannot be negated.

Cuba1.png

 

Health Outcomes Result from Coercive Policy 

Many experts believe that we ought to try to achieve the levels of health outcomes generated by Cuba and resist the violations of human rights that are associated with the ruling regime. The problem is that they cannot be separated. It this through the use of coercive policy that the regime is able to allocate more than 10% of its tiny GDP to health care and close to 1% of its population to the task of being a physician. It ought also be mentioned that physicians in Cuba are also mandated to violate patient privacy and report information to the regime. Consequently, Cuban physicians (who are also members of the military) are the first line of internal defense of the regime. The use of extreme coercive measures has the effect of improving health outcomes, but it comes at the price of economic growth. As documented by Werner Troesken, there are always institutional trade-offs in term of health care. Either you adopt policies that promote growth but may hinder the adoption of certain public health measures or you adopt these measures at the price of growth. The difference between the two choices is that economic growth bears fruit in the distant future (i.e. there are palliative health effects of economic growth that take more time to materialize).

Health Outcomes are Accidents of Non-Health Related Policies

As part of the institutional trade-off that make Cubans poorer, there might be some unintended positive health-effects. Indeed, the rationing of some items does limit the ability of the population to consume items deleterious to their health. The restrictions on car ownership and imports (which have Cuba one of the Latin American countries with the lowest rate of car ownership) also reduces mortality from road accidents which,  in countries like Brazil, knock off 0.8 years of life expectancy at birth for men and 0.2 years for women.  The policies that generate these outcomes are macroeconomic policies (which impose strict controls on the economy) unrelated to the Cuban health care system. As such, the poverty caused by Cuban institutions  may also be helping Cuban live longer.

Human Development is not a Basic Needs Measure

The last point in the paper is that human development requires agency.  Since life expectancy at birth is one of the components of the Human Development Indexes (HDI),  Cuba fares very well on that front. The problem is that the philosophy between HDIs is that individual must have the ability to exercise agency. It is not a measure of poverty nor a measure of basic needs, it is a measure meant to capture how well can individual can exercise free will: higher incomes buy you some abilities, health provides you the ability to achieve them and education empowers you.

You cannot judge a country with “unfree” institutions with such a measure. You need to compare it with other countries, especially countries where there are fewer legal barriers to human agency. The problem is that within Latin America, it is hard to find such countries, but what happens when we compare with the four leading countries in terms of economic freedom. What happens to them? Well, not only do they often beat Cuba, but they have actually come from further back and as such they have seen much larger improvements that Cuba did.

This is not to say that these countries are to be imitated, but they are marginal improvements relative to Cuba and because they have freer institutions than Cuba, they have been able to generate more “human development” than Cuba did.

Cuba2.png

Our Conclusion

Our interpretation of Cuban health care provision and health outcomes can be illustrated by an analogy with an orchard. The fruit of positive health outcomes from the “coercive institutional tree” that Cuba has planted can only be picked once, and the tree depletes the soil significantly in terms of human agency and personal freedom. The “human development tree” nurtured in other countries yields more fruit, and it promises to keep yielding fruit in the future. Any praise of Cuba’s health policy should be examined within this broader institutional perspective.