finally a few words on "net neutrality"

So I've had several people ask me to comment on the recent joint proposal by Google and Verizon for the FCC to regulate broadband internet while leaving wireless internet essentially unchanged.  I have wanted to comment on so-called net neutrality for a while because in my opinion a lot of the talking points involving this issue are very abstract and have little connection to reality.  Moreover, I think the debate comes down to the same issue that many of our current problems unfortunately come down to: a large company tries to sell the public that a regulation is "for the common good," but in reality it is simply a way to strengthen their business model or bottom line.  And enter Google.

So what is net neutrality?  According to its most fervent supporters the idea is that no internet traffic should be discriminated against based on the user or type of information.  And anyone who believes in discrimination is evil.  Hence net neutrality is a good idea because discrimination is bad.  But in all reality discrimination can be highly beneficial with regards to internet traffic.  Broadband providers have extremely complex networks that send an unimaginable amount of data from literally billions of sources.  Some is email, some is video, some is porn.  In order to keep the network from being hogged or to prevent a few high bandwidth users from slowing the access of others, it is perfectly reasonable to allow the providers to discriminate in order to properly maintain their networks.

And what's more is that the end goal of net neutrality supporters, an internet where packets are effectively treated the same regardless of source, size or user, is essentially exactly how broadband internet operates right now.  The free market has provided their end goal.  Absent a few examples like when Comcast chose to block ports used by torrent websites (in order to prevent bandwidth hogs from distributing copyrighted material illegally) or forcing people who operate email servers to upgrade to a commercial subscription, there is no serious packet discrimination that net neutrality supporters can point to and say "This is wrong.  The consumer is being hurt."  The reason for this is obvious: its not an actual problem to begin with.  There is nothing inherently wrong with forcing someone who needs to use more bandwidth to pay more.  

And like I said, enter Google.  This is company who owns youtube, provides over 8 GB of storage to anyone who uses their email service and who major source of income is based on people looking at and clicking online ads.  They are not only a bandwidth hog, but their entire business model is based on generating large amounts of traffic.  They understandably see a move by the government in the name of stopping discrimination as a way to prevent them having to realize the true costs of their network usage, and it would prevent broadband providers from either charging them more for the right to the priority access or slowing Google's packets to prevent network congestion.  In effect, people who use less bandwidth would be subsidizing google.

Now at this point, the FCC decided to step in.  Although the D.C. Circuit Court of Appeals slapped down the FCC in April when it ruled the FCC didn't have the authority to impose its net neutrality rules on Comcast based on broadband's definition as an "information service" under the Telecommunications Act of 1996, the FCC decided to simply redefine broadband as a telecommunications service under the act, giving it ample authority to regulate.  In fact, by doing so the FCC would be allowed to impose as much regulation on broadband providers as telephone companies, which includes price controls, right of access rules, and the ability to force geographical divisions and terms of service on providers.  In other words, we are taking one of the few industries that has been left unregulated, and has hence lowered prices, improved speed/service, and has grown by leaps of bounds, and imposing the heavy hand of government in order to protect the market position of a large multinational corporation.  There is little doubt that the internet is one of the great success stories of the market policing itself, both on the content side and on the access side.  Yet, according to net neutrality supporters all hell is set to break loose if the government doesn't get in there and .... ? That's just it, there isn't anything they can point to.  If it's not broke don't fix it.  They are fighting imaginary battles against imaginary villains down the road.

So although I don't believe that there are many, if any, benefits that could be derived from the net neutrality framework, I do believe it could impose a large number of negative consequences on access, competition, market efficiency, and costs of internet access.  In short, I have three major objections to the proposed regulations:

1) Network neutrality regulations threaten to set a precedent for even more intrusive regulation of the Internet;
This one is pretty obvious.  Once the FCC get their greasy little paws on something and it starts believing that it is what it does, and not the work of entrepreneurs and capital stake holders, that makes the internet open, free, expansive and a source of growth, it will inevitably argue for more control.  Sure right now they are claiming that they will regulate with a "light touch" so as to provide maximum freedom from regulation, when something inevitably goes wrong they will of course argue that they could have prevented it only if they had been in control.  They will never claim that any of these future bad consequences were due in part to their own regulations becuase that never happens - I'm pretty sure that is some kind of GOP myth or something.  If we don't nip this in the butt now, don't blame me when your transactions on amazon will be subject to FCC approval in about 15 years in order to "prevent fraud" or some bullshit along those lines.  And don't forget that little old surcharge on you bill that pays this "protection money."  But don't worry it will be hidden so that you won't be too disturbed by it.  It will come in the form of higher prices for both services and access.

2) Imposing such regulation will chill investment in competitive networks (such as wireless) and deny network providers the ability to differentiate their services;
This one is also pretty obvious I think.  When the FCC comes in and begins to impose rules like how you can charge your customers, how much you can charge and the types of services you must provide it inevitably limits consumers choices.  This in turn limits innovation and in essence codifies a singular business model.  Additionally, as regulation becomes more and more complex, it makes it harder and harder for anyone other than large corporations from being able effectively navigate the regulation thickets.  Currently there is a lot of innovation in the internet subscription market; besides traditional cable broadband, where there can be multiple players in a single market, there is DSL, increasing wireless broadband penetration, fiber optic infrastructure and satellite internet.  These all provide competition and innovation, preventing the types abuses that net neutrality supporters so abhor.  There is also a large risk that the regulations could have the perverse effect of cementing broadband providers market positions, thereby lowering their incentive, and the incentives of others, to invest in these alternative infrastructures.  Lastly, I addressed the lack of ability to control and maintain network stability above.

3) Network neutrality regulations confuse the unregulated Internet with the highly regulated telecom lines that it has shared with voice and cable customers 
This is similar to my first argument, but I just want to add a few more points.  Traditionally broadband was provided by cable companies and shares the line with both cable TV and telephone service.  Both these are highly regulated both with regards to network penetration and content, especially cable TV.  Therefore I find it unwise to further blur the line of the two.  If the FCC can prevent obscenity from being sent on cable TV, why should they stop there and allow it for a different service running over the same line they they now are in charge of.  Now I believe that all of this censorship is fundamentally wrong, and that it should be completely abandoned, but at the very least we shouldn't impose these stupid rules of the internet as well.  Therefore we should keep them as segregated as possible, preventing the kinds of regulatory abuse described above.

At the end of the day, this whole issue comes down to one thing for me: crony capitalism.  Look at the Google-Verizon proposal.  They want to impose net neutrality rules on the broadband providers while leaving wireless completely unregulated.  This is because it fits their business models best this way.  By allowing google to profit from forcing network providers to treat its traffic the same regardless of the effects on the network, while still allowing Verizon to discriminate traffic on its wireless networks.  This allows Verizon, whose major partner on phones like its best selling Droid is Google, to discriminate based on the type of plan purchased, importance of the traffic and the type of traffic - everything it wants to prevent for broadband.  They should rename the proposed legislation the "Google-Verizon Promotion at the Expense of Evil Comcast and AT&T Act of 2010."  There is a solution, however, and it has been working great for two decades: let the consumers decide.  If they want better or prioritized service, they can pay more for it.  If they think a broadband internet provider is being to restrictive with their network, they can switch to a DSL or wireless provider.  This would allow the market to continue to police itself and would prevent the government from inching its way further into one of the truly free markets in our society.

jim moran on what is wrong with economy

"Right now we've got to get this economy back on its feet," said Rep. Jim Moran (D-VA) (and I swear to God that is his actual name). "And the most de-stimulating part of our economy right now is state and local spending. They're cutting back and in fact in the last three months they cut about 100,000 jobs. In the last two years they've cut over 300,000 jobs. These are people who won't be able to make their mortgage payments, who won't be shopping at stores, who will be pulling the economy down..."

Really?  This moran really thinks the most destimulating part of our economy is lack of state and local spending? Is this in anyway a defensible viewpoint?  But I guess this is what you think when you represent northern Virginia and the only reason there are jobs there is because the huge largess of the federal government which takes money from the productive members of the rest of the country so that people in Moran's district can push some paper around.  Let's look at Exhibit A to see whether job losses in the public sector are a major problem right now.

Exhibit A

So state and local government job losses, which are more than offset by the number of jobs added by the federal government and are only 1.7% the number of losses in the private sector, are the major destimulating factor in the economy?  Look, the House and Senate just passed the $26 billion bailout of state governments.  This is nothing more than a special interest payout to union members by the democrats.  This money was meant for the American Federation of Teachers and the American Federation of State, County and Municipal Employees as payback for the campaigning for democrats the past few cycles.  Their major constituency wanted some cash and they got it.

And I am tired of the staright up bullshit that we have to do it "for the children."  Nothing about this money is going to help children.  These unions don't care about the children.  Now I'm not saying that teachers don't care about their students, but I am saying that the unions don't.  I could go on a rant about how the teacher's unions are the number one reason why are public schools are failing, but I already did, although only partially, here and here.  In short, teachers can't be fired, so once they are hired they continue to educate our kids even if they are horrible.  Why is this acceptable in our society?  Everyone in every other kind of profession is accountable.  And not only accountable for the amount of effort they put in.  They are accountable for RESULTS.  I don't give two shits if you are a teacher who comes in early and leaves late.  If your kids aren't getting the proper education then you should be fired and try a career doing something else.  This is the way it works in the real world.

But alas this is to no avail.  The only study I could find was in 2005 and the U.S. was ranked third in education spending in the world at around $8,000 per pupil (here).  However, that number is way under the actual spending levels as it includes only what is spent by state and local districts directly on the pupils.  It does not include the money that goes into the education bureaucracy or the outlays spent directly by the federal government.  In fact these two recent studies by the Washington Post and the Cato Institute showed that actual per student spending was closer to $25,000 and $19,000 in the school districts in Washington, D.C. and Los Angeles, receptively.  And these are two of the worst schoold districts in the country.  Until we recognize that accountability of educators and not spending it what is needed, public schools will continue to fail.  But don't worry, that moran said that we can alleviate the biggest destimulating section of the economy by giving them tens of billions more!  And I'm sure this money will lead to better results.  Until it doesn't.  And then the teachers demand more money.  And the cycle continues...

paul ryan's roadmap

While I was away on vacation, my favorite New York Times columnist Paul Krugman wrote a scathing attack on my boy Paul Ryan's Roadmap for America's Future.  The article was entitled The Flimflam Man, and asserted that Ryan was intentionally trying to mislead the American people and was hence a flimflam.  The article ended with this doozy:

So why have so many in Washington, especially in the news media, been taken in by this flimflam? It’s not just inability to do the math, although that’s part of it. There’s also the unwillingness of self-styled centrists to face up to the realities of the modern Republican Party; they want to pretend, in the teeth of overwhelming evidence, that there are still people in the G.O.P. making sense. And last but not least, there’s deference to power — the G.O.P. is a resurgent political force, so one mustn’t point out that its intellectual heroes have no clothes. 

But they don’t. The Ryan plan is a fraud that makes no useful contribution to the debate over America’s fiscal future.

 Krugman's whole thesis is that Ryan's plan is so absolutely, unequivocally useless that he is attempting to defraud the electorate by offering it up as a potential solution to our long term fiscal woes caused from vastly expanding entitlement payouts when baby boomers begin to retire.  Krugman expoused the following four major attacks on the Ryan plan in making this assessment.  They are 1) The CBO did not score the revenue portion of the Roadmap when it scored the budget effects of the plans spending cuts, 2) The proposed tax cuts would vastly outweigh any revenue savings negating any positive effect on the budget, 3) The fundamental tax reforms proposed by Ryan would benefit the rich while increasing taxes on the middle class and poor, 4) The plan would end Medicare.  I will address each of these criticisms in kind, and show why Mr. Krugman, rather than Mr. Ryan is the one without any serious ideas of how to avert the looming fiscal disaster that is entitlement spending.

1) The CBO did not score the revenue portion of the Roadmap when it scored the budget effects of the plans spending cuts

Well, I have to give it to Mr. Krugman here, he is right on this one.  But Mr. Krugman says "At Mr. Ryan’s request, it produced an estimate of the budget effects of his proposed spending cuts — period. It didn’t address the revenue losses from his tax cuts."  But the truth is very different than Krugman's assertion that Mr. Ryan asked the CBO to ignore the revenue side of his plan.  The fact is that it is not part of the CBO's job description.  The CBO only estimates spending levels NOT revenue.  That is for the office of the Joint Committee on Taxation (JCT), not the CBO.  Ryan asked the JCT to score his plan early in the year, however, there was this trillion dollar entitlement that was being force fed through every conceivable procedural loophole in Congress that happened to take up all their time.  For this reason they turned down Mr. Ryan's request because his plan was still only in the early planning stages.  So although the revenue side was not scored by a government accounting agency, I believe it is extremely misleading and dishonest of Krugman to assert that this was done at Mr. Ryan's request as a tactic to mislead the public.

2) The proposed tax cuts would vastly outweigh any revenue savings negating any positive effect on the budget

Mr. Krugman references a study by the Tax Policy Center (TPC), a left leaning joint venture of the Urban Institute and the Brookings Institute (both left leaning themselves) that determined that although Ryan's plan would effectively reduce spending, the tax cuts would cost approximately $4 trillion of additional  revenue over the first decade it takes effect relative to the tax rates that are currently in place (Note that it used the comparison scenario as one in which ALL the Bush tax cuts are allowed to expire).  This is evidence, according to Mr. Krugman, that Ryan's plan would do little to curb the deficit, as the TPC estimated that using their revenue projections coupled with Mr. Ryan's spending cuts the deficit would remain at approximately $1.3 trillion in 2020.

There are so many things I have to say about this I don't know where to start.  First and foremost, you have to take into account exactly what Mr. Ryan's revenue side of the plan actually is: fundamental tax code reform.  He would eliminate almost all deductions, exemptions and tax credits that are used disproportionately by the rich to shield income from taxation.  He would create only two personal income tax rates: 10% on the first $50,000 of taxable income, and 25% on everything above that.  One of the few exemptions he does allow to remain is a very generous standard deduction and personal exemption that would equal approximately $39,000 for a family of four, in order to protect poor workers from being taxed until their income reaches a level where they can effectively support themselves.  He would also eliminate taxes on interest, capital gains and dividends, which would greatly decrease the incentives to invest and hire thereby spurring economic growth.  Lastly, he would eliminate the corporate tax, which at 35% is second in the industrialized world only to Japan, and replace it with a business consumption tax (similar to a value added tax) at 8.5%.  This would make U.S. business more competitive while also forcing eliminating any tax benefit for corporations located overseas.  To eliminate the competitive disadvantage on American businesses and products, the BCT is not imposed on U.S. exports when they leave the U.S., while instead it is imposed on foreign imports when they enter the U.S. Current WTO rules prevent a corporate income tax from being border adjustable, so this fundamental reform is one of the few realistic ways of addressing the issues regarding the competitive tax disadvantage faced by many U.S. based corporations.

Now like I said, this is serious tax reform on a level unprecedented since the advent of the income tax.  Therefore, it is extremely difficult to forecast how it will affect revenue levels.  Mr. Ryan has repeatedly stated that his goal is to create a simplified tax system that still maintains historical levels of revenue which is approximately 18% of GDP.  The income and corporate tax rates in the plan are outlined above were put in place with that goal in mind.  According to the study done by the TPC, these taxation levels would only amount to about 16% of GDP and hence the revenue shortfall that Mr. Krugman cites as evidence of the plans lack of credibility.  However, there are also serious questions regarding the accuracy of the TPC's forecasts.  Mr. Ryan addresses the criticism that his proposal would cost trillions in revenues on his website here, but here are his main points:

• It is always important to examine the underlying baseline against which a plan is measured in these statements.  
• The tax plan in the Roadmap is designed to generally track the CBO’s “alternative fiscal scenario” baseline for revenues.  As a result, the Roadmap has fully accounted for any “revenue loss” that results from CBO’s “alternative fiscal scenario.”  As noted above, this baseline assumes that all of the 2001/2003 tax provisions are extended and the AMT is permanently patched for inflation (i.e. current tax policy as we know it is extended in future).  In contrast, the so-called “current law” baseline assumes much higher revenue amounts because all of the 2001/2003 tax provisions are repealed after this year, as dictated under current law, and the AMT is not indexed for inflation, allowing it to hit more and more middle-class taxpayers each year.  
• As a result, CBO’s current law baseline for revenues is $3 trillion higher over 10 years than its alternative fiscal scenario, meaning that any proposal aiming to track current tax policy would automatically be judged as losing $3 trillion in revenue relative to current law.     
• The current-law revenue baseline already builds in a host of tax increases that virtually no policymakers are proposing.  Relative to this current law baseline, any tax plan that doesn’t implicitly raise taxes significantly is labeled a major revenue loser.  It is telling, for instance, that the Tax Policy Center scored Presidential candidate Obama’s tax proposals and concluded that it would “lose” over $2.9 trillion in revenue over 10 years, relative to current law. 

As you can see, relative to any serious proposal other thank allowing the entirety of the Bush Tax cuts expire and allowing the alternative minimum tax to hit millions of more American's per year, almost any plan is going to lose revenue.  As Mr. Ryan correctly notes even Mr. Obama's plans to soak the rich would lose nearly $3 trillion of revenue according to the TPC analysis, which is not all that far off from is $4 trillion prediction for Mr. Ryan's plan (NOTE - I just want to say is a little disheartening to live in an age where a difference of $1 trillion is not that much).  Additionally, the TPC analysis is admittedly done in static terms.  Under their analysis cutting taxes as proposed by Mr. Ryan will do nothing to spur increased growth and will hence not bring in any additional revenue due to this growth.  Now I'm not saying that tax changes such as these will completely pay for themselves, but they absolutely will grow the economy and increase total taxable revenue faster than the alternative.  This will make up for at least part of the shortfall outlined above.  Additionally, although the TPC has a great deal of experience and expertise in analyzing personal income rates and their effects of revenues, they are not sure exactly how the BCT would affect revenues relative to the current corporate income tax, for this reason they made several assumptions that negatively affected in effectiveness and hence forcasted lower revenues.  In their defense this is extremely hard to judge because of the sheer size and nature of the tax changes outlined by the plan, but it does add uncertainty to their analysis.  Lastly they made a number of assumptions regarding subchapter S and other similar pass through tax business associations that they would take all their income through tax free dividends rather other avenues such as wages.  Admittedly this would be possible under the current version of the plan, although it is highly likely that because it has now been identified, this loophole would be eliminated before final passage of the bill Therefore the revenue estimates should be revised upwards.

In conclusion regarding the revenue shortfall that Krugman uses to attack the plan, it was based on an analysis that would undoubtedly reach the conclusion that it lost revenue compared to a politically untenable scenario.  It is also biased in favor estimating the revenue on the low side.  And lastly and most importantly, this is nothing more than a proposal.  The taxation numbers put forward by Mr. Ryan were designed to hit a long term revenue target of 18% of GDP.  If these estimates prove to be off, which the arguably are not or are very close if not, Mr. Ryan has repeatedly stated that he would be willing to adjust the plan to meet that target.  In the end I think Mr. Krugman's main beef with the plan is that he believes the historical average of federal revenue at 18% of GDP is too low, but instead of stating his obvious belief that the government knows how to spend money better than you do, he callously attacks a serious proposal using numbers he knows fit his argument but are not realistically relevant.

3) The fundamental tax reforms proposed by Ryan would benefit the rich while increasing taxes on the middle class and poor

Mr. Krugman claims that "The Tax Policy Center finds that the Ryan plan would cut taxes on the richest 1 percent of the population in half, giving them 117 percent of the plan’s total tax cuts. That’s not a misprint. Even as it slashed taxes at the top, the plan would raise taxes for 95 percent of the population."  First and foremost, Mr. Ryan's plan would allow anyone and everyone to choose whether to pay through the current tax system or his simplified tax system listed above.  Therefore it is simply not true that taxes would be raised on anyone.  Mr. Krugman either ignores this fact or hasn't done his homework for one of his articles.  Secondly, although the marginal tax rates would come down the most for the rich, the elimination of exemptions and other deductions which are mostly utilized by the rich would offset that partially a leading to less of a decrease in their effective tax rates.  But what is important here is that a dramatic simplification of the tax code whereby marginal rates are lower leads to more incentives for marginal production - i.e. growth.  By incentivizing people to work you will get more of it and the prosperity associated with it.  A simpler tax code will also have the added benefits of simplifying enforcement and make it harder for anyone to hide income.

4) The plan would end Medicare

Although the plan would restructure Medicare in a way that would give the individual consumer more control, it would not end the program.  There is only one sure fire way that Medicare would be destroyed and that is to do nothing.  Look at the percentage of federal revenue that would be required to fund social security and Medicare if they remain on their current paths (for an ominous look at the impending disaster, check out the National Center for Policy Analysis' Website):

Now here is what Mr. Ryan's policy does to ensure the solvency of Medicare according to his website:

• It preserves the existing Medicare program for those currently enrolled or becoming eligible in the next 10 years (those 55 and older today) - So Americans can receive the benefits they planned for throughout their working lives.  For those currently under 55 – as they become Medicare-eligible – it creates a Medicare payment, initially averaging $11,000, to be used to purchase a Medicare certified plan. The payment is adjusted to reflect medical inflation, and pegged to income, with low-income individuals receiving greater support. The plan also provides risk adjustment, so those with greater medical needs receive a higher payment.
• The proposal also fully funds Medical Savings Accounts [MSAs] for low-income beneficiaries, while continuing to allow all beneficiaries, regardless of income, to set up tax-free MSAs.
• Based on consultation with the Office of the Actuary of the Centers for Medicare and Medicaid Services and using Congressional Budget Office [CBO] these reforms will make Medicare permanently solvent
• Modernizes Medicaid and strengthens the health care safety net by reforming high-risk pools, giving States maximum flexibility to tailor Medicaid programs to the specific needs of their populations. Allows Medicaid recipients to take part in the same variety of options and high-quality care available to everyone through the tax credit option.

Now I'll admit that this would change how Medicare is structured by giving the consumer the power of choice to determine what plans best fit their needs.  However, to claim that it would end Medicare is disingenuous at best.

In conclusion, to claim that Mr. Ryan's proposal is not a serious one is absolutely absurd.  It addresses the impending collapse of social security and Medicare by making both programs permanently solvent while also giving consumers choices about how their coverage is structured, as well as how their social security income is invested.  It restructures the tax code to promote work, savings and is highly beneficial to long term investment.  Lastly, and unfortunately, it is the only serious proposal made by any member of Congress or of the executive that will prevent the looming fiscal crisis with regards to entitlements.  Calling it unserious and fraudulent is itself an unserious statement, and it is further evidence that Paul Krugman is not a legitimate commentator.  Even the TPC, whose numbers Krugman cited in his attack and are pretty hostile themselves to the plan, issued this statement on Friday defending Mr. Ryan's proposal and calling it "a useful contribution to the debate."  I guess some people will buy Krugman's argument that the government knows what best and that we can tax only the rich to pay for everything without any adverse consequences.  However, both Mr. Ryan and I believe that it is time for the American people to see a serious proposal that is fair, simple, and moves away from the expanding culture of dependency towards the qualities that this country was founded.  The same principles that made it into the greatest country the world has ever seen - freedom, liberty, hard work, self dependency and the power of the individual to choose what is best for them.  Please visit the Roadmap for America's Future and decide for yourself.