James Pethokoukis

Politics and policy from inside Washington

Net neutrality creates systemic risk for US economy

Oct 23, 2009 18:30 UTC

The Federal Communications Commission decision to begin the process of imposing an Internet neutrality rule — network operators such as AT&T would be barred from charging variable prices for different kinds of traffic from content providers such as Google or Amazon — is curious as well as wrongheaded.

The financial crisis that has convulsed the global economy for the past two years should be a potent reminder to communications regulators that the best of government intentions can create horrible, though unintended, consequences. Easy monetary policy by the Federal Reserve, for instance, intended to counter a recession in 2001, helped create a dangerous housing bubble.

Like physicians and Fed governors, the first goal of regulators should be to do no harm. And that is especially true when they are trying to impose a solution in search of a problem. Broadband prices, for one thing, are on the decline. The average cost of consumer broadband has dropped from to less than $20 a month from $50 a month in 2001. And more people have access. As late of 2004, 70 percent of households still used dial-up modems for web access. Today, just 10 percent do with broadband speeds doubling over that period. Tough to find a market failure here.

Of course, the Internet has hardly reached its potential. But future network upgrades by telecom firms to handle high bandwidth applications will be costly. One way to pay for them would be to charge higher rates to Google, Amazon and other corporate users who generate huge volumes of traffic.

Not surprisingly, content providers are in favor of net neutrality and the de facto government-created subsidy it would create at the expense of telecommunications companies. Net neutrality is merely another form of rent-seeking that seeks to manipulate regulators for private gain. The goal: Use the FCC to turn telecoms into highly-regulated utilities that would absorb the cost of future network buildouts — before passing it along to consumers, of course.

The Washington-based Open Internet Coalition, which represents Google, Amazon and eBay, sees things differently, saying the FCC decision advances a regulatory framework that “promotes innovation and consumer choice on the Internet.”

But not only do more and more consumers have access to ever-faster broadband, they have more choices. In addition to the telecoms, America has four nationwide 3G wireless providers and fifth,Clearwire, readying a nationwide launch of a 4G WiMax service.

But the FCC — with the full encouragement of the Obama administration — nonetheless intends to push forward with seeming little concern about the unintended consequences of intervening into a well-functioning sector vital to the American economy. At the very least, the FCC will likely face years of court battles over the rule that could serve to paralyze the sector. Now there’s your systemic risk.

COMMENT

Benny,
you keep saying we should make the companies bear (not bare) the cost of upgrading, and not the public. How does that not just come right back at the consumers? The ISP’s will of course raise their rates. I’m not sure where I stand on this issue yet, there are compelling arguments on both sides. I am principally against government regulation, but there are areas where it is necessary. This could be one, I don’t like the corporations to hold all the power, so just saying “no regulation is better for the public” is not a convincing argument either. But restraining those corporations who employ millions and advance technology is not a road to go down without a very good map.

Posted by Dave | Report as abusive

U.S. unemployment, state by state

Oct 22, 2009 18:13 UTC

A great map by NPR. Notice the high rates in swing states like Florida, Ohio and Michigan.

statemap

COMMENT

I live approximately 30 miles west of Cleveland in a town called Lorain. I spent 30 years in the United States Army, and each trip home on leave, I saw more and more deterioration.

I have watched my town go from a reasonably employed and populated flourishing place, to a virtual ghost town. The Steel Mill and the Ford Plant are barely existing. Many of the businesses in the downtown area have been boarded up and long gone. The Lakefront area, prime for development and recreation, is languishing. The sad fact is that many of the residents are complacent to the point of being comatose.

The once thriving industrial base was wiped out, in part, by unions. Businesses and corporations have no incentive to invest in this area, and who can blame them? The Lorain City government throws up so many roadblocks in the form of high taxes, red tape, and bureaucratic stupidity, that unless we throw all of them out and start over, they’ll be no resurgence for this town. The zombies in this area keep voting the same party back into office.

Oh, I forgot to mention: Northeast Ohio is a democratic stronghold.

Congratulations, swing states….how’s that “change” working out for ya?

Posted by SFC MAC | Report as abusive

How the Baucus bill pays for healthcare reform

Oct 22, 2009 17:55 UTC

If those Medicare cuts don’t happen, forget about it, gang (via the Tax Foundation):

baucusbill

Romer: Unemployment likely to remain “severely elevated”

Oct 22, 2009 17:04 UTC

Watch CEA chair Christina Romer manage voter expectations:

Consistent with the recent cyclical pattern, the unemployment rate is predicted to continue rising for two quarters following the resumption of GDP growth. Whether this happens and how high the unemployment rate eventually rises will obviously depend on the strength of the GDP rebound. …  With predicted growth right around two and a half percent for most of the next year and a half, movements in the unemployment rate either up or down are likely to be small. As a result, unemployment is likely to remain at its severely elevated level.

Wall Street pay is the Great Distraction of the Great Recession

Oct 22, 2009 11:49 UTC

If I made of list of factors contributing to the recession and financial crisis, Wall Street pay would come in around 6th, after 1) easy monetary policy; 2) TBTF; 3) US housing policy; 4) global savings glut/China labor shock; 5) Wall Street group think.  Yet pay is where so much energy is being directed at this issue thanks to its populist appeal. America hates TARP so Washington needs to make amends by hammering execs at TARP recipients.

Now two other takes. First, Marginal Revolution:

There is no way this will work as advertised.  If the administration actually follows through, most of these executives will quit and get higher paying jobs elsewhere.  Executives not directly affected by the pay cuts will also quit when they see their prospects for future salary gains have been cut.  Chaos will be created at these firms as top people leave in droves.  Will the administration then order people back to work?

Here is Naked Capitalism:

The point is that the collection of these scalps will do nothing to comp levels ex these firms. The companies that also enjoy implicit government guarantees are free to do the “heads I win, tails you lose” game of privatized gains and socialized losses. And Ken Lewis is the poster child of why these measures are completely meaningless. He sacrificed his 2009 pay, but will still collect $125 million when he departs Bank of America.

If the government is going to backstop the industry (and this isn’t an “if” anymore), it needs to limit those firm’s activities to what is socially valuable and regulate them heavily to contain risk taking. As we have said, reining in executive pay (and note there is no will to do that anyhow) is not an effective approach. Those employees who don’t like that are free to decamp and raise money in ways that do not involve the regulated firms in any way, shape, or form, save perhaps counterparty exposures on very safe, highly liquid instruments.

COMMENT

I agree with much, but take issue with the Naked Capitalism blurb. The solution is not to’limit those firm’s activities to what is socially valuable and regulate them heavily to contain risk taking.’ The solution is to eliminate the government policy of too big to fail.

Once that message is sent loud and clear, then the behavior of market participants will adjust accordingly and ‘excessive’ or ‘irresponsible’ risk taking will decline by virtue of the natural dynamics of capitalist discipline. Because the prospect of real failure is powerful incentive for any institution to be more judicious in the risks that it takes — as opposed to today’s environment where ‘failure’ means the government will likely step in to make you whole.

Posted by Bill, Fairfax, VA | Report as abusive

Is the amazing American jobs machine broken?

Oct 21, 2009 19:10 UTC

This chart, constructed by the Vice President’s office via BLS data, would seem to indicate just that:

grossjobcreation

COMMENT

There are 3 groups of people in any economy; call them A, B and C

Group-A goes to work and creates wealth.
Group-B chooses to live on the generosity of Group-A, through taxation and charitable giving.
Group-C is truly unable to care for themselves and relies on charity.

To have a vibrant economy with social justice the Government must ensure that Group-A can and does go to work. This requires infrastructure and reasonable taxes. Failure to do this will cause Group-C to die. The logical conclusion is that the cuts in government spending need to be from the program politicians have used to buy the Group-B votes.
Jobs are created by the activity of Group-A, if we continue to reduce the size of Group-A our economy cannot create jobs.

Study: Blame China, not Wall Street, for Great Recession

Oct 21, 2009 19:02 UTC

This paper make a great case for blaming the Great Recession on the massive influx of cheap labor (and the continued weak yuan) into the global economy. Bad decisions on Wall Street didn’t help, but they are not the root cause:

The common wisdom is that cheap money and lax supervision of financial institutions led
to this financial crisis, and solving that crisis will take us out of the recession. In our view,
the financial crisis is just the symptom. The fundamental cause of the crisis is the huge
labor supply shock the world has experienced, not the glut in liquidity in money supply.

In what follows we argue that this huge and rapid increase in developed world’s labor
supply, triggered by geo-political events and technological innovations, is the major underlying
force that is affecting world events today. The inability of existing financial and legal
institutions in the US and abroad to cope with the events set off by this force is the reason for
the current great recession: The inability of emerging economies to absorb savings through
domestic investment and consumption caused by inadequate national financial markets and
difficulties in enforcing financial contracts through the legal system; the currency controls
motivated by immediate national objectives; the inability of the US economy to adjust to
the perverse incentives caused by huge moneys inflow leading to a break down of checks
and balances at various financial institutions, set the stage for the great recession. The
financial crisis was the first symptom.

COMMENT

Jim,
You come to LA and all you do is hang out with the elitist Don and don’t come visit us at IBD? Shame on you. Don’t tell me you are an elitist, too.
I mean, you are good, but you are not that good.
Brian Deagon

Posted by Brian | Report as abusive

Tryanny of the status quo: homebuyer tax credit edition

Oct 21, 2009 16:22 UTC

A great point made by the Tax Foundation about the National Association of Realtors and its support of the homebuyer tax credit:

When the economy is recovered, is the NAR going to support its elimination? Not a chance. There’s a better chance of Glenn Beck being appointed to Obama’s cabinet than NAR ever advocating for eliminating a tax preference for housing.

Assuming the homebuyer credit is extended to June 30, 2010, come May next year the NAR and NAHB lobbyists will be on Capitol Hill again saying that the economy still hasn’t recovered. And then when it’s extended for another year and the economy is fully recovered, they’ll be saying things like “we can’t afford to go back to where we were 18 months ago with lower home prices.” By then, it will be permanent, and any time discussion of repealing it or scaling it down is brought to the forefront, NAR will cite how home prices are going to fall if it’s repealed. You get what Milton Friedman called a tyranny of the status quo, or an endowment effect of a tax provision.

COMMENT

Although I am one of the taxpayers who would benefit from the $8,000 first homebuyer credit, I also realize that waiting for the right home makes more sense than rushing to grab a house currently on the market to get a credit from the IRS.

Still, extending the date 6 months would be helpful to those of us who have been making offers on short sales or bidding on foreclosures. My real estate agent has been aggressively pushing me to purchase a home in Saint Lucie County where prices are falling every month. According to the latest articles I’ve read, economists are predicting regions like South Florida will continue to see foreclosures rise and home prices drop. So if I save another $10,000 by waiting 6 months, I can’t rationalize closing by Nov 30 to beat the current deadline. As the old expression goes, Six of one, Half Dozen of the other.

Posted by Nancy | Report as abusive

Thanks Washington! Why dollar weakness will continue

Oct 21, 2009 15:10 UTC

The great Andy Busch of BMO Capital Markets effortlessly explains the link between the current anemic state of the dollar and America’s terrible fiscal situation:

The US fiscal deficit remains the major concern for US dollar reserve
holders and the situation is not improving. Granted, the peak of new
Treasury issuance occurred in August. However, there is no sign from
Washington that spending will be under control any time soon.

This is why you have seen this week US Treasury Secretary Geithner and
Federal Reserve Chairman Ben Bernanke all warn that the US fiscal
deficit must come down or risk disaster. They know that the US dollar
is weakening due to this red ink. 2009 fiscal deficit was an astounding
$1.4 trillion as spending increased from $3.0 trillion to $3.5 trillion
while tax revenue fell from $2.5 trillion to $2.1 trillion. The debt is
now at $12 trillion and is expected to grow by another $9 trillion over
the next decade.

Without any changes to health care, the CBO estimates spending for
Medicaid and Medicare is expected to grow $700 billion over the next
decade. With health care legislation conservatively estimated to add
another $900 billion to the deficit, the numbers are spiraling out of
control. Actually that phrase doesn’t do the situation justice. Maybe
the trailer for the movie 2012 is more appropriate.

Most disturbing is the combined level of federal, state, and local
government spending. According to the OECD, this totals up to 42% of
U.S. gross domestic product. Think about it: 4 out of every 10 dollars
of everything produce in this country is channeled through governments.
Quick poll: who thinks this is the most efficient way to run an
economy?

The point is that the US has embarked on a glide path of spending that
is making the currency weak and US dollar reserve holders knees weak,
too. The Federal Reserve appears to be the only one left in the
government who can do something about it by raising rates. With
unemployment expected to continue upwards, this is not expected to
happen soon.

This means that in the short term, the only change to the downward
direction for the US dollar has to come from outside the country. So
far, Brazil and Canada have acted. In the long term, the US has to act
to change spending or rates. Unfortunately, Congress is likely to
actually increase spending while the Federal Reserve is unlikely to
raise rates.

Therefore, the US dollar is likely to remain weak for a long period of time.

COMMENT

I understand and appreciate the concerns about the dollar. But what I have difficulty with is why some folks want to defend the dollar by raising interest rates now, at a time when our economic recovery is still in a nascent and fragile stage. If the Fed started a rate increase cycle today, wouldn’t that raise the risk of a double-dip recession? And if so, why in the world would we want to do that?

Folks who are expressing their concerns about the dollar have an important message that all of us need to pay attention to. I just think taking action to fix that problem right now is premature. Lets get the economic patient healthy again before we address the side effects of the easy money medicine.

Posted by Bill, Fairfax, VA | Report as abusive

America’s Blade Runner economy

Oct 21, 2009 14:18 UTC

In the 1982 sci-fi film “Blade Runner,” it appears as if Japan is the world’s leading economy and culture. It is a cinematic portrayal of the future sketched by many economists in the 1980s who wanted America to adopt Japanese-style industrial policy. But America may yet have an economy that resembles Japan’s. This NY Times story looks at how Japan amassed such a huge national debt, twice the size of its economy:

How Japan got into such a deep hole, and kept digging, is a tale of reckless spending.

The country poured hundreds of billions of dollars into civil engineering projects in the postwar era, marbling Japan with highways, dams and ports.

The spending initially fueled Japan’s rapid postwar growth and kept the Liberal Democratic Party in power for most of the last half-century. But after a spectacular asset and stock market boom collapsed in 1990, the country fell into a long economic malaise.

The Democratic Party, which swept to victory in August, promises to rein in public works spending. But the party’s generous welfare agenda — like cash support to families with children and free high schools — could ultimately enlarge budget deficits.

“It’s dangerous for the Democrats to push on with all of their policies when tax revenues are so low,” said Chotaro Morita, head of fixed-income strategy at Barclays Capital Japan. “From a global perspective, Japan’s debt ratio is way off the charts,” he said.

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