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And now David Reed joins the movement to stop allocating spectrum by use.

...radio signals don't interfere with each other! That may seem surprising, because engineers and regulators use the metaphor of "interference" to get their work done. But in fact, radio signals just add to each other, non-destructively. And it turns out that what we call "interference" is actually best thought of as "limitations of a particular receiver technology".

What does that mean? Well, it means that better radio technologies eliminate interference. There's no question there.

Yet that insight means that the idea of "spectrum regulation" has a serious problem. If technology improves, the regulations become unnecessarily strict. When we make better radio systems, the old ones become obsolescent, and wasteful. We could improve the entire system by junking the old stuff, and replacing it all with functionally compatible systems, based on new insights and design...

In a separate comment, Reed says,

IMO, the FCC presides over a dramatically broken, dramatically monopolistic market. The monopoly "owners" try to look like entrepreneurs because they like money, but in fact most of them spend most of their time lobbying for favors from government, rather than innovating.

What is becoming clear is that the FCC needs to think about buying back the spectrum that currently is the property of phone companies, television stations, and so forth. Then put some engineers together to set standards for the "wireless Internet." Then let every device that adheres to those standards use the spectrum, just as any computer that adheres to the TCP/IP protocols can use the Internet.

We need to figure out a fair price at which the FCC can buy back spectrum from its current owners. The price could be zero (pure confiscation). Or it could be set at a reverse auction. Or it could be a price determined by an independent arbitration panel that comes up with a "just price."

Another thing we need to think about is a transition plan. I don't think we can break radio and TV reception in 2002 and wait until 2006 to figure out a way to get it working again under the new regime.

Discussion Question.

In the spectrum buy-back idea, should TV stations be compensated for the cost of buying equipment that complies with new standards?

It turns out that DeWayne Hicks (see posts 35 and 37) is not the only wacko who thinks that the FCC should let the market determine the best use for spectrum. Forbes' Rich Karlgaard also advocates having the FCC get out of the business of allocating blocks of spectrum to different companies and industries.

...our FCC's laws--which treat spectrum as a sort of real estate, complete with CCRs and fences--get doubly moronic every year and a half.

The appropriate metaphor for spectrum in the 21st century is the ocean, not real estate. Boats make one guarantee--to avoid one another--then the ocean is pretty much theirs to use. Similarly, e-mail, voice and video should be free to travel the entire sweep of God's airwaves. Only one law need apply: Don't interfere.

Discussion Question. In fact, setting up standards and enforcing rules for an open spectrum would be quite a challenge. What are some issues that would have to be addressed?

You would never see it on the op-ed page of the New York Times, but there is a strong case to be made for abolishing the corporate income tax, as given by Web logger Megan McArdle. Among the points she makes are,

The Corporate Income Tax brought in $204.9 billion in 1998. My tax professor (a Democrat) estimated the cost of corporate compliance in that year to be $300 billion. That's just the direct cost -- what corporations paid tax lawyers and accountants.

Somebody ought to check that $300 billion estimate. If every fortune 500 company hires 100 tax attorneys and accountants at $100,000 each, that is only $5 billion. And if another one million corporations each pay an average of $100,000 a year in compliance costs, that is another $100 billion.

In any event the ratio of compliance costs to revenue is enormous. And beyond that, as McArdle points out, the distortions are very high.

Discussion Question. If the corporate income tax were abolished, would corporate-sponsored consumption (meals paid by corporations, and so forth) increase, decrease, or stay the same?

When a lobbying group called TechNet made a splash recently by calling for government to set a goal to have broadband in every home, my initial reaction was similar to that of Business Week's Howard Gleckman.

Why in the world should all taxpayers subsidize those who purchase one particular telecommunications service? Why not a subsidy for dialup? Or for an old-fashioned telephone? How about cable TV? Or people who raise homing pigeons?

However, none of the stories that I have read show TechNet focusing on a handout per se. In Network World Fusion, for example, the group is reported as recommending

1. Exercise regulatory restraint.
2. Encourage investment in broadband by removing regulatory disincentives.
3. Use a purely market-based approach when allocating wireless spectrum.
4. Allow tax incentives for broadband deployment in underserved communities.

Only the last item is the kind of handout that might be considered objectionable.

Does the third item mean that the group would like to toss all of the spectrum back into the air (so to speak) and let it be re-allocated by the market? If so, then they seem to be as radical as DeWayne Hendricks (post 35, below).

Discussion Question. Consider point 2, to "encourage investment in broadband by removing regulatory disincentives." Would putting more pressure on the Baby Bells to enable other carriers to offer DSL at a profit be consistent or inconsistent with this principle?

Financial derivatives have been involved in many recent prominent corporate implosions, including Enron's. Derivatives are like a strong medication that can be helpful when used properly and dangerous when abused.

In the opinion of Andrew Hofer, poorly thought-out financial regulation actually drives many of the abuses. For example,

Insurance companies need yield. So derivative salesmen see an opportunity to engineer around the regulations. They package securities that substitute price volatility for the proscribed credit risk.

The problem is that certain types of risk are monitored and restricted by regulators, but other types of risk are not. Institutions head toward the unregulated risk.

One key to proper management and regulation of derivatives is making sure that the market value of positions gets reported regularly. Instead, in many cases, accountants allow a company to report positions at book value rather than at current market value. When regulators go along, this is a recipe for catastrophe.

Along these lines, Hofer points out

Regulations that focus on complete disclosure are much more effective than those that attempt to dictate behavior, and they impose less of a burden on the regulated entity.

Discussion Question.

Are market incentives sufficient to promote better disclosure of companies' dealings in derivatives, or is government regulation the only solution?

If it were feasible, the optimal way to move data the "last mile" would be using the airwaves. In a profile in Wired, Dewayne Hendricks argues that it is feasible.

There's no sensible reason why Americans shouldn't have inexpensive, ubiquitous, high-performance broadband access, Hendricks says. Using technologies that are already available or in fast-track development, everyone could enjoy reliable, fully symmetrical wireless at T1 speed or better. No more digital divide. No more last-mile problem. No more compromises. The only things standing in the way are the FCC, Congress, and "other people who just don't get it."

One obstacle to Hendricks' vision is the current ownership structure of spectrum. In the 1990's, the FCC auctioned off spectrum to firms for "personal communications services" under the assumption that spectrum would remain scarce. Also, the television broadcasters were given spectrum in order to provide high-definition television (HDTV).

Today, it looks as if the model of licensing spectrum for specific uses is inefficient. Imagine how stifled the Internet would be if you were not allowed to use the same network for email, web browsing data transfer, digital telephony, and so forth--but instead the government restricted each service to using a different category of network.

Discussion Question. Re-allocating spectrum implies very large wealth transfers among different industries. If Hendricks is correct, and spectrum should be shared rather than segmented, should the government simply confiscate spectrum and re-assign it, regardless of who loses and who wins?

In this interview, Brewster Kahle points out that his Internet Archive of the Web as it existed at various points in time holds 100 terabytes of data, at a hardware cost of $400,000. To put this in perspective, he says,

So if all books are 20 TBs, and 20 TBs are $80,000, that's the Library of Congress. Then something big has changed. All music? It's tiny. It looks like there're only one million records that have been produced over the last century. That's tiny. All movies? All theatrical releases have been estimated at 100,000, and most of those from India. If you take all the rest of ephemeral films, that's on the order of a couple hundred thousand. It's just not that big. It allows you to start thinking about the whole thing.

Kahle is arguing that it is feasible to make all of the content ever produced accessible to everyone at a remarkably low cost. The obstacles are more institutional than economic. For example, authors and publishers are not going to hand over copyrighted material at no cost.

Discussion Question. Assuming that we could figure out a way to compensate writers and artists, would there be large social benefits to making the world's books, musical recordings, and films available to everyone at little or no cost?

According to this BBC report, a study that will appear in the British Medical Journal says that a U.S. HMO provides better care than the British National Health Service, for approximately the same cost. The BBC report quotes one of the study's authors, Richard Feachem, as saying

If an NHS patient moved to Kaiser they would be delighted with the experience, and if a Kaiser patient moved to the NHS they would be horrified.

The report credits market competition as stimulating Kaiser to provide better care at comparable cost.

Discussion Question. Advocates of a "Patients' Bill of Rights" argue that legislation and the threat of lawsuits are needed in order to force HMO's to maintain quality. Why would markets and consumer choice not be sufficient?

Paul Krugman posted to his web site some analyses of recent events. In Argentina's Money Monomania, he writes,

My New York Times readers are, I hate to admit, not as interested in Argentina as they should be, so I am placing it here. I hope someone sees this, and that it is of some use.

I saw it, and I found it more interesting than his Times columns.

Krugman argues that an overvalued exchange rate does macroeconomic damage in two ways. First, it adversely affects the balance of trade. Second, it leads to deflation, at least in relative terms. Discussing Argentina and Japan, he writes,

Suppose that your country is committed to a fixed nominal exchange rate and that the currency is overvalued. What I mean by "overvalued" is that the price of domestic goods, relative to foreign goods, is higher than it would be if all prices were completely flexible. What one would expect to happen in this case is a process of deflation -- certainly relative deflation, with the domestic inflation rate less than the foreign, and quite possibly actual deflation too.

Krugman says that for a given nominal interest rate, this deflation means a high real interest rate. One of the benefits of a currency depreciation is that it eliminates the deflation and thereby lowers the real interest rate.

Discussion Question. Steve Roach (See post 31, below), thinks that the United States needs a currency depreciation because of its trade deficit. Krugman believes that Japan needs a depreciation in spite of the fact that it runs a trade surplus. Can one reconcile their views?

According to some venerable yardsticks, U.S. assets are overvalued. In this macroeconomic Jeremiad, Morgan Stanley's Steve Roach offers a possible explanation.

The Teflon-like resistance of the US dollar is yet another manifestation of this pervasive sense of denial. Currencies, of course, are relative prices. And in a synchronous global recession everyone gets hurt. Yet if a US-centric world tumbles into recession, goes the logic, the dollar is still viewed as the "tallest pygmy."

The indicators of overvaluation are the price-earnings ratio in the U.S. stock market (still far above historical norms) and the large deficit in the U.S. balance of trade, due to an over-valued dollar. Roach believes that eventually both of these mispricings must be corrected.

If you are an investor who shares Roach's concerns, then you should buy assets from countries outside the United States. But that is where the "tallest pygmy" issue arises. Other industrial economies, such as Japan and Europe, are plagued by institutional rigidities. Less-developed countries remain risky (as Argentina illustrates). China may be on a high-growth path, but do you want to bet on a Communist country? India also has been performing well in recent years, but can it truly overcome its history of ethnic quarrels and general corruption?

Roach thinks that the Internet bubble created imbalances in the economy that will be costly to correct. This contrasts with Hal Varian's view (see post number 7 on the first archive), which is that the rest of the economy can absorb the former dotcommers relatively easily and productively.

Discussion Question. Suppose that Roach is correct, and we experience a decline in the stock market and a sharp drop in the value of the dollar in relation to foreign currencies. What industries would expand as a result? What industries might collapse? Could the United States labor market make the necessary adjustments without going through a period of high unemployment?