Category Archives: Setting Economic Priorities

Problems with Spectrum Property Rights

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Dale Hatfield and Phil Weiser write,

For a band like that traditionally used for AM broadcasting, it seems impractical, if not impossible, to provide licenses with anything close to certainty in terms of interference protection…a station in an adjacent–or more remote–geographic area could seek damages or injunctive relief based on a series of natural conditions that happen only infrequently…the realities of radio wave propagation in this region of the spectrum simply do not lend themselves to clear and enforceable boundaries for the geographic are dimension of the spectrum resource.

The authors do point out that the properties of the PCS band (the frequency range used by cell phones) are less problematic for a property-rights regime. Moreover,

the commonality of interest among cellular and PCS providers reflects a shared understanding that there is a mutual threat of interference and a mutual benefit to cooperation…Consequently, even though the reality of the spectrum property right is “muddy,” the affected parties are still able to agree on mutually beneficial accomodations.

Dean Baker on Drug Research

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He writes,

It is not difficult to envision alternative mechanisms to pay for the research currently being incentivized with patent monopolies. Several economists have proposed a patent buyout system, where the government would buy out patents and place them in the public domain. A simpler method, however, would be to have direct public funding. The government already spends more than $30 billion a year to finance biomedical research through the National Institutes of Health (NIH). It would probably be necessary to increase this amount by $50-$60 billion a year in order to replace the funding currently supported through patent monopolies.

This additional funding could probably best be channeled through a mechanism other than NIH, with private companies bidding for major contracts to support research in a variety of areas. By having a relatively limited number of prime contractors, who could then contract out as they please, we would avoid having a situation of the government micromanaging research. The contracts could then be renewed and/or expanded, depending on the company’s track record. The conditions of getting the funding would be both that all patents are placed in the public domain and also that all research findings are made publicly available on the Internet as soon as practical.

I agree that we should think outside of the patent box when it comes to medical research. In fact, in my essay for the growth forum, I also chose to propose an alternative to the patent system.

Less Hiring and Firing

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Stephen J. Davis and John Haltiwanger write,

we think the information revolution has played a significant role in the trend declines in worker reallocation. Information about criminal records, credit histories, unfavorable media coverage, and even ill-advised web postings has become more abundant and cheaper to access and process. The likely result is a shift to stricter selection on the hiring margin and less use of trial employment arrangements that contribute to hires and separations.

I dunno about that one. If we had really high rates of hiring and firing, you could tell a story about the information revolution accounting for that phenomenon, also.

They also cite other factors, including regulations, that might be slowing down the rate of hiring and firing.

Meanwhile, the more recent figures show improvement.

Government Accounting

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Jason Delisle and Jason Richwine write,

The momentum for fair value accounting is building. The Congressional Budget Office has all but endorsed it, describing fair value as a “more comprehensive” accounting of costs. Scholars with the Federal Reserve, the Financial Economists Roundtable, and the Simpson-Bowles fiscal commission are on board as well. Reps. Paul Ryan and Scott Garrett have championed this issue in the House of Representatives, which passed legislation to put federal loan programs on fair value accounting earlier this year. That vote, however, mostly followed party lines, and the Senate has never advanced similar legislation.

If a private firm accounted for its future obligations the way that the government does, it would be prosecuted. One of the ideas I include in Setting National Economic Priorities (at this point, still vaporware) is government accounting reform.

Chris Dillow on a Basic Income

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He writes,

A lowish basic income satisfies the right’s desire that there be only limited redistribution. But it would compel people to find low-paid and unpleasant work.

Pointer from Mark Thoma.

Dillow believes that a basic income should be high enough so that a person could turn down low-paid and unpleasant work. I am confident that I could not persuade him otherwise, but all I can say is that I disagree. The summers I spent in an electronics factory were much better for my morale than the summers that I spent idle. And if my daughters faced the choice of a future cleaning hotel rooms or a future living on welfare checks, I honestly would think of them as better off cleaning hotel rooms.

In fact, one of the arguments against a negative income tax is that there is some evidence that labor supply is highly inelastic, so that even with high implicit marginal tax rates poor people choose to work. That evidence would suggest that many people share my preferences about the dignity of having a job and earning one’s living.

If the studies are correct, then lowering the implicit marginal tax rate will induce only a small increase in labor supply. I happen to think that in the long-run, perhaps meaning the multi-generational long run, the labor supply elasticity is higher than the studies show. However, even if I am wrong about that, I would still prefer lowering the marginal tax rate on ethical grounds. Let government policy reinforce the work ethic, rather than exploit it.

David Brooks’ Economic Priorities

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Dean Baker writes (The post is unsigned, so it might not be Baker),

we get Brooks telling us:

“The government should reduce its generosity to people who are not working but increase its support for people who are. That means reducing health benefits for the affluent elderly.”

There are two questions that come up here. First what is the definition of “affluent” and second what counts as “generosity.”

In case you didn’t know, Baker does not heart Brooks. My own views align with neither Baker nor Brooks.

1. Brooks supports more government spending on infrastructure, as does Baker. I do not.

2. On the redistribution issue, my perspective differs somewhat from Brooks. My concern is that we have too many uncoordinated means-tested programs, making marginal tax rates too high for the able-to-work poor. As you know, I prefer something more along the lines of a small universal basic income provided at the Federal level, with additional specific needs addressed through programs from states, local governments, and charities.

As for health benefits, I am not for taking away Medicare from the elderly today, but I am for scaling back promises to people tomorrow. Note that Baker claims that today’s beneficiaries have paid for their benefits. I call baloney sandwich. What they paid for were their parents’ benefits, and what they paid into the system was not sufficient to pay for the benefits they are now receiving. If it were true that they had paid for their benefits, the system would be solvent.

3. Brooks endorses the reform conservative Room-to-Grow idea of showering middle-class families with tax credits. I see that as political posturing. If I could be in charge of tax reform, we would get rid of credits and deductions, and we also would move away from taxing income and instead toward taxing consumption. Note, however, that tax reform is not one of my top three priorities.

4. Brooks wants us to open the immigration door wide for high-skilled immigrants, while presumably trying to keep it relatively closed for low-skilled immigrants. If it were up to me, the door would be wide open for people who are grateful for the chance to live in America and are eager to assimilate, and otherwise my feelings about opening the door would be more ambivalent. But I also would not make immigration reform a top priority.

5. Brooks wants more spending on education. I take the null hypothesis seriously.

Principles-Based Regulation for Food and Drugs

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Anahad O’Connor writes,

The Food and Drug Administration frequently recalls dietary supplements that are found to contain banned substances. But a new study suggests that many of these products return to store shelves months later with the same dangerous ingredients.

With principles-based regulation, you look at companies to see if they have processes in place to ensure that they follow the right principles. Do the health-food stores have people in charge of checking the labels of what they put on shelves? Do the companies that manufacture drugs have people in charge of making sure that they do not put known dangerous chemicals into the drugs? Do the companies that import drugs from overseas have processes in place to ensure that they are not tainted? etc.

When you find processes that are flawed, you order fixes. When find an absence of processes, you impose heavy penalties, which might include prison for the executives.

Tax-free Savings Accounts

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Chris Edwards says that they are working in Canada.

In just the past year, TFSA account assets increased 34 percent, and the number of accounts increased 16 percent. In June 2014, 13 million Canadians held $132 billion in TFSA assets. Given that the U.S. population is about 10 times that of Canada, it would be like 130 million Americans pouring $1.3 trillion into a new personal savings vehicle.

Edwards also links to a 2002 proposal for Universal Savings Accounts.

Of course, if you believe in secular stagnation or the r-g is a big problem, then the last thing you want to see is more saving.

Quarantine the FDA

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Robert Goldberg writes,

These companies could start producing Ebola vaccine/treatments tomorrow — except that the Food and Drug Administration’s insistence on randomized studies and endless demands for more data means firms have to spend millions on paperwork instead of producing medicines.

Try to imagine a randomized study for an ebola vaccine conducted on human beings. “We’re going to expose hundreds of people to ebola, half of whom will have been given the vaccine and half of whom will have been given a placebo.”

One idea I have is a separate agency that uses principles-based regulation instead of rules-based regulation. Companies could elect to abide by this alternative regulator and bypass he FDA.

Having said that, I am generally not in favor of taking the latest media-inflated crisis and saying that it confirms one’s political outlook. And I am not suggesting that the ebola story should be used to confirm mine.

Thoughts on Two-Sided Markets

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Lynne Kiesling writes,

the distribution wires firm can, and should, operate as a platform and think about platform strategies as the utility business model evolves. An electric distribution platform facilitates exchange in two-sided electricity and energy service markets, charging a fee for doing so. In the near term, much of that facilitation takes the form of distribution, of the transportation and delivery. As distributed resources proliferate, the platform firm must rethink how it creates value, and reaps revenues, by facilitating beneficial exchange in two-sided markets.

Until now, I have not thought much about this whole two-sided market concept. I am struggling to see what it buys you. Earlier in her post, she quotes from a Harvard Business Review article.

In the traditional value chain, value moves from left to right: To the left of the company is cost; to the right is revenue. In two-sided networks, cost and revenue are both to the left and the right, because the platform has a distinct group of users on each side. The platform incurs costs in serving both groups and can collect revenue from each, although one side is often subsidized

If I’m understanding this correctly, then a brothel is a traditional value chain, but a singles bar is a platform. In terms of that metaphor, Kiesling is suggesting that electric utilities could change from operating like brothels to operating like singles bars.

Some problems I am having:

1. I am not sure what, if anything, makes brothels the natural business model in one industry and singles bars the natural business model in another.

2. Suppose that a singles bar has to pay women in order to get them to show up. By my reading of the HBR excerpt, then it becomes a traditional value chain. Metaphorically, it becomes a brothel, although I assume that it can avoid legal difficulty as long as the beds are off premises.

3. To me, cable TV looks like a brothel, not a singles bar. And to me, electricity looks like cable TV.

4. Metaphorically speaking, taxi companies and hotels operate brothels. Uber and airbnb operate singles bars. What Uber and airbnb are tapping into is supply-capacity that taxi companies and hotels were not using, either because they didn’t think of it or because it didn’t fit their business model. Is there spare electricity-generating capacity that utilities could be tapping into? If so, do they have the know-how and flexibility to tap into it?