Category Archives: Economics

Net Neutrality is Misguided

This article in Tech Crunch sums the argument in favor of Net Neutrality:

Everyone agrees on the end: we want an open internet. But there’s more than one means to that end. We disagree on the means, not the end. The Senate Democrat perspective assumes that ISP companies will infringe the speech of their customers or restrict their traffic flow, unless government regulators prevent this. So they conclude we must grant government this new power.

This perspective is misguided in two ways. First, it assumes new government powers are the only way to prevent ISP companies from restricting content or traffic flow in ways that harm consumers. Second, it ignores the risk and cost of these new government powers.

Two alternatives to achieve the common goal of an open internet are regulation and competition.

Net Neutrality regulation means rules controlling how to handle data content and movement. These rules must go through multiple approvals and public comment. They are necessarily reactionary and lag technology and innovation. They are also detailed and complex by nature. This attracts rent seeking and lobbying for loopholes by ISP companies, which makes the rules even more complex and inefficient. This increases the complexity and cost of doing business, which reduces innovation, rewards established companies and deters new providers from entering the market. That means higher prices and less consumer choice.

For one example, consider T-Mobile’s zero-rating video data. Most of their customers loved this service, and the ones who didn’t could opt out at no charge. Yet providing this service got T-Mobile hauled in front of the FCC to explain themselves to regulators. They were exonerated, but this positive outcome was not preordained. It cost them thousands to defend themselves and they could have been subjected to massive fines. When ISPs get hauled in front of the FCC to testify every time they do something regulators didn’t anticipate, say goodbye to innovation.

An example the Senate Democrats use is “fast lanes” vs. “slow lanes”. This is a red herring. Some kinds of traffic, like video, consume far more bandwidth than others. For the internet to function properly, these different kinds of traffic must be handled and routed differently. In short, there already are “fast lanes” and “slow lanes” —  it’s a technical necessity. The question is how we pay for them. Blanket rules like Net Neutrality risk creating a tragedy of the commons, where everyone uses bandwidth but nobody invests in developing it, or forces everyone else to pay the costs of heavy bandwidth users, which encourages over-consumption, reducing quality of service for everyone.

Yet the Senate Democrats do have a certain logic. With only a handful of monolithic ISP companies, there is no real competition and some form of regulation like Net Neutrality becomes necessary. However, as citizens and consumers, we should not accept the inevitability of having only a handful of monolithic ISP companies. And we surely should not pass new regulations like Net Neutrality that will foster and lock in this dystopian future. Net Neturality is self-actuating and self-perpetuating. It creates and exacerbates the very problems it intends to prevent, as it purports to solve them.

In short, it is naive to believe:

  • That Net Neutrality regulations will stay ahead of fast-changing technology and creative interpretation by ISP companies.
  • That a distant federal bureaucracy will make better decisions about how to allocate bandwidth and handle traffic, than ISPs directly negotiating with each other and seeking customers.
  • That Net Neutrality rules will be immune from rent-seeking, carved-out loopholes and other forms of regulatory capture by big ISPs.
  • That these complex rules won’t raise the cost of business, restricting innovation, competition, and consumer choice.

Consider the alternative that the Senate Democrats ignored: competition. With competition, if one provider does something you don’t like, vote with your wallet and switch. You can switch at any time, for any reason: terms, privacy, cost, etc. Your vote hits the ISP where it counts: financially. Complex rules don’t bother them or protect you; their lawyers and lobbyists are better than yours, and are helping draft those rules.

Under competition, the rules we need are simple: prohibit fraud and establish property rights for access. There is no need for complex rules micro-managing data content and movement. This reduces rent-seeking and lobbying and keeps the cost of doing business low. Without complex rules dictating how to run their business, companies are free to innovate in technology and service to differentiate themselves, much like T-Mobile did for telecom.

But this works only under true competition. That means every person has a choice of several providers (not just two) and can switch between them quickly, easily, and cheaply. Unfortunately, we don’t have this in the USA. Why not? Primarily because multiple layers (local, state, federal) of complex regulations lock in existing ISPs and make it expensive for new companies. The reason some ISPs get away with bad behavior, like famously bad customer service and high prices, is because their customers have no alternative. Over-regulation protects them from competition. Adding even more more layers of regulation (e.g. Net Neutrality) will fix this like throwing gasoline on a fire.

Far better to address the root cause. Unwind the layers of complex regulations and municipal property access rules that lock in ISP companies and block competition. ISPs already are too much like utilities. This is the problem, not the solution.

Thoughts on the Dark Forest

I recently read Cixin Liu’s Three Body Problem and Dark Forest. This blog entry is a spoiler, so you may want to stop reading this if you plan to read these books.

Fermi’s Paradox is a key concept and plot element, particularly one explanation for it called the Dark Forest, tied to character Luo Ji’s axioms of life in the universe:

  1. Life’s goal is to survive
  2. Resources (matter & energy) in the universe are finite
  3. We can never be sure of alien life’s true intentions
  4. Distances between stars impair communication

Conclusion: (3) and (4) create a chain of suspicion making conflict inevitable.

I am not convinced. This is fixed-mindset, zero-sum thinking, similar to the flawed economic thinking behind Malthusian doomsday predictions and protectionist trade policies here on Earth. The above rules are not unique to outer space. The same could be said of different cultures here on Earth – every man presents a threat to all others as they must compete to secure the limited means of survival, leading to inevitable conflict. During some historical periods – primarily in pre-agricultural tribal societies – this was true. Yet today it is false. We have Human societies of size, complexity and interdependency that would be unimaginable to prior generations. Why?

Two key factors. First, the increased productivity of division of labor. Second (and a part of the first), Ricardo’s theory of Comparative Advantage. It was not love or enlightenment that caused Humans to stop fighting each other over the limited resources Nature provided (as animals do), and instead cooperate to create new resources making everyone better off. It was recognition of these fundamental economic facts.

The same applies to space exploration, even more so. Cixin Liu misses this point entirely and falls for the simplistic zero-sum thinking that has duped many before him. Items 1-4 are true, yet the conclusion does not necessarily follow. He’s missing an important 5th axiom: The potential benefits of cooperating with alien life are so tremendous they cannot be measured. When balanced against risks (3) and (4), conflict is no longer inevitable. The result may end in conflict or cooperation, depending on the situation.

Don’t Pay Your Mortgage Early

It’s common for people to want to pay off their mortgage early, and for financial advisors to recommend this. I think it’s a bad idea. Here’s why:

You either have the cash to buy a house or you don’t.

If you do: if you invest your cash, a diversified long-term portfolio will return around 6-7% CAGR. You can get a 30-year fixed mortgage at less than 4%, and it’s tax deductible so it’s really less than 3%. Every dollar you pay for the house, is not being invested. So you lose 6-7% in order to save less than 3%. Don’t do that!

If you don’t: you can’t pay cash for a house, so you either rent or buy with a mortgage. If you buy with a mortgage, get a 30-year fixed and don’t pay it off early. Why? Consider the opportunity cost. That is: suppose you have an extra dollar – what should you do with it? Whatever gives you the highest return. Every financial situation is different, but a typical situation greatest benefit first looks something like this:

  • If you have credit card debt, you save 18% or more.
  • If you invest it, it will earn 6-7%.
  • If you put it into the mortgage, you save less than 3%.

Here’s a specific example: suppose you borrow $500k at 3% for 30 years. You decide to pay an extra $100 per month. You’ll pay off the loan about 2 years early saving about $21,000 in interest. If instead you invested $100 every month earning 6% annually, you’d have $100,000. That’s $36,000 in principal and $64,000 in earnings.

By paying off your mortgage early, you gave up $64,000 in order to save $21,000.

Misleading Economics and Reporting

Here’s an example of poor reporting: misleading statements based on mistaken assumptions arising from economic ignorance, that tends to stoke groundless class envy:

Correcting and re-wording statements in the video completely changes the tone:

“The world’s millionaires control 47% of the world’s wealth” –> People can only control wealth they created, so we can say: “The world’s millionaires created more than half the world’s wealth, a fraction of which they control themselves, the rest enjoyed by consumers – or captured by governments as taxes, which ostensibly benefits the people.”

“Millionaires are growing their money at 6.3%, while lower income earners saw their wealth grow 4.3%” –> All income brackets are getting wealthier, which is healthy. Yet this analysis follows income brackets, not individual people or families, who move up and down between brackets, so it doesn’t imply that poor individuals or families are advancing slower than rich individuals or families. Indeed, mathematical variance would cause the brackets to diverge even if individuals were shifting brackets and moving closer together. More detail here:

“It is the up-and-comers creating most of this wealth” –> “Economic distinctions are dynamic, not static, which is a healthy sign that anyone with the right combination of ideas, work and luck can become wealthy. And successful people who don’t continue to work work hard lose their wealth and fall back into lower income brackets”.

Housing in San Francisco

Kudos to Eric Fischer for a detailed analysis of Housing in San Francisco.

He did a regression and found 3 key features that correlate with housing prices:

  • Housing Supply: how much housing is available on the market
  • Salaries: how much are people in the area earning?
  • Employment: how many people in the area are employed?

Interestingly and surprisingly, the trend of rents over time was quite steady unaffected by the introduction of policies like rent control. The data & regression suggests that housing follows the basic laws of supply & demand just like other commodities.

On the Minimum Wage

Lots of news about the minimum wage lately. I’m disappointed at how poorly people understand it – especially people with some knowledge of economics. This leads to the nearly universal view that it is a policy that benefits the poor. I believe this view is incorrect. Here’s why.

I characterize the minimum wage as a form of welfare, or a  policy intended to help the poor. Any such policies should meet 2 basic guidelines.

  1. The benefits should be focused on the poor.
  2. The costs should be paid by the non-poor (middle class or rich).

The minimum wage fails both of these guidelines. I’ll take them in order.

People making the minimum wage are new or inexperienced workers – but not necessarily poor. Many new or inexperienced workers are young people spanning the entire economic spectrum including middle class and wealthy families. High school and college kids working part time jobs during the school year and full time during summers. Minimum wage jobs are frequently taken by middle class or wealthy retired people looking for something to do and a little extra income. Of course there are also some adult head of households working minimum wage jobs to support themselves or their families. Whatever benefits the minimum wage provides are not focused on the poor, but distributed equally to all of these different people, many of whom aren’t poor and don’t need the benefit.

When we think about what kind of businesses have minimum wage jobs, what comes to mind? Fast food, stores like Wal-Mart and Target, etc. And what do these businesses have in common? They are patronized by the lower and middle classes. Rich people are less likely to eat at McDonalds or shop at Wal-Mart. Increasing the minimum wage makes the products and services these businesses provide, more expensive. And the people paying those higher prices are the people who shop there – not the rich, but the lower and middle class.

In short, the minimum wage fails to focus its benefits on the poor, and a significant % of its cost is paid not by the rich, but borne by the poor and middle class. It fails the test of charity.

Yet the problems with the minimum wage don’t stop there. It also fails the test of economics.

Minimum wage doesn’t increase the productivity of labor. All it does is make it illegal to sell one’s own labor below a certain price. People whose productivity of labor is below that price will be unemployed. So each person who benefits from the minimum wage, does so at the expense of others who can’t get jobs at all. Economists argue over how much minimum wage laws raise unemployment – not whether it does.

Minimum wage laws also exacerbate the pernicious effects of discrimination. Suppose you own a fast food restaurant and 2 people apply to flip burgers: one is a black high school dropout, the other is a clean-cut white kid attending college. Who are you going to hire? Remember you have to pay them the same. Normally, a kid attending college doesn’t compete with high school dropouts because his skills enable him to demand a higher rate for his labor. But when minimum wage is high enough, he competes with people having fewer skills and experience. The unemployment rate among young black males is already more than twice as high as the national average. Higher minimum wages will only make that worse, not better.

In this sense, minimum wage laws harm the very people they are supposed to protect –  the newest, least experienced workers, especially minorities and otherwise disadvantaged – by forcing them to compete with more skilled and experienced workers for jobs.

Minimum wage laws passed over broad areas like an entire state have another problem: variable cost of living. The cost of living – and wages – are much higher in San Francisco than in Redding; or in Seattle vs. Spokane. The $15 minimum wage proposed for CA is a bad idea for San Francisco, yet in Redding the effects would be even worse.

Finally, a word about the popular phrase living wage. Many of the people working minimum wage jobs are part-time college students, retirees, and others who have independent means of support and don’t need a  living wage. Yet those who do need a living wage to support themselves or a family, aren’t working minimum wage jobs very long. A minimum wage job is an entry level job. Minimum wage workers quickly gain on-the-job experience and skills and move on to higher paying jobs. Even if the total number of people working minimum wage jobs is growing, they’re not the same people year over year. The group of minimum wage workers has high churn – a constant influx of new low skilled people entering the job market, as others leave the group moving on to higher paying jobs. The minimum wage doesn’t even help heads of households working entry level jobs because:

  • It makes it harder for them to get a job in the first place.
  • They don’t hold minimum wage jobs very long before they move on to higher paying work.

I don’t like to shoot something down unless I offer an alternative. In this case, one alternative is the guaranteed minimum income. This could replace not only the minimum wage, but all forms of poverty and welfare – replace the entire welfare state and all its myriad forms with a single program. Cutting it off abruptly at a certain income level would penalize people receiving this benefit for working. So instead, graduate their income so they always benefit from working. And require able-bodied people receiving this benefit to do whatever work they are capable of doing – sweeping streets, filling potholes, filing paperwork at the local DMV or public school, etc. This is typically work that the govt would perform, whether directly or through contracts, so this would save taxpayers money while taking few jobs from private industry. And it would benefit the people working by teaching them skills that make them employable. And it makes common sense: if you want to receive the guaranteed minimum income, you must be willing to perform some amount of guaranteed minimum work.