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May 28, 2010

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"Digital Robber Barons?"

Posted: 28 May 2010 01:17 AM PDT

Paul Krugman is on vacation, so I essentially picked an article randomly (by date) from the PKarchive. This column appeared December 6, 2002. Not much has changed:

Digital Robber Barons?, by Paul Krugman, Commentary, NY Times: Bad metaphors make bad policy. Everyone talks about the "information highway." But in economic terms the telecommunications network resembles not a highway but the railroad industry of the robber-baron era — that is, before it faced effective competition from trucking. And railroads eventually faced tough regulation, for good reason: they had a lot of market power, and often abused it.
Yet the people making choices today about the future of the Internet — above all Michael Powell, chairman of the Federal Communications Commission — seem unaware of this history. They are full of enthusiasm for the wonders of deregulation, dismissive of concerns about market power. And meanwhile tomorrow's robber barons are fortifying their castles.
Until recently, the Internet seemed the very embodiment of the free-market ideal — a place where thousands of service providers competed, where anyone could visit any site. And the tech sector was a fertile breeding ground for libertarian ideology, with many techies asserting that they needed neither help nor regulation from Washington.
But the wide-open, competitive world of the dial-up Internet depended on the very government regulation so many Internet enthusiasts decried. Local phone service is a natural monopoly, and in an unregulated world local phone monopolies would probably insist that you use their dial-up service. The reason you have a choice is that they are required to act as common carriers, allowing independent service providers to use their lines.
A few years ago everyone expected the same story to unfold in broadband. The Telecommunications Act of 1996 was supposed to create a highly competitive broadband industry. But it was a botched job; the promised competition never materialized.
For example, I personally have no choice at all: if I want broadband, the Internet service provided by my local cable company is it. I'm like a 19th-century farmer who had to ship his grain on the Union Pacific, or not at all. If I lived closer to a telephone exchange, or had a clear view of the Southern sky, I might have some alternatives. But there are only a few places in the U.S. where there is effective broadband competition.
And that's probably the way it will stay. The political will to fix the 1996 act, to create in broadband the kind of freewheeling environment that many Internet users still take for granted, has evaporated.
Last March the F.C.C. used linguistic trickery — defining cable Internet access as an "information service" rather than as telecommunications — to exempt cable companies from the requirement to act as common carriers. The commission will probably make a similar ruling on DSL service, which runs over lines owned by your local phone company. The result will be a system in which most families and businesses will have no more choice about how to reach cyberspace than a typical 19th-century farmer had about which railroad would carry his grain.
There were and are alternatives. We could have restored competition by breaking up the broadband industry, restricting local phone and cable companies to the business of selling space on their lines to independent Internet service providers. Or we could have accepted limited competition, and regulated Internet providers the way we used to regulate AT&T. But right now we seem to be heading for a system without either effective competition or regulation.
Worse yet, the F.C.C. has been steadily lifting restrictions on cross-ownership of media and communications companies. The day when a single conglomerate could own your local newspaper, several of your local TV channels, your cable company and your phone company — and offer your only route to the Internet — may not be far off.
The result of all this will probably be exorbitant access charges, but that's the least of it. Broadband providers that face neither effective competition nor regulation may well make it difficult for their customers to get access to sites outside their proprietary domain — ending the Internet as we know it. And there's a political dimension too. What happens when a few media conglomerates control not only what you can watch, but what you can download?
There's still time to rethink; a fair number of Congressmen, from both parties, have misgivings about Mr. Powell's current direction. But time is running out.

One way to induce competition is to follow the model used for phone services and force internet service providers to sell their services at wholesale rates to other providers (e.g., see unbundled network elements). In any case, there's no reason why there should be so little competition in this industry other than political power that these firms have.

Will "Huge Teacher Layoffs" be Prevented?

Posted: 28 May 2010 12:25 AM PDT

Christina Romer makes the case for helping states keep teachers in the classroom:

How to prevent huge teacher layoffs, by Christina D. Romer, Commentary, Washington Post: The emergency spending bill before the House would address the education crisis facing communities across America -- and the jobs of hundreds of thousands of teachers are at stake. Because ... state and local budgets are stressed to the breaking point..., hundreds of thousands of public school teachers are likely to be laid off over the next few months. As many as one out of every 15 teachers could receive a pink slip this summer...
Additional federal aid targeted at preventing these layoffs can play a critical role in combating the crisis. Such aid would be very cost-effective. There are no hiring or setup costs. The teachers are there, eager to stay in their classrooms. ...
Furthermore, by preventing layoffs, we would save on unemployment insurance payments, food stamps and COBRA subsidies for health insurance, and we would maintain tax revenue. Accounting for these savings, the actual cost of the program is likely to be 20 to 40 percent below the sticker price...
Yes, we all understand that our budget deficit is too large. ... But it would be penny-wise and pound-foolish to deal with that issue by failing to allot essential spending on teachers at a time when the unemployment rate is still near 10 percent.
The right way to deal with a budget problem that was years in the making is by formulating a credible plan to reduce the deficit over time and as the economy is able to withstand the necessary fiscal belt-tightening. ...

And here's the response:

Bill on jobless benefits, state financial help scaled back, by Lori Montgomery, Washington Post: Under fire from rank-and-file Democrats worried about the soaring national debt, congressional leaders reached a tentative agreement Wednesday to scale back a package that would have devoted nearly $200 billion to jobless benefits and other economic provisions...
After struggling throughout the day to reach a compromise, House leaders scheduled a Thursday vote on the slimmed-down package in hopes of pushing it through both chambers before the 10-day Memorial Day recess...
But the ultimate fate of the package was unclear as Republicans stepped up efforts to paint it as irresponsible when the recession and its aftermath are driving the nation deeply into debt -- a concern many Democrats share. ...
"This is fiscal recklessness. And that's why even some Democrats are starting to revolt," Senate Minority Leader Mitch McConnell (R-Ky.) said...
Senate Majority Leader Harry M. Reid (D-Nev.) was noncommittal when pressed by reporters about the tax bill's chances in his chamber. ... While expressing confidence that some form of the legislation would pass, Reid said he had yet to secure commitments from any Republicans. At least one GOP senator must defect...
But Reid said the Senate would at the very least approve an unemployment extension before adjourning this weekend. "We can't leave here unless we address that issue," he said.

The deficit hawks generally talk about the fate of our children when making the case to reduce the deficit, but at a time like now when the recession is pressuring school budgets, how are kids helped by reducing their educational opportunities?

More on recent trends in education:

Economic segregation rising in US public schools, by Stacy Teicher Khadaroo, csmonitor.com: ...The portion of schools where at least three-quarters of students are eligible for free or reduced-price meals – a proxy for poverty – climbed from 12 percent in 2000 to 17 percent in 2008.
The federal government released a statistical portrait of these schools Thursday as part of its annual Condition of Education report. When it comes to educational opportunities and achievement, the report shows a stark contrast between students in high-poverty and low-poverty schools (those where 25 percent or less are poor).
Economic segregation is on the rise in American schools, and that "separation of rich and poor is the fountainhead of inequality," says Richard Kahlenberg, a senior fellow at The Century Foundation... High-poverty schools "get worse teachers ... are more chaotic ... [have] lower levels of parental involvement ... and lower expectations than at middle-class schools – all of which translate into lower levels of achievement."
Cities aren't the only places facing this challenge: Forty percent of urban elementary schools have high poverty rates, but 13 percent of suburban and 10 percent of rural elementary schools do as well. In some states – Mississippi, Louisiana, and New Mexico – concentrated poverty affects more than one-third of K-12 schools.
Hispanic and black children make up the majority of students in high-poverty schools – 46 percent and 34 percent, respectively, compared with just 14 percent white and 4 percent Asian/Pacific Islander. ...
"There have been gains in achievement in high-poverty schools over the last decade or so ... but what we don't see in most cases is a closing of the gap," says Daria Hall, director of K-12 policy at the Education Trust in Washington...
In graduation rates, there's actually been a backward slide. In 2008, high-poverty schools reported that 68 percent of seniors graduated the previous year, compared with 86 percent in 2000. For students in low-poverty schools, the rate remained about 91 percent.
Solutions have been hard to come by... While efforts to improve high-poverty schools are valiant, they've haven't worked very well...

links for 2010-05-27

Posted: 27 May 2010 11:03 PM PDT

David Andolfatto: Avoid Making Bold Assertions on the Basis of a Single Model

Posted: 27 May 2010 01:08 PM PDT

David Andolfatto responds to my recent posts and sets me straight about his beliefs on fiscal policy and other matters. It turns out that I didn't represent them accurately, something I try to avoid. As he notes below, he is neither for nor against fiscal policy, and remains agnostic about its use. His main point is that different models give different conclusions, some such as Woodford and Eggertsson are quite supportive of fiscal policy while others are not. His objection is about taking the word of one model over another when we really don't have the evidence to know which model is best. That's a fair point. I should also acknowledge, as many people have pointed out, that it's possible to find shrill, over the top attacks on all sides of the debate on macroeconomic policy:

Taken Out Behind the Woodshed, by David Andolfatto : Been out of commission for a while. (Had Lasik surgery on Monday -- I can actually see now -- which will no doubt please those who accuse me of blindness). And I have just now read the replies to my previous two posts. Not very pretty. I'll have a few things to say about this. Before I begin though, I would like to take a moment to thank all my supporters out there: thanks...you've both been great!

When I originally contemplated the idea of Macromania, I thought it might be a cheap and interesting way to learn a few things. By and large, it has turned out to be a successful experiment (for me personally, at least).

But not everything in the experiment has turned out well. My more thoughtful postings were met with thoughtful replies, followed by fruitful discussion. My more childish personal attacks on people I did not even know were met by counterattacks of a similar nature by people who do not even know me. I am now reminded of a useful Bible lesson: As you sow so shall you reap.

There is nothing wrong, I think, with the harsh criticism of an idea. Having a stupid idea does not make one stupid. But it is another thing altogether when one criticizes a person. And here I confess to having gone too far. There are probably times and places where personal attacks might be justified, but I don't want Macromania to be a venue for that sort of activity. Nothing good comes of it.

So I would like to clear the air. Both Paul Krugman and Brad DeLong deserve far more respect that what I afforded them. (Let me also toss Ron Paul in there, who has at times found himself in my crosshairs). My ego is not so large as to expect that they would welcome an apology from me. But I would like to apologize nevertheless, for the record, if for nothing else.

And while I'm clearing the air, I would like to reply to Mark Thoma's post here. Mark takes some justified jabs at me. But he also misrepresents me along a few dimensions. Again, for the record:

[1] I am neither for nor against fiscal stimulus in the form of government purchases to combat a peacetime economic crisis (I have repeatedly said that I am an agnostic whose beliefs on the matter vary over time as I am exposed to more evidence). I have, in fact, made arguments elsewhere in favor of fiscal policy as a redistributive mechanism (but sadly, in my view, redistribution is never mentioned in this debate; it's all about the effect of G on Y).

[2] What I am against is the practice (perhaps it is unintended or simply a product of my imagination) of seducing the public into thinking that our "science is settled" on any given question. Greg Mankiw's more cautious approach as exhibited here teaches us how to persuade without being dogmatic.

[3] I have never, as far as I can remember, disputed the logic of fiscal stimulus in a NK model with zero nominal interest rates. But the NK model is not the only game in town. There are competing frameworks (for example, the so-called New Monetarist framework) that are no less plausible and may deliver very different answers to the same policy question. We need to keep an open mind and avoid making bold assertions on the basis of a single model.

OK, now let's go do some economics.

"The Flight to Quality"

Posted: 27 May 2010 12:24 PM PDT

Brad DeLong argues the world wants more safe financial assets, and that governments ought to provide them:

The Flight to Quality, by J. Bradford DeLong, Commentary, Project Syndicate: In late May, the yield to maturity of the 30-year United States Treasury bond was 4.07% per year – down a full half a percentage point since the start of the month. That means that a 30-year Treasury bond had jumped in price by more than 15%. ... This signals ... an extraordinary rise in market-wide excess demand for such assets.
Why does this matter? Because, as economist John Stuart Mill wrote in the first half of the nineteenth century, excess demand for cash (or for some broader range of high-quality and liquid assets) is excess supply of everything else. What economists three generations later were to call Walras's Law is the principle that any market in which people are planning to buy more than is for sale must be counterbalanced by a market or markets in which people are planning to buy less.
We have seen this principle in action since the early fall of 2007, as growing excess demand for safe, liquid, high-quality financial assets has carried with it growing excess supply for the goods and services... And global financial markets are now telling us that this excess demand for safe, liquid, high-quality financial assets has just gotten bigger. ...
But most of the recent shift has come not from an increase in demand for safe, liquid, high-quality financial assets, but from a decrease in supply: six months ago, bonds issued by the governments of southern Europe were regarded as among the high-quality assets in the world economy that one could safely and securely hold; now they are not. ...
When there is excess demand for safe, liquid, high-quality financial assets, the rule for which economic policy to pursue – if, that is, you want to avoid a deeper depression – has been well-established since 1825. If the market wants more safe, high-quality, liquid financial assets, give the market what it wants.
After all,... a market tells us which things are valuable and thus gives us the signal to make more of them. ... So those governments whose credit is still unshaken ... should be creating a lot more of them. ...
How much should they do? As long as there is a clear global excess supply of goods and services – as long as unemployment remains highly elevated and inflation rates are falling – they are not doing enough. And the gap between what they should be doing and what they are doing grew markedly in May.
This isn't rocket science or capping deep-sea oil blowouts. These are problems that we have long known how to solve.

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