But Don’t We Really Need Government Research?
It’s a valuable public good, research is, isn’t it? Think of where we’d be without it! I mean, it was government research that came up with the Internet, for heaven sake.
That’s a response to the argument I made last week against government funding of scientific research. Moving away from public funding of scientific research would solve the problem of private companies capturing publication spoils from research that taxpayers funded.
The Defense Advanced Research Projects Agency did indeed come up with and popularize the protocol called TCP/IP, which the Internet uses. (Everyone’s use of the protocol really makes the Internet what it is, of course, but nevermind that.)
To take the Internet as proof that the government is a necessary producer of research and innovation, you have to reject the scientific method. Unfortunately, there are rarely controls in public policy. We can’t find out what would have happened if government policy had taken a different course, so we don’t know anything more about who should fund research from the fact that government-funded research has produced good things in the past.
But what would have happened if U.S. public policy had taken a different course? I’ve thought about the impossible-to-answer question of where we would have been without DARPA and other government influences on telecom. What most people don’t consider, I believe, is the restraining influence the government-granted AT&T monopoly had on telecommunications for most of the 20th century. AT&T developed a “Teletypewriter Exchange” system in 1931, for example, but had no need to develop it, there being little or no competitive pressure to do so. (Its patent on attaching devices to phone wires undoubtedly helped as well, preventing anyone using AT&T’s wires for modem service.)
Had there been competition, I suspect that someone would have come up with the idea of packet-switched networks—that’s what the Internet is—before Leonard Kleinrock did in 1962. Kleinrock was a student at MIT—he wasn’t at DARPA, which didn’t get into packet-switching until about 1966. (Then again, MIT was almost certainly awash in government money—specifically military money—so there you go. Maybe we owe all the good things we’ve got to war, but I doubt it.)
My guess—and it’s only that—is that we would have had the Internet some decades earlier if not for government interventions in telecommunications. We probably would have had multiple, competing “Internets,” actually, adopted more slowly than the Internet we got. (In a chapter of Privacy in America: Interdisciplinary Perspectives, I explored how government has accelerated the development of computing and communications, overpowering society’s capacity to adjust, with negative consequences for privacy.)
Support for government-funded research requires one to elide opportunity costs, the things foregone when one thing is chosen. As I said before, tradeoffs are ineluctable: Money spent on government research takes away from private research, or from other priorities such as reducing debt. In the absence of taxation to support research, the money would go to the public’s priorities as determined directly by the public in manifold spending and investing decision. Taxation and spending on government research is merely the substitution of centralized, political decision-making for a distributed, direct decision-making system. Its supporters are generally going to be beneficiaries of that system—elites, in short.
Even these beneficiaries of the status quo tend to agree that political decisions about funding for scientific research are warped. The solution to that problem, they’ll say, is fixing the political system—that is, creating a political system that is not so political.
Such a breakthrough is as unlikely as the invention of water that is not wet. Perhaps we can put DARPA on both projects.
To Spur Technology Innovation, Stop Pulling on the Rope
I spent the morning at The Atlantic‘s Washington Ideas Forum. Before the big names were to do their spiels during the afternoon today and tomorrow morning, there were a series of breakout sessions, among which was one on “Technology Innovation.”
Our suggested “points to ponder” were:
- Can our nation regain our competitive edge through innovation?
- Will our knowledge and information-based workforce continue to offer cutting-edge technologies to improve the way we live and work?
- What measures can we implement to foster creativity and encourage companies to grow intelligently? and
- Will the paradigm of how people work, think and communicate be meaningfully transformed as a result of technology? Or is this another short-term trend, with no long term changes?
At least one of the other participants thought the summary of the discussion I gave in the latter half was pretty good, so I’ll share my takeaway here roughly as I did there—maybe sounding just a little more “Cato-y” here.
Americans Are Not Convinced of Top Down Economics
Several recent polls have shown Americans are becoming increasingly skeptical of Washington’s economic planning capabilities. According to a recent Washington Post poll, 73 percent of Americans doubt Washington’s ability to solve economic problems. In fact, these numbers have leapt from 52 percent last year and from 41 percent in 2002. It appears that the more the government has tried to fix the U.S. economy, the less confident Americans are that the government is capable of doing such things.
When the government in Washington decides to solve economic problems, how much confidence do you have that the problem actually will be solved: A lot, some, just a little, or none at all?
Source: Washington Post Poll
Another example of this skepticism toward government economic planning comes from a recent Rasmussen poll finding that 71 percent of Americans believe the private sector is better than the government at determining technological potential.
Who is better at determining the long-term benefits and potential of new technologies, private sector companies and investors or government officials?
71 percent: Private sector companies and investors
11 percent: Government officials
17 percent: Not sure
This suggests the public is not convinced that President Obama’s “investment” spending will necessarily be properly directed to its most useful ends. For example, in the president’s 2011 State of the Union address, he marshals the word “invest” or “investment” 13 times, with 8 specifically referencing government investment. It is important to remember that when government “invests” in the economy, it requires officials to make decisions about who gets funding. This presupposes that the government has the knowledge to know which technologies have the greatest potential and thus are worthy of investment. Instead of letting billions of individuals work through a marketplace to best allocate resources to the technologies with the greatest potential, this would instead rely on a small, centralized group of intellectuals deciding who gets what.
Also, according to this Rasmussen poll the public is not convinced that when the government does “pick winners” to receive government funding, that the money will not be wasted. 64 percent believe it is likely that if a private company, which cannot find investors, gets funding from the government that the money will be wasted.
Sometimes a company cannot find investors for a new technology and they seek research funding from government. Suppose a private company cannot find investors but gets funding from the government. How likely is it that government funding will be wasted?
30 percent: Very likely
34 percent: Somewhat likely
21 percent: Not very likely
4 percent: Not at all likely
11 percent: Not sure
Wednesday Links
- “Collective bargaining gives unions the exclusive right to speak for covered workers, many of whom may disagree with the views of the monopoly union.”
- “Which two have done more to improve your life — Thomas Edison and Steve Jobs, or Barack Obama and Nancy Pelosi?”
- “A temporarily frozen debt limit could instead signal U.S. lawmakers’ resolve to get our fiscal house in order. It may even reassure investors about long-term U.S. economic prospects.”
- “What makes Americans exceptional is our ornery resistance to being bossed around.”
- Senator Bob Corker (R-Tenn.) spoke recently at a Cato forum on fiscal policy about the CAP Act–here’s an excerpt of his remarks:
HHS Wildly Overstates the Problem of Pre-Existing Conditions — and Ignores Its Cause
On the eve of a House vote to repeal ObamaCare, the Department of Health and Human Services has released a report claiming that if repeal succeeds, “1 in 2 non-elderly Americans could be denied coverage or charged more due to a pre-existing condition.” A few problems with that claim:
- An HHS survey found that in 2001, only 1 percent of Americans had ever been denied health insurance.
- Economists Mark Pauly and Len Nichols write, “the fraction of nonelderly uninsured persons…who would be rated as actuarially uninsurable is generally estimated to be very small, less than 1 percent of the population.”
- RAND health economist Susan Marquis and her colleagues find that in markets that do not impose ObamaCare-style government price controls on health insurance, such as California’s individual market, ‘‘a large number of people with health problems do obtain coverage…Our analysis confirms earlier studies’ findings that there is considerable risk pooling in the individual market and that high risks are not charged premiums that fully reflect their higher risk.’’
- It is true that insurers charge higher premiums to many people with pre-existing conditions — and it is crucial that they have the freedom to do so. Risk-based premiums create virtuous incentives for people to buy insurance while they are healthy and to be cost-conscious consumers. They also encourage insurers to develop innovative products that protect against the risk of higher premiums. The real problem here is that the government has created an employment-based health insurance system that denies consumers the protections that unregulated markets already provide, as well as additional protections that insurers would develop absent this government intervention.
- ObamaCare’s health-insurance price controls will encourage insurers to deny care to the very sick people those price controls are intended to help.
- The Obama administration projected that 375,000 people would sign up for ObamaCare’s “Pre-Existing Condition Insurance Plans” by the end of last year. But only 8,000 people enrolled in such plans by December 2010, suggesting the demand isn’t nearly as great as the administration claimed.
Is ObamaCare Pushing Rope?
Regarding ObamaCare’s first adverse-selection death spiral, Julie Rovner posts this over at Shots, the NPR health blog:
The advocacy group Health Care for America Now was the first to bring the action to widespread attention. “Even for the insurance industry this behavior is surprisingly brazen,” HCAN Executive Director Ethan Rome wrote in a blog entry for the Huffington Post. “They don’t like the rules, so they’re going to take their ball and go home.”
But the insurance industry trade group America’s Health Insurance Plans rejected HCAN’s contention that the companies’ refusal to sell to all comers is somehow a violation of a promise made earlier this year by AHIP CEO Karen Ignagni that insurance companies would comply with regulations regarding children and pre-existing conditions.
In an interview, AHIP spokesman Robert Zirkelbach said Ignagni was responding only to promises that children wouldn’t be excluded from their parents’ plans and that if the kids are covered, the policies would include treatment of their pre-existing condition.
What emerged in the regulations, however, Zirkelbach said, was, in effect, a requirement that insurance companies accept children even if they are already sick. That, he said, would be tantamount to exactly what companies want to avoid with the adult population — letting people wait until they are sick to sign up for insurance. Which is exactly why the insurance industry is so insistent on a coverage mandate: It needs premiums of healthy people to help cover the costs of those who are not.
In effect, ObamaCare supporters said to the public, “Give the government more power over insurance companies and the government will make health insurance more accessible and secure.” These few paragraphs capture how that strategy has turned into a cat-and-mouse game with insurers, and is turning ObamaCare’s most attractive selling point — guaranteed coverage for kids with pre-existing conditions — into an empty promise.
In stark contrast stands the individual insurance market. Yes, insurers there generally (but not always) charge premiums that correspond to risk, and sometimes turn people down — but that market has also been remarkably innovative when it comes to protecting sick people from higher premiums. RAND Health economist Susan Marquis and her colleagues write, “a large number of people with health problems do obtain coverage” in the individual market: “Our analysis confirms earlier studies’ findings that there is considerable risk pooling in the individual market and that high risks are not charged premiums that fully reflect their higher risk.” Even as Congress debated ObamaCare, UnitedHealthcare introduced an innovative new product that protects people with employer-sponsored coverage from facing sky-high premiums when they leave their company plan. Economist John Cochrane predicts that further innovations can make health insurance more secure and improve the quality of medical care.
Which process seems more likely to improve quality and reduce costs? The political process, where politicians and regulators try to force insurance companies to act against their financial self-interest? Or the market process, where self-interest forces insurers to find innovative ways to give consumers more of what they want?
One From Silicon Valley: Leave Us Alone
A passionate plea from Michael Arrington TechCrunch, the number three tech blog in the country and the number four blog overall, according to Technorati’s current rankings:
Silicon Valley has fueled much of the growth in our economy over the last few decades and has created amazing (and highly profitable) companies that are making the world a much better and more interesting place to live. All that happened while the government ignored us.
We don’t want handouts. We don’t want “public-private partnerships,” and we sure as hell don’t want legislation. Just let us do our thing and maybe say thanks to those companies that create jobs by the hundreds of thousands and send in those humongous corporate tax payments on profits. Because all you can do is screw up something beautiful. Really.
While maintaining his hugely popular site, Arrington has made himself something of a controversialist. His policy preferences aren’t strictly libertarian, but his instincts are that freedom produces innovation much better than any alternative public policies.
Political Economy in Three Panels
Indeed, every improved product or service may make us no longer value products and services we previously used. That’s what Schumpeter called “creative destruction.” A longer version of the same phenomenon was on the front page of Monday’s Wall Street Journal, in an article about how Wal-Mart’s rivals secretly fund “grassroots local campaigns” against Wal-Mart, organized by political consulting firms, to protect the existing firms’ positions. Every innovator puts somebody out of business, as Agnes’s friend recognizes.
Beware of Americans Proselytizing the Chinese Economic Model
In a Cato paper released earlier this month, I argued that the glacial pace of America’s economic recovery and its growing public debt juxtaposed against China’s almost uninterrupted double-digit annual economic growth and its role as Congress’s sugar daddy have bred insecurity among U.S. opinion leaders, many of whom now advocate a more strident approach to China, or emulation of its top-down approach.
I cite, among others, Thomas Friedman of the New York Times, who is enamored of autocracy’s capacity to facilitate China’s singularity of purpose to dominate the industries of the future:
One-party autocracy certainly has its drawbacks. But when it is led by a reasonably enlightened group of people, as China is today, it can also have great advantages. That one party can just impose the politically difficult but critically important policies needed to move a society forward in the 21st century. It is not an accident that China is committed to overtaking us in electric cars, solar power, energy efficiency, batteries, nuclear power, and wind power. China’s leaders understand that in a world of exploding populations and rising emerging-market middle classes, demand for clean power and energy efficiency is going to soar. Beijing wants to make sure that it owns that industry and is ordering the policies to do that, including boosting gasoline prices, from the top down.
Friedman’s theme—but less googoo eyed and more all-hands-on-deck!—is echoed in an op-ed by China-expert James McGregor, which ran in yesterday’s Washington Post. McGregor conveys what he describes as an emerging sentiment within the U.S. business community in China. That is: the Chinese government is hell bent on creating national economic champions; is using its increasing leverage (as global financier and fastest-growing market) to impose its own interpretations of the global rules of economic engagement in support of its comprehensive industrial policy, and, ultimately; the United States must wake up and rise to the challenge by crafting some top-down industrial policy of its own.
I don’t dispute some of McGregor’s premises. China’s long process of market liberalization has slowed down, halted, and even reversed in some areas. Policies are proliferating that favor local companies (particularly state-owned enterprises), hamper the operations of foreign-owned firms, and impede market access for imports. Indeed, many of these policies are likely the product of industrial planning.
But McGregor’s conclusion is extreme:
The time has come for a White House-led, public-private, comprehensive examination of American competitiveness against a clear-eyed view of China’s very smart and comprehensive industrial development policies and plans…What technology do we protect? What do we share? What are our commercial strategic imperatives as a nation? How do we retool the U.S. government’s inadequate and outdated trade bureaucracy to provide thoughtful strategic focus and interagency coordination? How do we overcome the fundamental disconnect between our system of scattered bureaucratic responsibilities and almost no national economic planning vs. China’s top-down, disciplined and aggressive national economic development planning machine?
Central planning may be more en vogue in Washington than usual nowadays, but to even come close to reaching his conclusion requires disregarding many facts, which is how McGregor gets there sans tongue in cheek.
John Paul Stevens, Defender of High-Tech Freedom
I’m saddened to hear of the retirement of Justice John Paul Stevens. Whatever you might say about his jurisprudence in other areas, one place where Justice Stevens really shined was in his defense of high-tech freedom.
Justice Stevens wrote the majority opinion in some of the most important high-tech cases of the last four decades. In other cases, he wrote important (and in some cases prescient) dissents. Through it all, he was a consistent voice for freedom of expression and the freedom to innovate. His accomplishments include:
- Free speech: Justice Stevens wrote the majority decision in ACLU v. Reno, the decision that struck down the infamous Communications Decency Act and clearly established that the First Amendment applies to the Internet. In the 13 years since then, the courts have repeatedly beat back attacks on free speech online. For example, Justice Stevens was in the majority in ACLU v. Ashcroft, the 2004 decision that struck down another attempt to censor the Internet in the name of protecting children.
- Copyright: Justice Stevens wrote the majority opinion in the 1984 case of Sony v. Universal, the case in which the Supreme Court upheld the legality of the VCR by a 5-4 vote. The decision, which today is known as the “Betamax decision” after the Sony VCR brand, made possible the explosion of digital media innovation that followed. When the recording industry tried to stop the introduction of the MP3 player in 1997, the Ninth Circuit cited the Betamax precedent in holding that “space shifting” with your MP3 player is permitted under copyright’s fair use doctrine. The iPod as we know it today probably wouldn’t exist if Sony had lost the Betamax case. Justice Stevens also wrote an important dissent in the 2003 decision of Eldred v. Ashcroft, in which he (like the Cato Institute) argued that the Constitution’s “limited times” provision precluded Congress from retroactively extending copyright terms.
- Patents: The explosion of software patents is one of the biggest threats to innovation in the software industry, and Justice Stevens saw this threat coming almost three decades ago. Stevens wrote the majority decision in the 1978 case of Parker v. Flook, which clearly disallowed patents in the software industry. Three years later, Stevens dissented in the 1981 case of Diamond v. Diehr, which allowed a patent on a software-controlled rubber-curing machine. Although the majority decision didn’t explicitly permit patents on software, Stevens warned that the majority’s muddled decision would effectively open the door to software patents. And he has been proven right. In the three decades that followed, the patent-friendly U.S. Court of Appeals for the Federal Circuit has effectively dismantled limits on software patents. And the result has been a disaster, with high-tech firms being forced to spend large sums on litigation rather than innovation.
So if you enjoy your iPod and your uncensored Internet access, you have Justice Stevens to thank. Best wishes for a long, comfortable, and well-deserved retirement.
The Standards Themselves Are, Frankly, Irrelevant
Three days ago I reported that draft, grade-by-grade, national curricular standards would soon be released by the Common Core State Standards Initiative. Yesterday, they were. (If you want to get a sense for what the proposed standards are follow the link to them. Don’t bother with the appendices, though, unless you really want to get into the weeds.)
Naturally, in the coming days lots of people will be offering heaps of commentary about what the standards do or do not contain. That’s not my main concern (though reading through the English standards I am dubious that mastery of them could be easily or consistently assessed). You see, the content of the standards is largely irrelevant because the main problem isn’t what the standards are, but standardization itself.
As I’ve blathered about on numerous occasions, it makes little sense to expect all kids to master all the same things at the same rates. All kids are different – they have different talents, desires, and abilities — and to impose one, “best” progression on them is simply illogical.
Another problem with imposing a single standard nationwide — and yes, this will be imposed, unless states suddenly decide they don’t like getting their citizen’s tax dollars back from Uncle Sam – is that it prevents competition between curricula. And that, in turn, kills innovation, the lifeblood of progress. So unless these standards have achieved perfection — and I’m pretty sure they haven’t — it’s a very dangerous thing to make them the end-all and be-all.
Finally, no matter how brilliant the draft standards, there is no reason to believe that they will drive meaningful educational improvement. Government schools will still be government schools, and the people employed by them will still have very little incentive to push kids to excellence, and every incentive to game the system to make the standards toothless. And no one yet has offered a decent proposal, other than school-choice supporters, for getting around that very inconvenient, public-schooling truth.
All of these problems help to explain why there is no convincing empirical evidence that national standards drive superior educational outcomes. Unfortunately, most national-standards advocates will talk themselves blue in the face about what’s in the standards, but avoid at all costs the question of whether standardization makes sense in the first place.
Six Reasons to Downsize the Federal Government
1. Additional federal spending transfers resources from the more productive private sector to the less productive public sector of the economy. The bulk of federal spending goes toward subsidies and benefit payments, which generally do not enhance economic productivity. With lower productivity, average American incomes will fall.
2. As federal spending rises, it creates pressure to raise taxes now and in the future. Higher taxes reduce incentives for productive activities such as working, saving, investing, and starting businesses. Higher taxes also increase incentives to engage in unproductive activities such as tax avoidance.
3. Much federal spending is wasteful and many federal programs are mismanaged. Cost overruns, fraud and abuse, and other bureaucratic failures are endemic in many agencies. It’s true that failures also occur in the private sector, but they are weeded out by competition, bankruptcy, and other market forces. We need to similarly weed out government failures.
4. Federal programs often benefit special interest groups while harming the broader interests of the general public. How is that possible in a democracy? The answer is that logrolling or horse-trading in Congress allows programs to be enacted even though they are only favored by minorities of legislators and voters. One solution is to impose a legal or constitutional cap on the overall federal budget to force politicians to make spending trade-offs.
5. Many federal programs cause active damage to society, in addition to the damage caused by the higher taxes needed to fund them. Programs usually distort markets and they sometimes cause social and environmental damage. Some examples are housing subsidies that helped to cause the financial crises, welfare programs that have created dependency, and farm subsidies that have harmed the environment.
6. The expansion of the federal government in recent decades runs counter to the American tradition of federalism. Federal functions should be “few and defined” in James Madison’s words, with most government activities left to the states. The explosion in federal aid to the states since the 1960s has strangled diversity and innovation in state governments because aid has been accompanied by a mass of one-size-fits-all regulations.
For more, see DownsizingGovernment.org.
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