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.

But Don’t We Really Need Government Research? is a post from Cato @ Liberty - Cato Institute Blog

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:

1. Can our nation regain our competitive edge through innovation?
2. Will our knowledge and information-based workforce continue to offer cutting-edge technologies to improve the way we live and work?
3. What measures can we implement to foster creativity and encourage companies to grow intelligently? and
4. 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.

First, note the conspicuous use of collective pronouns in the first three discussion points. They obscure the goals and actors quite nicely, summarizing to: There is an undefined group out there that we want to have do an undefined set of things amounting to innovation.

I was reminded of the metaphor for spurring economic progress (if I recall, and I don’t recall where I first heard it): Spurring economic progress is like pushing a rope. You really can’t do it. Someone has to pull it, and the job of policymakers is simply to not pull on the wrong end.

In our brainstormy session, the ideas generally focused on pushing our end of the rope. “We” need more basic research and R&D. “We” need more and better education in science and technology. “We” need more inspired leadership, the spur of a new Sputnik.

These things are all probably inputs to innovation in some sense. None of them, I don’t think, will produce innovation as a matter of course. And nobody knows where to direct these efforts so that they do produce innovation.

A few other ideas emerged, ways that public policy can stop pulling on the rope. One was letting immigrants stay in this country—particularly the ones who have just earned advanced degrees—and welcoming them to stay. Another one was reducing the role of patent strategy in tech-business decision-making. Patents seem no longer to be primarily a spur to innovation, but a strategic arsenal used offensively or defensively by tech giants. A third idea that nearly surfaced was tax cuts, but its author in the conversation pivoted from what other countries are doing with tax policy to “national competitiveness,” never actually saying that U.S. tax cuts would spur business activity and innovation.

Arriving back at the office, I chanced to come across some thinking that would have contributed mightily to the discussion: NYU professor of economics Bill Easterly talking about the relationship of individual rights to economic growth, development, and innovation:

[I]ndividual rights is also a way to mobilize all the knowledge in society that we need to make the economy work. It’s the individual that has the particular knowledge so that they know how to run their factory, to employ people, to be a worker themselves, to start new businesses.

We’ll talk later about examples—like the guy in Rwanda, who stumbled upon a very unexpected success. He figured out—this is not something anybody would have predicted—that Rwanda could prosper by exporting gourmet coffee, which you can find in New York’s best coffee shops.

One reason that worked so well for Rwanda, is they have a tremendous infrastructure problem. It’s very hard to get heavy stuff shipped abroad because they are landlocked, they’re surrounded by countries with lousy roads, lousy ports. But gourmet coffee is something that you can create with lots of labor, which Rwanda does have a lot of, and it has very high value-to-weight ratio. So you just put it on the airplane, and ship it to New York.
…
So, there was no expert economist that flew in and told Paul Kagame, the autocrat of Rwanda, “Here’s the plan: Identify gourmet coffee as the growth industry worldwide. That’s the recipe.” None of that happened.
…
These successes are always a surprise. That’s why the expert top-down plan doesn’t work. You need the entrepreneur, you need the consumer, you need the market feedback, you need the democratic feedback, and all of this is built on this large edifice at the bottom of individual rights.

Defend people’s rights to own and use their property, however they might imagine to do that, then watch them deliver their surprises. That’s innovation policy. Stop pulling on the rope.

To Spur Technology Innovation, Stop Pulling on the Rope is a post from Cato @ Liberty - Cato Institute Blog

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

It might be time to rethink the alluring sound of government “investment” and reevaluate the merits that government has the knowledge necessary to make these sorts of economic decisions.

Cross-posted from Reason.com 

Americans Are Not Convinced of Top Down Economics is a post from Cato @ Liberty - Cato Institute Blog

• “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:

Wednesday Links is a post from Cato @ Liberty - Cato Institute Blog

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.

HHS Wildly Overstates the Problem of Pre-Existing Conditions — and Ignores Its Cause is a post from Cato @ Liberty - Cato Institute Blog

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?

Is ObamaCare Pushing Rope? is a post from Cato @ Liberty - Cato Institute Blog

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.

One From Silicon Valley: Leave Us Alone is a post from Cato @ Liberty - Cato Institute Blog

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.

Political Economy in Three Panels is a post from Cato @ Liberty - Cato Institute Blog

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.

First, in an effort to preempt any suggestion that China’s protectionism is nothing exceptional and can be remedied through the World Trade Organization and other channels, McGregor offers this blanket statement: “Chinese policymakers are masters of creative initiatives that slide through the loopholes of WTO and other international trade rules.”  I realize that op-ed writing forces one to economize on words, but that statement, which serves as McGregor’s springboard to socialism, cannot suffice for an analysis of the facts.  One of those facts is that the United States has been successful in compelling changes in China’s protectionist practices in all of the formal WTO disputes it has lodged that have been resolved thus far (6 of 8 formal cases have been resolved).  If China violates the agreed rules of trade, and its actions impair benefits or impose costs on U.S. interests that are too large to ignore, pursuing a WTO case is a legitimate and proven channel of resolution. Chinese protectionism can be addressed without the radical changes McGregor counsels. 

But I think McGregor—sharing the tactics of other in the media and politics—exploits public angst over a rising China to promote his idea as the obvious and only solution to what he sells as a rapidly-metastasizing problem.  McGregor argues that China is aiming to create national champions through subsidies and other preferential policies, while charging foreign companies admission to its market in the form of technology transfer, joint-venturing requirements, and local content rules.  McGregor claims, that this appropriation of foreign technology will be used to “create Chinese ‘indigenous innovations’ that will come back at us globally.”  Ultimately, McGregor fears that “American technology companies could be coerced to plant the seeds of their destruction in the fertile China market.”

It is telling that McGregor doesn’t consider U.S. government expropriation of those companies’ technology assets as planting the seeds of their own destruction.  Indeed, it is nothing short of expropriation when technology that is owned by individual companies in the private sector, making unique decisions to improve their own bottom-lines on behalf of their own shareholders is suddenly subject to the questions McGregor wants answered: What technology do we protect? What do we share? What are our commercial strategic imperatives as a nation?  Those questions, let alone the answers, imply that the U.S. government should have at least de facto ownership and control over these privately-held technology assets.

What is wrong with allowing each of these companies to decide for themselves whether they want to license or transfer some of their technology to Chinese companies, as the price of doing business in China?  Some will, some won’t, but the presupposition that those who do are selling the golden goose is not based on fact.  Let companies decide for themselves how to use their resources, and don’t treat industry as a monolith, as in “What are our commercial strategic imperatives as a nation?” 

Had we tried to answer and implement the answer to that question in the face the Japanese “threat” two decade ago, we’d be bereft of some of the most ingenious technological breakthroughs and the hundreds of industries and thousands of products that “our system of almost no national economic planning” has yielded.

When we peel away the chicken-little rhetoric, when we dispense with neo-Rahm Emanualism (“Never manufacture a good crisis and then let it go to waste”), when cooler heads and analytical minds prevail, the economic question boils down to this: What has been more successful at creating growth, central planning or decentralized dynamism?  For both China and the United States, it has been the latter. 

My bet is that China’s re-embrace of greater central planning will be brief, as it wastes resources, yields few -if any- national champions, and limits innovation.  For similar reasons, U.S. opinion leaders will eschew central planning, as well.

Beware of Americans Proselytizing the Chinese Economic Model is a post from Cato @ Liberty - Cato Institute Blog

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.

John Paul Stevens, Defender of High-Tech Freedom is a post from Cato @ Liberty - Cato Institute Blog

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.

The Standards Themselves Are, Frankly, Irrelevant is a post from Cato @ Liberty - Cato Institute Blog

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.

Six Reasons to Downsize the Federal Government is a post from Cato @ Liberty - Cato Institute Blog

• The moral and constitutional case for gay marriage.

• The populists have it wrong. Why free trade and globalization are great blessings to  Americans and poor families around the world.

• How Obama’s plan for health care will affect medical innovation in America: “Imposing price controls on drugs and treatments–or indirectly forcing their prices down by means of a ‘public option’ or expanded public insurance programs–would reduce the incentive for innovators to develop new treatments.”

• Register now for the upcoming Cato forum featuring author Tim Carney and his new book, Obamanomics: How Barack Obama Is Bankrupting You and Enriching His Wall Street Friends, Corporate Lobbyists, and Union Bosses. Buy the book, here.

• Podcast: “Shoes, Undies and Airplane Security” featuring Jim Harper.

Thursday Links is a post from Cato @ Liberty - Cato Institute Blog

That’s the conclusion of economist Glen Whitman and physician Raymond Raad, who write in Forbes:

Unfortunately, the health care bills moving through Congress could curtail medical innovation. Imposing price controls on drugs and treatments–or indirectly forcing their prices down by means of a “public option” or expanded public insurance programs–would reduce the incentive for innovators to develop new treatments.

Proposed reforms could also retard business model innovation–an area where innovation is weak. Congress has already used its control of Medicare to limit the growth of specialty hospitals. A nationally mandated insurance package would severely curtail innovation in payment methods and insurance products, which have the potential to improve the coordination and delivery of health care services.

The health care debate should address more than just covering the uninsured and controlling costs. When the U.S. generates medical innovations, the whole world benefits. That is a virtue of the American system that is not reflected in comparative life expectancy and mortality statistics.

The op-ed is based on the authors’ Cato Institute policy analysis, “Bending the Productivity Curve: Why America Leads the World in Medical Innovation.”

ObamaCare Threatens Innovation is a post from Cato @ Liberty - Cato Institute Blog

That is one of the conclusions in my new paper, “Made on Earth: How Global Economic Integration Renders Trade Policy Obsolete.”

For hundreds of years, trade policy has been premised on the assumptions that exports are good, imports are bad, and the interests of domestic producers are tantamount to the “national interest.” Though that mercantilist worldview has never been accurate, its persistence as a pillar of trade policy into the 21st century is especially confounding given the emergence and proliferation of disaggregated production processes, transnational supply chains, and cross-border investment. Those trends have blurred any meaningful distinctions between “our” producers and “their” producers and speak to a long chain of interdependent economic interests between product conception and consumption.

Still, trade policy places the interests of domestic producers above all else even though the definition of a domestic producer is elusive and even though actions on behalf of producers often harm interests along the product continuum, which include engineers, designers, financiers, processors, assemblers, marketers, shippers, retailers, consumers, and others.

In 2008, foreign nameplate automobile producers, employing American workers, paying American taxes, and supporting American businesses, communities, and charities, accounted for almost half of all U.S. light vehicle production. The largest “U.S.” steel producer, Arcelor-Mittal, is a majority-Indian-owned company with headquarters in Luxembourg and Hong Kong. The largest “German” producer, Thyssen-Krupp, is completing a $3.7 billion green-field investment in steel production facilities in Alabama, which will create an estimated 2,700 jobs in that state.

So, who are “we”? And who are “they”?

Are these foreign-named or –headquartered companies not “our” producers because some of the profits they earn are repatriated or invested in operations outside the United States? If so, then shouldn’t we consider U.S. Steel Corporation, which earned 25 percent of its revenue last year on steel produced in Slovakia and Serbia, and General Motors, which has had success producing and selling cars in China, to be “their” producers? Why should U.S. Steel, General Motors, and the unions that organize workers at those companies dictate the parameters of U.S. trade policy, while Toyota, Thyssen and their non-union workers have no input? Why should trade policy reflect a bias in favor of producers—or worse, particular producers—at all? That bias hurts other interests—both foreign-based and domestic—in the supply chain.

Global commerce isn’t a competition between “us” and “them.” It is instead a competition between entities that defy national identification because of cross-border investment or because the final good or service comprises value added from many different countries. This reality demands openness in both directions, which flies in the face of conventional trade policy wisdom, which seeks to maximize access for domestic producers abroad while minimizing access for foreign producers at home.

It is only for simplicity’s sake that a container full of iPods shipped from China and unloaded in Seattle registers as imports from China. But the fact is that only a few dollars of the $150 cost to produce an iPod is Chinese value-added. The rest is mostly value attributable to Japanese, Korean, Singaporean, Taiwanese, and American components and labor. Then iPods retail for about $300 and most of the mark-up accrues to Apple, which uses the profits to support innovation and higher paying jobs in the United States.

From a trade policy perspective, each iPod imported from China adds $150 to our bilateral deficit in “high tech” goods. It is regarded as a problem to solve. The temptation is to restrict.

But from a commercial perspective, each imported iPod supports U.S. economic activity up the value chain. Without access to lower-cost labor abroad—if rudimentary component manufacturing and assembly operations were required to take place in the United States—ideas hatched in American labs would be far less likely to make it beyond the white board. Much higher costs would make it far more difficult to create these ubiquitous devices that have, in turn, spawned new ideas and industries.

Essentially, the factory floor has broken through its walls and today spans borders and oceans, making Chinese and American labor complementary in this and many other industries. Yet, despite all of this integration, despite the reliance of producers in the United States and abroad on imported raw materials, components, and capital equipment, trade policy still pretends that access to the domestic market is a favor to grant or a privilege to revoke. Trade policy is officially ignorant of commercial reality.

Openness to trade in both directions is an imperative in the 21st century. Policies that do not try to channel incentives for the benefit of specific groups but rather provide the greatest opportunities for citizens to participate most effectively in our increasingly integrated global economy are the ones that will maximize economic growth and national welfare. People in other countries should be thought of more as customers, suppliers, and potential collaborators instead of competitive threats.

In the 21st century, instead of serving the exclusive interests of domestic producers, trade policy should be about welcoming investment and attracting and cultivating the human capital necessary to make the United States the location of choice for the world’s highest value economic activities.

Is Trade Policy Obsolete? is a post from Cato @ Liberty - Cato Institute Blog

Most international comparisons conclude that America’s health care sector under-performs those of other advanced nations.  Aside from other serious flaws, those studies typically ignore each nation’s contribution to medical innovation — the discovery of new knowledge and practices that improve health in all nations. Today, the Cato Institute releases a new study — the most comprehensive study of its kind — that helps fill that void.

In “Bending the Productivity Curve: Why America Leads the World in Medical Innovation,” economist Glen Whitman and physician Raymond Raad conclude that the United States far and away outperforms other nations on medical innovation, but that the legislation moving through Congress threatens America’s ability to innovate.  From the executive summary:

To date…none of the most influential international comparisons have examined the contributions of various countries to the many advances that have improved the productivity of medicine over time…

In three of the four general categories of innovation examined in this paper — basic science, diagnostics, and therapeutics — the United States has contributed more than any other country…In the last category, business models, we lack the data to say whether the United States has been more or less innovative than other nations; innovation in this area appears weak across nations.

In general, Americans tend to receive more new treatments and pay more for them — a fact that is usually regarded as a fault of the American system. That interpretation, if not entirely wrong, is at least incomplete. Rapid adoption and extensive use of new treatments and technologies create an incentive to develop those techniques in the first place. When the United States subsidizes medical innovation, the whole world benefits. That is a virtue of the American system that is not reflected in comparative life expectancy and mortality statistics.

Policymakers should consider the impact of reform proposals on innovation. For example, proposals that increase spending on diagnostics and therapeutics could encourage such innovation. Expanding price controls, government health care programs, and health insurance regulation, on the other hand, could hinder America’s ability to innovate.

Raad will discuss the study this Friday at noon at a policy forum at the Cato Institute.

Will America Keep “Bending the Productivity Curve”? is a post from Cato @ Liberty - Cato Institute Blog

Last night, thanks to Craigslist and a Web-enabled cell phone, I unloaded two extra tickets to tonight’s World Cup qualifying game between the U.S. and Costa Rica in under an hour. (8:00, ESPN2 “USA! USA! USA!”)

Wanting to avoid the hassle of selling the tickets at RFK, I placed an ad on Craigslist offering them at cost, figuring I might find a taker and arrange to hand them off downtown today or at the stadium tonight. Checking email as I walked to the gym, I found an inquiry about the tickets and phoned the guy, who happened to live 100 feet from where I was walking. A few minutes later, he had the tickets and I had the cash.

This quaint story is a single data point in a trend line—the high-tech version of It’s Getting Better All the Time. Everyone living a connected life enjoys hundreds, or even thousands, of conveniences every day because of information technology. Through billions of transactions across the society, technology improves our lives in ways unimaginable two decades ago.

Before 1995, nobody ever traded spare soccer tickets in under an hour, on a Tuesday night, without even changing his evening routine. If soccer tickets are too trivial (you must not understand the game), the same dynamics deliver incremental, but massive improvements in material wealth, awareness, education, and social and political empowerment to everyone—even those who don’t live “online.”

Sometimes debates about technology regulation are cast in doom and gloom terms like the Malthusian arguments about material wealth. But the benefits we already enjoy thanks to technology are not going away, and they will continue to accrue. We are arguing about the pace of progress, not its existence.

This is no reason to let up in our quest to give technologists and investors the freedom to produce more innovations that enhance everyone’s well-being even more. But it does counsel us to be optimistic and to teach this optimism to our ideological opponents, many of whom seem to look ahead and see only calamity.

Technology: Debating the Pace of Progress is a post from Cato @ Liberty - Cato Institute Blog

Peter Van Doren points me to some revealing passages in a new article in the Journal of Economic Perspectives. In “Subsidizing Creativity through Network Design: Zero-Pricing and Net Neutrality,” Robin S. Lee and Tim Wu caution against tiered pricing for Internet access services, writing:

[U]nless sufficient bandwidth and quality of service can be guaranteed for the “free” Internet, there is a risk that . . . tiering will serve to sidestep de facto prohibition on termination fees. . . . [A] priced-priority system could simply become a de facto fee charged for all content providers if the “free” Internet was of sufficiently poor quality and consumers shifted their usage behavior accordingly. . . . [T]his might dampen the introduction of new content and services and eliminate the subsidy for content innovation currently provided by net neutrality.

Locking in net neutrality by regulation would lock in a subsidy to content providers. Lee and Wu prefer it, and many of us may like the results, but it’s hard to call a subsidy regime “neutral.”

From the Oxymoron File: The Neutral Subsidy is a post from Cato @ Liberty - Cato Institute Blog

Jeff Jonas has published an important post: “Your Movements Speak for Themselves: Space-Time Travel Data is Analytic Super-Food!”

More than you probably realize, your mobile device is a digital sensor, creating records of your whereabouts and movements:

Mobile devices in America are generating something like 600 billion geo-spatially tagged transactions per day. Every call, text message, email and data transfer handled by your mobile device creates a transaction with your space-time coordinate (to roughly 60 meters accuracy if there are three cell towers in range), whether you have GPS or not. Got a Blackberry? Every few minutes, it sends a heartbeat, creating a transaction whether you are using the phone or not. If the device is GPS-enabled and you’re using a location-based service your location is accurate to somewhere between 10 and 30 meters. Using Wi-Fi? It is accurate below 10 meters.

The process of deploying this data to markedly improve our lives is underway. A friend of Jonas’ says that space-time travel data used to reveal traffic tie-ups shaves two to four hours off his commute each week. When it is put to full use, “the world we live in will fundamentally change. Organizations and citizens alike will operate with substantially more efficiency. There will be less carbon emissions, increased longevity, and fewer deaths.”

This progress is not without cost:

A government not so keen on free speech could use such data to see a crowd converging towards a protest site and respond before the swarm takes form — detected and preempted, this protest never happens. Or worse, it could be used to understand and then undermine any political opponent.

Very few want government to be able to use this data as Jonas describes, and not everybody wants to participate in the information economy quite so robustly. But the public can’t protect itself against what it can’t see. So Jonas invites holders of space-time data to reveal it:

[O]ne way to enlighten the consumer would involve holders of space-time-travel data [permitting] an owner of a mobile device the ability to also see what they can see:

(a) The top 10 places you spend the most time (e.g., 1. a home address, 2. a work address, 3. a secondary work facility address, 4. your kids school address, 5. your gym address, and so on);

(b) The top three most predictable places you will be at a specific time when on the move (e.g., Vegas on the 215 freeway passing the Rainbow exit on Thursdays 6:07 – 6:21pm — 57% of the time);

(c) The first name and first letter of the last name of the top 20 people that you regularly meet-up with (turns out to be wife, kids, best friends, and co-workers – and hopefully in that order!)

(d) The best three predictions of where you will be for more than one hour (in one place) over the next month, not counting home or work.

Google’s Android and Latitude products are candidates to take the lead, he says, and I agree. Google collectively understands both openness and privacy, and it’s nimble enough still to execute something like this. Other mobile providers would be forced to follow this innovation.

What should we do to reap the benefits while minimizing the costs? The starting point is you: It is your responsibility to deal with your mobile provider as an adult. Have you read your contract? Have you asked them whether they collect this data, how long they keep it, whether they share it, and under what terms?

Think about how you can obscure yourself. Put your phone in airplane mode when you are going someplace unusual – or someplace usual. (You might find that taking a break from being connected opens new vistas in front of your eyes.) Trade phones with others from time to time. There are probably hacks on mobile phone system that could allow people to protect themselves to some degree.

Privacy self-help is important, but obviously it can be costly. And you shouldn’t have to obscure yourself from your mobile communications provider, giving up the benefits of connected living, to maintain your privacy from government.

The emergence of space-time travel data begs for restoration of Fourth Amendment protections in communications data. In my American University Law Review article, “Reforming Fourth Amendment Privacy Doctrine,” I described the sorry state of the Fourth Amendment as to modern communications.

The “reasonable expectation of privacy” doctrine that arose out of the Supreme Court’s 1967 Katz decision is wrong—it isn’t even founded in the majority holding of the case. The “third-party doctrine,” following Katz in a pair of early 1970s Bank Secrecy Act cases, denies individuals Fourth Amendment claims on information held by service providers. Smith v. Maryland brought it home to communications in 1979, holding that people do not have a “reasonable expectation of privacy” in the telephone numbers they dial. (Nevermind that they actually have privacy—the doctrine trumps it.)

Concluding, apropos of Jonas’ post, I wrote:

These holdings were never right, but they grow more wrong with each step forward in modern, connected living. Incredibly deep reservoirs of information are constantly collected by third-party service providers today.

Cellular telephone networks pinpoint customers’ locations throughout the day through the movement of their phones. Internet service providers maintain copies of huge swaths of the information that crosses their networks, tied to customer identifiers. Search engines maintain logs of searches that can be correlated to specific computers and usually the individuals that use them. Payment systems record each instance of commerce, and the time and place it occurred.

The totality of these records are very, very revealing of people’s lives. They are a window onto each individual’s spiritual nature, feelings, and intellect. They reflect each American’s beliefs, thoughts, emotions, and sensations. They ought to be protected, as they are the modern iteration of our “papers and effects.”

600 Billion Data Points Per Day? It’s Time to Restore the Fourth Amendment is a post from Cato @ Liberty - Cato Institute Blog

Last week, I had the opportunity to testify before the House Science Committee‘s Subcommittee on Technology and Innovation on the topic of “cybersecurity.” I have been reluctant to opine on it because of its complexity, but I did issue a short piece a few months ago arguing against government-run cybersecurity. That piece was cited prominently in the White House’s “Cyberspace Policy Review” and — blamo! — I’m a cybersecurity expert.

Not really — but I have been forming some opinions at a high level of generality that are worth making available. They can be found in my testimony, but I’ll summarize them briefly here.

First, “cybersecurity” is a term so broad as to be meaningless. Yes, we are constructing a new “space” analogous to physical space using computers, networks, sensors, and data, but we can no more secure “cyberspace” in its entirety than we can secure planet Earth and the galaxy. Instead, we secure the discrete things that are important to us — houses, cars, buildings, power lines, roads, private information, money, and so on. And we secure these things in thousands of different ways. We should secure “cyberspace” the same way — thousands of different ways.

By “we,” of course, I don’t mean the collective. I mean that each owner or controller of a prized thing should look out for its security. It’s the responsibility of designers, builders, and owners of houses, for exmple, to ensure that they properly secure the goods kept inside. It’s the responsibility of individuals to secure the information they wish to keep private and the money they wish to keep. It is the responsibility of network operators to secure their networks, data holders to secure their data, and so on.

Second, “cyber” threats are being over-hyped by a variety of players in the public policy area. Invoking “cyberterrorism” or “cyberwar” is near-boilerplate in white papers addressing government cybersecurity policy, but there is very limited strategic logic to “cyberwarfare” (aside from attacking networks during actual war-time), and “cyberterrorism” is a near-impossibility. You’re not going to panic people — and that’s rather integral to terrorism — by knocking out the ATM network or some part of the power grid for a period of time.

(We weren’t short of careless discussions about defending against “cyber attack,” but L. Gordon Crovitz provided yet another example in yesterday’s Wall Street Journal. As Ben Friedman pointed out, Evgeny Morozov has the better of it in the most recent Boston Review.)

This is not to deny the importance of securing digital infrastructure; it’s to say that it’s serious, not scary. Precipitous government cybersecurity policies — especially to address threats that don’t even have a strategic logic — would waste our wealth, confound innovation, and threaten civil liberties and privacy.

In the cacophony over cybersecurity, an important policy seems to be getting lost: keeping true critical infrastructure offline. I noted Senator Jay Rockefeller’s (D-WV) awesomely silly comments about cybersecurity a few months ago. They were animated by the premise that all the good things in our society should be connected to the Internet or managed via the Internet. This is not true. Removing true critical infrastructure from the Internet takes care of the lion’s share of the cybersecurity problem.

Since 9/11, the country has suffered significant “critical-infrastructure inflation” as companies gravitate to the special treatments and emoluments government gives owners of “critical” stuff. If “criticality” is to be a dividing line for how assets are treated, it should be tightly construed: If the loss of an asset would immediately and proximately threaten life or health, that makes it critical. If danger would materialize over time, that’s not critical infrastructure — the owners need to get good at promptly repairing their stuff. And proximity is an important limitation, too: The loss of electric power could kill people in hospitals, for example, but ensuring backup power at hospitals can intervene and relieve us of treating the entire power grid as “critical infrastructure,” with all the expense and governmental bloat that would entail.

So how do we improve the state of cybersecurity? It’s widely believed that we are behind on it. Rather than figuring out how to do cybersecurity — which is impossible — I urged the committee to consider what policies or legal mechanisms might get these problems figured out.

I talked about a hierarchy of sorts. First, contract and contract liability. The government is a substantial purchaser of technology products and services — and highly knowledgeable thanks to entities like the National Institutes of Standards and Technology. Yes, I would like it to be a smaller purchaser of just about everything, but while it is a large market actor, it can drive standards and practices (like secure settings by default) into the marketplace that redound to the benefit of the cybersecurity ecology. The government could also form contracts that rely on contract liability — when products or services fail to serve the purposes for which they’re intended, including security — sellers would lose money. That would focus them as well.

A prominent report by a working group at the Center for Strategic and International Studies — co-chaired by one of my fellow panelists before the Science Committee last week, Scott Charney of Microsoft — argued strenuously for cybersecurity regulation.

But that begs the question of what regulation would say. Regulation is poorly suited to the process of discovering how to solve new problems amid changing technology and business practices.

There is some market failure in the cybersecurity area. Insecure technology can harm networks and users of networks, and these costs don’t accrue to the people selling or buying technology products. To get them to internalize these costs, I suggested tort liability rather than regulation. While courts discover the legal doctrines that unpack the myriad complex problems with litigating about technology products and services, they will force technology sellers and buyers to figure out how to prevent cyber-harms.

Government has a role in preventing people from harming each other, of course, and the common law could develop to meet “cyber” harms if it is left to its own devices. Tort litigation has been abused, and the established corporate sector prefers regulation because it is a stable environment for them, it helps them exclude competition, and they can use it to avoid liability for causing harm, making it easier to lag on security. Litigation isn’t preferable, and we don’t want lots of it — we just want the incentive structure tort liability creates.

As the distended policy issue it is, “cybersecurity” is ripe for shenanigans. Aggressive government agencies are looking to get regulatory authority over the Internet, computers, and software. Some of them wouldn’t mind getting to watch our Internet traffic, of course. Meanwhile, the corporate sector would like to use government to avoid the hot press of market competition, while shielding itself from liability for harms it may cause.

The government must secure its own assets and resources — that’s a given. Beyond that, not much good can come from government cybersecurity policy, except the occassional good, long blog post.

Some Thinking on “Cyber” is a post from Cato @ Liberty - Cato Institute Blog