Bottom-up

My friend Jerry Brito is one of the best-connected and most insightful observers of the Internet I know, so when he starts talking up an Internet trend, I pay attention. But after reading his case for Bitcoin, a new digital currency, I remain a skeptic.

The article is worth reading in full, but here’s an important part of his case for Bitcoin:

The web has also seen all-purpose digital currencies, from defunct dot-com bubble start-ups Flooz and Beenz, to the slightly more successful e-gold. Unlike cash, however, digital currencies to date have had a third party intermediary monitoring transactions. That’s because digital cash is different from physical cash in one very important way: If I hand you a 100 euro bill, I no longer have it. You can’t be as sure of that, however, when the cash is just 1′s and 0′s. So it’s been necessary to have a trusted intermediary deduct the amount from the payer’s account, and add it to the payee’s.

Bitcoin is the first online currency to solve the so-called “double spending” problem without resorting to a third-party intermediary. The key is distributing the database of transactions across a peer-to-peer network. This allows a record to be kept of all transfers, so the same cash can’t be spent twice–because it’s distributed (a lot like BitTorrent), there’s no central authority. This makes digital Bitcoins like cash dollars or euros: Hand them over directly to a payee, and you don’t have them anymore, all without the help of a third party.

It’s an intriguing concept, but the fundamental question about any currency is whether its value will be stable over time. I’ll discuss why this seems dubious in a series of two posts. Today I’ll focus on the demand side; tomorrow I’ll consider claims that the supply of Bitcoins will be more stable than traditional currencies.

The fundamental demand-side problem is that it’s not clear why anyone would want Bitcoins—which are, after all, just entries in a database—in the first place. The obvious retort is that the same objection could be made of any fiat money system. The value of a fiat currency like the dollar is a matter of social convention: it’s valuable to me because other people will accept it as payment for stuff I want to buy. Theoretically, if you persuaded everyone that dollars were worthless, this would become a self-fulfilling prophesy. Conversely (the argument goes) all we have to do to make Bitcoins a “real” currency is to persuade some people that it’s valuable. And apparently, the creators of Bitoin have already succeeded in this task.

But dollars have at least two advantages over Bitcoins. The obvious difference is that the United States government requires taxes to be paid in US dollars. Since federal taxes represent a significant fraction of most peoples’ income, they will continue to demand dollars even if they prefer another currency for day-to-day transactions.

The more subtle difference has to do with network effects and transaction costs. Dollars underpin the American economy in essentially the same way that the TCP/IP protocol underpins the Internet. The original choice of a medium of exchange was arbitrary, but people needed to pick something and once the dollar was chosen it acquired tremendous momentum. Convincing Americans to switch to a currency other than the dollar is roughly as futile as convincing the Internet to switch to a protocol other than TCP/IP, and for the same reasons.

First, people have made tremendous investment—emotional, financial, and technological—in dollars. Millions of vending machines and cash registers are designed to work with dollar-denominated coins and bills. People expect to see dollar-denominated prices in stores, and they have an intuitive sense for what’s a reasonable dollar-denominated price for a gallon of gas or a dozen eggs. They have dollar-denominated bank accounts, get dollar-denominated paychecks, and expect to retire on dollar-denominated pensions. It’s really hard to persuade Americans to use something else.

Second, currencies are subject to massive network effects. It’s much more convenient to carry a currency that 99.9 percent of people accept than the currency that 0.1 percent will take. People who hold obscure currencies have to waste time and money converting it to a more popular currency before they can perform everyday transactions. And people who conduct business in multiple currencies not only have to perform a lot of extra math, they also have to worry about exchange rate risk—the risk that a change in exchange rate will suddenly make a previously profitable business model suddenly unprofitable.

Together these factors make the demand for dollars “sticky.” It’s hard to see any analogous stickiness in the demand for Bitcoins. As far as I can tell, there are few, if any, markets where Bitcoin transactions are more convenient than traditional fiat currency transactions. I’ve read some claims that Bitcoin is popular in the drug trade and other illicit markets, where the lack of intermediaries has obvious advantages. It’s hard to judge whether these claims are true, or whether such markets are substantial enough to support a new global currency, but I have my doubts.

Illicit uses aside, the demand for Bitcoins seems to be driven by a combination of speculation and ideological enthusiasm. And we have a word for an asset whose value is driven by irrational exuberance: a bubble. I predict this one will pop once the novelty wears off.

Like Conor Friedersdorf, I’m thrilled that Andrew Sullivan has gotten his green card. And I also agree with Conor that we Americans should be embarrassed that it took 18 years:

Think about what his case says about our system as a whole. Here’s a guy who was born in Britain, our closest ally in the world. He did his undergraduate work at Oxford University, and holds two post-graduate degrees from Harvard University. He speaks fluent English, and is better versed in American civics than the vast majority of US citizens. Tremendously successful in his career, he’s a huge net plus for the federal treasury, and as small a financial risk as can be imagined: if his employer shuttered tomorrow, he could survive on donations from readers, or get a lucrative book contract without trying, or start doing more speaking engagements and survive on fees alone.

Finally, Andrew had an immigration lawyer – one imagines a very good one – helping him through this years long process. Despite all that, it took this man, an ideal immigrant as measured by the self-interest of the receiving country, 18 years just to get permission to stay permanently!

This is absurd, and as effective a disincentive to go through the legal process as can be imagined. Thankfully it all worked out in the end for Andrew, as so many things seem to be doing – the America that just welcomed him is more tolerant of gay marriage, more accepting of HIV (one of many complications in his bid to become a citizen), and more celebratory toward beards than the one where he first arrived. Still, the story of Andrew Sullivan’s immigration ordeal is as powerful an example you’ll find of the need for a better immigration protocol – one that is easier on folks who want to come here legally, and more advantageous for an America than can always use more intelligent, hard-working achievers.

I think people underestimate the massive costs of our dysfunctional immigration system to Americans. In the contemporary immigration debate, proposals to liberalize immigration rules are often framed as acts of generosity by American citizens toward would-be immigrants. But Sullivan’s case illustrates how massively counterproductive our immigration policies are from the perspective of narrow American self-interest. At any point over the last 18 years, Sullivan could have decided that getting his green card was too much trouble and moved back to his native country. If he had done that, both the United States economy and the United States Treasury would have been poorer as a result.

Few potential immigrants are as talented or successful as Sullivan is, but there are probably millions of people who are almost certain to be net taxpayers and net contributors to our economy. It’s ridiculous that we don’t offer such individuals a fast and predictable process for obtaining a green card.

This month, Cato Unbound is hosting a debate on parking policy. Donald Shoup kicks things off with a compelling argument for a quintessential libertarian policy proposal: repeal minimum parking regulations and use market rates to set on-street parking. Shoup explains how setting prices according to market demand will reduce congestion and allocate scarce parking spaces to their highest-valued uses.

My Cato colleague Randal O’Toole responded with an essay that I found puzzling:

Donald Shoup has done some excellent work on parking issues, and I fully support his proposals for market pricing of on-street parking and eliminating minimum-parking requirements for developers. I question, however, his proposal for what to do with the revenue from on-street parking and his closing diatribe against urban sprawl.

As Dr. Shoup is fully aware, American cities are at the heart of a battle over the future of American mobility. Urban planners and others seek to greatly reduce the role of the automobile in our future. The state of Washington has even passed a law mandating a 50 percent reduction in per capita driving by 2050. Dr. Shoup’s rhetoric about the evils of urban parking and its contribution to so-called sprawl helps to incite those who are trying to reduce our mobility.

O’Toole almost seems to be responding to a different article than the one Shoup published. I cannot find a “diatribe against urban sprawl” in Shoup’s essay. Shoup does point out that minimum parking regulations promote sprawl, but that seems hard to deny and in any event does not constitute a “diatribe.” Similarly, I’m hard pressed to find any “rhetoric about the evils of urban parking” in Shoup’s piece. All I see is an argument that minimum parking rules produce more parking than is economically efficient. Again, this is a claim that a Cato scholar should regard as almost self-evident.

What’s going on here? O’Toole is right that “American cities are at the heart of a battle over the future of American mobility.” But he’s wrong to think that only one side has enlisted government assistance. As O’Toole notes, some jurisdictions have enacted pro-density regulations like “urban-growth boundaries that create artificial land shortages, maximum-parking limits, and subsidies to high-density development.” But there are plenty of government policies pushing in the other direction.

Shoup’s example, minimum parking regulations, is just one of many. During the second half of the 20th Century, urban planners across the nation destroyed urban neighborhoods to make way for freeways, doing damage that persists to this day. They have also continued to use the power of eminent domain to destroy high-density housing stock and replace it with suburban-style housing. City earnings taxes in New York, Philadelphia, St. Louis, and elsewhere push businesses out to the suburbs. Poor government schools make life in the city unappealing for non-wealthy families with children. Municipalities across the country impose minimum lot sizes, minimum building setbacks, and maximum occupancies. New York uses “floor area ratio” regulations to limit building density. Congress has capped the height of buildings in Washington DC. Most other large cities have similar regulations.

So is the net effect of all these policies pro- or anti-density? If you’re a believer in limited government, the right answer is “who cares?” We should repeal pro-density regulations and subsidies. We should also repeal anti-density regulations and subsidies. The net result—whether our cities end up denser or more suburban—is simply not relevant.

Yet O’Toole seems so invested in the culture war between urbanists and suburbanites that he’s lost sight of the bigger picture. A large fraction of his essay is devoted to complaining about a “powerful anti-automobile movement” and an “elitist backlash against low-density development.” But why should libertarians regard people who prefer high-density, walkable neighborhoods as opponents? Government regulations restrict their freedom as surely as they restrict the freedom of suburbanites. If you’re an advocate of liberty, rather than merely a partisan for the automobile, then advocates of deregulatory urbanism such as Shoup, Matt Yglesias, Ed Glaeser, and Ryan Avent should be counted as allies. We should be promoting their work, not complaining about it.

Aaron Swartz has an imaginary socratic dialogue with Matt Yglesias about high-stakes testing:

We once allowed each teacher to direct their classroom in their own way, but high-stakes tests and “value-added” measurements now force all of them into the same mold.

Isn’t this a good thing, demands Matt Yglesias? We have science that shows good teaching can make a huge difference in people’s lives—doesn’t everyone deserve the benefits that come from having a good teacher? He dismisses the stories of the individual horrors that result from this process as mere anecdote—inevitably in imposing a one-size-fits-all solution there will be some negative side effects for a few, but the benefits for the many outweigh the costs. Again, I have tried to put this position in its most favorable light (I hope Matt will correct me if I’ve failed) but I’m flabbergasted by its callous naiveté. The problem with allowing hard incentive systems to squeeze out individual judgment is inevitably that people begin trying to game the system—they cheat on the tests, they coach students on the answers, they cut recess and art for more drill-and-skill. To dismiss the on-the-ground evidence of how badly these tests hurt kids, in favor of some Olympian view of the benefits of rising test scores, is ludicrous when the on-the-ground view is telling you the test scores are actually bogus.

Fine, Matt says, that just means we need to crack down on cheating. (This is always the first response of the incentive designer—we just need to improve the incentive system!) The fact that a couple teachers cheat on their students’ tests is no reason to give up on all the benefits better teachers can being. And that’s true, but blatant cheating is just the tip of the iceberg.

I think this is a great point, and it echoes some of the themes I’ve written about before. The testing regime that was the centerpiece of George W. Bush’s No Child Left Behind is a classic example of what James Scott calls high modernism. And it has the same flaws as high modernist projects everywhere: assuming the characteristics being measured are the only ones that matter, and ignoring the costs of the standardization required to do the measuring.

Aaron’s critique of current policies is spot-on, but his suggested alternatives are unsatisfying. He suggests that we “measure students by real results, rather than artificial tests.” And he suggests that we “put [our] trust in teachers” to serve their students. These suggestions aren’t wrong so much as they’re at the wrong level of abstraction. If I had kids, I’d gladly put them in a classroom run by Aaron according to Swartzian pedagogical principles. But as far as I know Aaron isn’t going to become a school teacher, and in any event there’s only one of him.

No Child Left Behind was trying to address a real problem: there really were (and are) schools and teachers who were failing to educate the children entrusted to them. President Bush’s solution was a bad one, as my colleagues at Cato have been arguing for close to a decade. But the problems with our schools long predate the high-stakes testing fad, and they will remain after we do away with them. The question isn’t how to run an individual classroom or school—we have plenty of examples of effective teachers. The question is how to replicate their successes at scale.

My own view is that the fundamental problem is that our education system is organized around a system of geographically-based monopolies. Traditionally, all non-wealthy children within a given district are sent to a school assigned by the local school bureaucracy. This kind of system is dramatically inegalitarian, as the worst schools tend to be in the poorest neighborhoods. And it leaves relatively little room for the kinds of radical pedagogical experimentation Aaron favors; only children with relatively wealthy parents have the option to choose non-traditional methods of instruction.

This is one reason I think Aaron’s hostility to charter schools is misplaced. Charter schools and high-stakes testing are largely advocated by the same people, and high-stakes testing is often part of the charter school evaluation process. But they’re conceptually distinct policies, and it’s perfectly possible to have charter schools that don’t rely on high-stakes testing. And whatever else you might say about charter schools, they’re certainly more amenable to bottom-up experimentation than traditional public school bureaucracies—especially in large urban districts that are most in need of reform.

Unfortunately, thanks to peculiarities of American political culture, decentralizing the provision of education has come to be regarded as a right-wing idea in the United States. But there’s nothing particularly conservative about making it easier for a guy like Aaron Swartz to create a school organized on dramatically different principles than existing public schools, and for non-wealthy parents to send their kids there. Insights about improving the performance of individual schools is important, but not as important as solving the meta-problem of making the education system as a whole more hospitable to experimentation and entrepreneurship.

In my last post I promised to consider how online news organizations can produce expensive content like reporting from Iraq.

Sites wanting to produce high-quality, expensive content face a chicken-and-egg problem. If you have a large audience, you can spread the costs of producing high-quality content over a larger base of readers. And if you have have a lot of high-quality content, that content will draw large numbers of readers. But if you have neither a large readership nor a lot of high-quality content, how do you get there?

The answer, of course, is that you bootstrap the process with cheap, sensationalistic content. You serve up smut, inane lists, and unpaid punditry. This kind of content is extremely cheap to produce and it draws a lot of readers.

But precisely because these kinds of content are so cheap, they attract a lot of competition and don’t stay profitable for very long. And so to keep growing, the largest and most successful sites move “up market” by hiring actual reporters who can produce original, non-sensationalistic content—the kind of content that smaller competitors can’t easily duplicate. The largest sites are in the best position to do this because they can spread the fixed costs of having a salaried reporters over a larger number of ad impressions.

This process shouldn’t surprise us, because it perfectly fits Clay Christensen’s model of disruptive innovation. Consider this example from the steel industry, drawn from the Christensen paper I wrote about last month:

Minimills first became technologically viable in the mid-1960s. The quality of the steel that minimills initially produced was poor because they melted scrap of uncertain and varying chemistry in their furnaces. The only market that would buy what the minimills made was the concrete reinforcing bar, or rebar, market because the specifications for rebar are loose. Once rebar is buried in cement, you can’t verify whether the steel has met the specifications. Rebar was therefore an ideal market for low-quality steel.

As the minimills attacked the rebar market, the integrated mills were actually happy to be rid of that business. Their gross profit margins on rebar often hovered near 7 percent…

All was well in this relationship until 1979, when the minimills finally succeeded in driving the last integrated mill out of the rebar market. Historical pricing statistics show that the price of rebar then collapsed by 20 percent. Why? A low-cost strategy only works when there are high-cost competitors in your market. After the last integrated mill had fled up-market and the low-cost minimill was only pitted against other low-cost minimills in a commodity market, competition quickly drove prices down to the point that none of them could make money.

The minimills soon looked up-market, and what they saw spelled relief. If they could just figure out how to make bigger and better steel—shapes such as angle iron, rails, and rods—they could roll tons of money again because the margins there were 12 percent. As the minimills extended their ability and attacked that tier of the market, the integrated mills were again relieved to be rid of that business because it just didn’t make sense to defend a 12-percent-margin business when the alternative was to invest to gain share in structural beams, where margins were 18 percent…

Peace characterized the industry until 1984 when the minimills finally succeeded in driving the last integrated mill out of the bar, rod, and rail market, which caused the minimills to reap the same reward for their victory: With low-cost minimill pitted against low-cost minimill, prices collapsed by 20 percent.

The minimills had to move up-market again.

The story ends with the minimills driving most of the integrated steel mills into bankruptcy.

Of course news isn’t steel. But I think this analogy helps us understand the extremely long chart that accompanies Nate Silver’s post about the NYT paywall. It shows which news outlets are most often credited with breaking news stories. The top 50 slots are dominated by traditional news organizations. Online-only websites are much further down the list, and they produce a trivial fraction of the overall reportage. But the distribution of topics among those sites is interesting. Most of them fall into a handful of categories: tech and gadgets, celebrity gossip, and politics. The web increasingly dominates these categories of news.

The disruptive technology of the web is busy devouring the rebar market of the news business. The most successful sites are getting tired of the thin margins at the lowest rungs of the latter and have started looking upward. The New York Times alone generated $387.3 million in digital revenue last year. That might not seem like a lot of money to the grey lady, but it looks like a huge jackpot to a still-small company like the Huffington Post. They—and dozens of their competitors—are working hard to find ways to take a piece of that pie.

Now obviously this isn’t an explanation of how web-based sites will produce high-end reporting. I’ve suggested a few possible strategies in previous posts, but I think focusing too much on the specifics will miss the broader trend. Without the technological and cultural baggage of a print past, web-only publications inherently have lower overhead. And the smaller average size of web-based publications means that the rate of experimentation is much higher. It’s only a matter of time before somebody figures out how to apply the low-costs tools of the web to high-value reporting. And the nimble, collaborative nature of the web means that successful models will be copied rapidly.

People look at today’s Huffington Post and conclude that the web can only do cheap, sensationalistic content. But in 1980, people looked at the minimills (and the microcomputer) and dismissed them as curiosities that could only serve the lowest rungs of their respective markets. But that was a misunderstanding of the economics of disruptive technologies. They always start at the low end of the market, but they rarely stay there.

Judging from the comments on my two posts last week on reporting and paywalls, I didn’t do a good job of making my case. I think that’s partly because this is an argument about culture as much as economics. Traditional newspaper journalists have a certain set of assumptions about the nature of journalism, the obligations of journalists, and the proper relationship between a journalist and her readers. The web has its own culture with its own set of answers to these questions. Unfortunately, the “debate” over the Times paywall has largely consisted of people on each side loudly reiterating their own side’s assumptions without paying much attention to what the other side has to say. Needless to say, that hasn’t been very illuminating.

So if you’ll forgive me for yet another post (actually two!) on an over-blogged subject, I want to step back and talk explicitly about some of the baseline assumptions made by these two cultures (the web and the print press, respectively). Every culture is solipsistic, with the result that assumptions that seem almost self-evident in one culture will strike the other culture as implausible or even perverse. It’s only by talking about these assumptions explicitly that we can make some sense of the ongoing argument between these communities.

As is often the case, the web/print culture clash is rooted in the differing capabilities of their respective technologies. Daily newspapers were born in an era of information scarcity. Distributing a newspaper is expensive enough that most people tended to take just one.

This meant that a newspaper had to be all things to all people: they needed to cover a full spectrum of topics and do it in a way that didn’t assume the reader had access to any other publications.

The web is obviously different. There are thousands of websites that offer news coverage. Readers don’t generally go to a single news website and read it “cover to cover.” Rather, they sample from a wide variety of sources. And this means that news sites don’t need to be all things to all readers. They can focus on a particular topic to cover in depth. They can write for a narrow audience, skipping background exposition that a general-interest outlet would have to cover.

Most importantly, they can link to other sites. Links are profoundly important for the character of the web because they allow writers to make incremental contributions to ongoing conversations. Rather than trying to be “all things to all people,” writers can link to and quote from conversations that are happening somewhere else and then make a (possibly small) contribution of their own. This division of labor opens the conversation up to many more people. A nuclear physicist may not feel competent to write an AP-style news story about the Fukushima nuclear incident, but he can link to a news story about it and then offer his expert opinion. And his thoughts can, in turn, be incorporated into future writing by non-experts.

This helps explain one of the perpetual sources of friction between mainstream media outlets and bloggers. Mainstream media outlets prize original reporting to the point that they’ll perform completely redundant reporting rather than citing another journalist’s work. In contrast, on the web it’s considered perfectly kosher to quote and link to another news outlet without doing original reporting. What’s not kosher online is failing to give credit to the original source for a story—even if subsequent reports are independently reported.

Indeed, the norm of linking to original sources is strongly enforced within the blogosphere. If a site develops a reputation for failing to credit sites that break stories, other sites will “boycott” it by refusing to link to its stories. The result is an economic model for rewarding sites that do original reporting. Web traffic operates as a de facto currency.

What we have here, at root, is a conflict between autarky and the division of labor. The newspaper style of news gathering is expensive because, like any autarkic system, it eschews the benefits of specialization. The Times does some kinds of reporting superbly and efficiently, but it does many other kinds of reporting clumsily and wastefully. On the web, in contrast, each news outlet focuses on producing the types of information it can produce most efficiently and “trades” with other publications for other kinds of information. The result is a decentralized system that produces news at much lower average cost than the centrally-planned model of a newspaper.

OK, so with that background, it’s worth going back to our running example of covering an away baseball game. Newspaper partisans want to know who is going to pay to send a New York reporter to Toronto to cover a Yankees away game. The answer is that this is the wrong question. The right question is: how is a New York publication going to get information about a Toronto baseball game to its readers? And the answer is there’s likely to be plenty of information about the game on the web already. So the 21st century news outlet’s job isn’t necessarily to do original reporting. Rather, its job is largely to help readers find the information that’s already out there, possibly with a bit of original reporting to fill in the gaps.

The obvious objection is that there’s no guarantee that there will be any coverage for the New York publication to link to. But although this is true in a trivial sense, it’s not actually much of an objection. There’s no law or institution guaranteeing I’ll be able to buy groceries next year, but I don’t lose sleep over the possibility that all the supermarkets in my town will go out of business—I’m confident someone will find a way to satisfy my demand for food. Similarly, people want to read about Yankees games in Toronto. If there’s a shortage of sports reporting in Toronto, one of the millions of people in Toronto will step in and fill the gap. Asking for an explanation of precisely how this will be done is the same kind of conceptual error as asking which farmers will produce the food I’ll have for dinner next week. The content in question isn’t too expensive to produce and there’s a financial incentive to produce it. So someone will.

That’s fine for baseball games, I hear you say, but who’s going to pay for the New York Times‘s Baghdad bureau? There probably aren’t a lot of Iraqis who will step up to write about the war for an American audience, no matter how much traffic such a blog would generate. I’ll address that question in my next post.

Reihan Salam was kind enough to link to Monday’s post comparing the New York Times to Pro Publica, which led Matthew Vadum of the Capital Research Center to lambast him for promoting what Vadum considers an “awful leftist media outlet.” I’m familiar enough with Pro Publica’s work to know they’re not awful and not particularly leftist, so I asked for details. He pointed me to this CRC report purporting to document the left-wing biases of the organization.

The report is six pages long. It spends the first three pages criticizing its founders, Herb and Marion Sandler, for their role in the subprime mortgage crisis and their left-leaning bias. Not until page 4 of the 6-page report does it get around to telling us anything about the organization’s work. Here is CRC’s evidence that Pro Publica “churns out little more than left-wing hit pieces”:

• CRC faults Pro Publica’s coverage of the ACORN scandal: “On Oct. 16, ProPublica’s website linked to an ABC News story entitled, ‘Experts: McCain ACORN Fears Overblown.’” And “on Oct. 29, a ProPublica reporter ignored the ACORN voter fraud reports and wrote a story instead about the background of a public affairs group that had attacked ACORN in a prepared advertisement in the New York Times.” The report notes that the Sandlers are supporters of ACORN.
• According to CRC, Pro Publica focused too much time investigating Sarah Palin’s role in the “Road to Nowhere” and Alaska earmarks.
• Pro Publica largely ignored the Jeremiah Wright controversy.
• The report lists various Obama administration scandals that Pro Publica failed to cover. However, it acknowledges that there were stories about Timothy Geithner and Tom Daschle’s tax troubles. Also “ProPublica reporters should receive high praise for their stories on Obama’s stimulus package and banking bailouts, on recent business and financial scandals, and on other issues related to open records and open government.”

And, um, that’s it. Now keep in mind that this is supposed to be the case against Pro Publica. One would have expected them to focus on the worst examples of left-wing bias and downplay their best and most balanced reporting. So it’s truly remarkable that their strongest evidence ranges from actually good editorial decisions (ignoring Jeremiah Wright) to quibbles about story selection (supposedly too much criticism of Palin and not enough of Obama). That’s remarkably weak sauce.

In particular, the CRC failed to find so much as a whiff of actual journalistic malfeasance. Nor is there any attempt at the kind of statistical analysis that could reveal a systematic partisan slant to their work. In short, no evidence that the organization’s work is either “awful” or “leftist.”

There’s a difference between good reporting that happens to be written by a left-leaning reporter (or funded by a left-leaning philanthropist) and partisan hackery. Conservative non-profits like CRC—and conservative media organizations like Fox News—have built an empire on conflating the two. But there is a difference, and it’s important to resist efforts to blur it.

As a counterpoint to the arguments I made yesterday, Reihan Salam points me to this article about MetroPCS, which is on deck to be the new #4 wireless carrier:

MetroPCS targets big city markets and keeps their prices low by only using their own networks in dense urban areas that are cheap to serve. They have been adept at securing roaming agreements to use competitor’s networks in other areas, so their cost to serve 90% of the country is a fraction of what it costs the larger companies. In fact, last year it cost the company only $18.49 a month to serve the average customer. That lets MetroPCS cut its rates to just about half what AT&T and Verizon charge, only $40 per month (including taxes) for unlimited talk, text, and Web, and about $50 per month for the same plan with a 4G smartphone. That’s a pretty impressive profit margin. And since AT&T and Verizon don’t release their cost per customer, but we can bet it’s a lot higher.

This highlights a couple of important points. First, obviously it’s a bit of a simplification to say that there are only 4 wireless carriers in the United States. There are, in fact, more than a dozen wireless carriers offering service in at least parts of the US. Three or four of them operate their own networks in parts of the country and have a non-trivial number of subscribers. We can certainly hope that this merger will cause MetroPCS to position itself as the new T-Mobile, catering to customers who care more about low prices and freedom than comprehensive coverage.

Second, this provides some evidence that cellular carriers are capital-constrained more than spectrum-constrained. It sounds like MetroPCS’s strategy is to save money by only building out its network in dense areas. I don’t know if that means it only has spectrum licenses in those dense urban areas, or if it has licenses elsewhere that it’s under-utilizing.

On the other hand, this article suggests at least one important way the merger is likely to be bad for MetroPCS: it depends on the larger carriers for roaming access. Presumably consolidation increases the pricing power of the larger carriers and makes it harder for MetroPCS to rely (some might say “free-ride”) on the infrastructure of its larger rivals.

The fundamental question, which I don’t know enough about the spectrum market to answer, is how much MetroPCS and other smaller carriers could grow before hitting a hard brandwidth constraint. If they only have enough bandwidth to serve a fraction of the customers the major carriers do, then it’s hard for them to serve as effective competitors. But it’s also possible that their networks are small because it’s just too expensive to expand them, in which case the argument for blocking the merger would be much weaker.

AT&T, the second-largest mobile phone company, recently announced that it intends to purchase T-Mobile, the number four wireless firm. Jerry Brito has a typically insightful post in which he argues that this merger is all about spectrum scarcity:

If a carrier wants to acquire more spectrum to meet consumer demand for new services, it can’t thanks to the artificial scarcity created by federal policies that dedicate vast swaths of the most valuable spectrum to broadcast television and likely inefficient government uses. It’s gratifying to see the FCC now confronting the “spectrum crunch,” but waiting for a deal to be brokered on incentive auctions is a luxury carriers don’t have.

I think this analysis is correct as far as it goes. But I think it’s worth thinking about the implications in more detail.

There’s been a ton of discussion of whether the merger would increase or reduce prices. That’s important, of course, but it’s only part of the story. Wireless connectivity is not a commodity like electric power or iron ore. Consolidation has implications not only for our pocketbooks, but also for consumer choice and innovation.

Consider the handset market. Over the last few years, mobile platform vendors like Apple and Google have been fighting with wireless companies like Verizon and AT&T for control over the user experience. Verizon apparently refused to carry the original iPhone because Steve Jobs demanded too much creative control. Google has taken a more conciliatory stance toward the carriers, allowing them to customize the Android operating system for their own customers. Still, the introduction of Android represented a dramatic shift of power from Verizon to Google; Verizon’s willingness to take this step was almost certainly a reaction to AT&T’s success with the iPhone.

The long-run balance of power between the software industry and the wireless industry depends a lot on their respective concentration. Generally speaking, the more concentrated industry will be able to dictate terms to the less-concentrated one. The existence of T-Mobile, Verizon, and Sprint gives Apple leverage in its negotiations with AT&T, just as the existence of Google, Microsoft, and Palm give AT&T leverage against Apple. Take T-Mobile out of equation and power shifts from Silicon Valley to the carriers. Personally, I’d rather have Apple and Google in charge than AT&T and Verizon.

And wireless carrier competition is particularly important for small hardware and software firms trying to break into the wireless market. Large, bureaucratic companies tend to resist disruptive technologies. The fewer wireless carriers there are, the harder time the inventor of the next iPhone or Kindle will have finding a partner willing to carry it. It’s not a coincidence that T-Mobile, the smallest of the national carriers, also has a reputation for running the most open network.

Competition offers other non-price benefits too. Chris Soghoian points out that T-Mobile currently offers industry-leaing privacy protections for its customers. After the merger, that option is likely to go away. The larger carriers also have a long history of crippling various features of mobile phones that they believe will harm their business models. The existence of smaller, more accommodating firms like T-Mobile provides an important check on these practices.

Fine, I hear you say, but shouldn’t we be minimizing government interference with the free market? We absolutely should. But we have to keep the big picture in mind as we think about what that means.

Consider the 1984 breakup of AT&T. In some sense, this was government interference in the marketplace. But in the larger context of federal telecom policy, it was clearly an effort to undo some of the damage done by earlier government policies. After decades of pro-monopoly telecom regulation, AT&T had become a de facto creature of the state, enjoying outsized profits and control over their customers thanks to government regulation. Breaking the company up was a way of reducing this state-conferred power and getting us closer to the state we would have reached in a competitive market.

Similarly, in 2004 Cato published a paper by Lawrence J. White advocating government regulation of Fannie Mae and Freddie Mac. These were nominally private companies, but White recognized that their outsized profitability flowed from privileges that had been conferred on them by the government. Once again, the limited government position involved targeted regulation of private parties to prevent them from further exploiting their government-conferred privileges.

A similar principle seems to apply here. The Big Four wireless carriers are not monopolies or government-sponsored entities, but like Ma Bell they enjoy enhanced profits and power thanks to government-created barriers to entry. And it seems likely that their profits and power would be magnified by further consolidation. Blocking the merger, then, might be less a matter of the government interfering with the free market—which it has been doing constantly since 1926 anyway—as trying to ensure its ongoing interference with the free market doesn’t have larger anticompetitive effects than necessary. In other words, once the government has created a four-member oligopoly by force of law, it has an extra responsibility to prevent collusion among its members.

Does that mean the FCC should block the merger? I’m not sure. Maybe wireless networks are so expensive to build that the market just can’t support more than three of them no matter how much spectrum is available. It’s certainly possible that the merged AT&T-Mobile will enjoy lower costs thanks to economies of scale, and that competition with Verizon and Sprint will force them to pass those savings along to consumers. But I’m skeptical. And even if post-merger prices would decline, it’s not clear that these savings are worth losing the non-price advantages of competition.

The Clinton-era FCC reportedly had a rule prohibiting any single cellular firm from controlling more than a third of the available spectrum. The rule was dropped by the Bush FCC, but maybe it’s time to bring it (or maybe even a more stringent version) back. One advantage of this rule is that it’s clear and objective, with limited potential for favoritism. Another advantage is that it doesn’t involve the government directly second-guessing the outcome of the market process. If Jerry and I are wrong to think the industry is primarily constrained by spectrum, then the firms could divest enough spectrum to get under the cap before completing the merger. That would allow them to realize whatever economies of scale might exist on the network-building side while ensuring that there’s enough spectrum available for other firms wanting to compete with them.

Update: Jim Harper points out that the Cato paper’s first recommendation was full privatization of Fannie and Freddie, and that government regulation was presented as a fallback position. He’s absolutely right, and I should have been more clear about that.

But I think this underscores my point. My first choice would be comprehensive spectrum reform that would put the majority of the electromagnetic spectrum under a flexible-use property regime. Then there’d be plenty of spectrum available to firms that wanted to enter the wireless market and no need for government review of wireless mergers.

But that isn’t the world we live in, and so we have to think about second-best policies. And as with Fannie and Freddie, I think that might mean a certain amount of regulation. Those regulations should be as narrowly targeted as possible on mitigating the problems with the broader regulatory structure—in this case, the anti-competitive effects of artificial spectrum scarcity.

Last week I got in a bit of an argument with Adam Thierer, Randy Picker, and others about the New York Times paywall. I think a paywall is a bad business strategy, but my opposition to paywalls is mostly a matter of (as I tweeted to Adam) “personal principle rather than business advice.” Adam seemed confused by that statement, so let me see if I can elaborate.

This hilarious post from the Monkey Cage, “Monkey Cage to Begin Charging NY Times Employees for Access,” captures the essence of my objection in a funny way. There are millions of people on the web competing for the attention of readers. I am one of them. I’m writing this paragraph because I want people to read it. Having readers is valuable. They yield advertising revenue, interesting comments, professional opportunities, and more. I regard each and every one of my readers—you—as doing me a favor. So thanks.

In economic terms, what’s happening is that I’m giving you something—a copy of this post—whose marginal cost to me is basically zero. You’re giving me something—your time—that is far more scarce and valuable. Since I’m getting the better end of the deal, I need to work hard to make sure you’re getting enough value out of the deal to entice you back in the future.

So I find it pretty rich when a site thinks it’s doing me a favor by letting me read its content. To be sure, the New York Times is a great website. But there is far more free, good content on the web than I could possibly find time to read. My RSS reader is full of smart bloggers I wish I had time to read. So the Times should be grateful for the time I devote to their website rather than one of the many alternatives.

I’m belaboring this point because there’s a kind of twisted moralism underlying a lot of discussion of this issue. Partisans for mainstream media sites like to portray consumers as deadbeats for preferring not to pay for online content. I think this partly reflects the general sense of entitlement among mainstream media outlets that is a holdover from the days when technological constraints made content a lot scarcer than it is today. And I think it also has to do with a point Mike Masnick made years ago: people find the number zero really counterintuitive. People find it hard to understand how you can make money giving away content, despite the fact that we’re literally surrounded by examples of companies making billions of dollars doing just that. And when people find an economic situation confusing, they often apply an inappropriate moral gloss to it.

So it’s worth saying explicitly that people who prefer free content have nothing to be embarrassed about. We’re just doing what savvy consumers in every competitive market do: looking for the best deal. If anything, it’s tacky for a media organization that’s been fortunate to receive a reader’s valuable attention to demand that she pony up some cash as well. The reader is doing the publisher a favor by reading its content, not the other way around.