Stephen Colbert’s Confused Parody of Citizens United

Responding to the growing trend of Fox News personalities (Sarah Palin, Mike Huckabee, etc) forming PACs and promoting them on the air, Stephen Colbert recently announced plans to create a PAC of his own. But then he got a letter from a Viacom lawyer (which he of course read on the air) informing Colbert that his promotion of the PAC on-air could constitute an “in-kind donation” by Viacom to the (not yet created) PAC, and that Viacom could therefore be guilty of violating federal law if Colbert actually created it. So on Friday, he made a media stunt out of traveling to the FEC to ask for a “media exemption,” which allows members of the news media to ignore campaign finance laws that apply to everyone else:

Colbert’s shtick is to play a buffoonish right-wing pundit who spouts ridiculous arguments that the audience is supposed to root against. So I think the idea is that we’re supposed to think it’s ridiculous that Stephen Colbert would use his position as a media personality to raise money for a PAC that would then attempt to influence elections. But there’s some serious cognitive dissonance going on here. Colbert’s parody beautifully, if inadvertently, illustrates what’s wrong with the liberal critique of the Citizens United decision.

In progressive mythology, Citizens United is a case about whether large corporations like BP, Verizon, and Pfizer can use their vast resources to buy ads that drown out the voices of other participants in the political debate and sway elections toward candidates they favor. This is a real problem, and I think Senators McCain and Feingold sincerely believed the legislation that bears their names would help solve it.

But “corporations” include many entities beyond the Fortune 500. The ACLU, Sierra Club, and Human Rights Watch are all corporations. “Free speech for corporations” might sound insidious if the corporation in question is Exxon Mobil. But it’s harder to get worked up about the corrupting influence of “corporate speech” when we’re talking about the ACLU running television ads criticizing a candidate for supporting the Patriot Act.

Under the First Amendment, citizens are entitled to buy ads criticizing a political candidate, especially in the last 30 days of an election. And a group of citizens who lack the resources to buy ads individually are entitled to use the corporate form to pool their resources and buy those ads collectively. That’s what Citizens United (the non-profit conservative organization) was doing when it bought ads promoting an anti-Hillary Clinton movie during the 2008 primaries. And in Citizens United (the Supreme Court decision) the high court affirmed their right to do so.

Which gets to the weirdness of Colbert’s parody. Stephen Colbert is trying (or at least pretending) to create a vehicle for his fans to pool their money so that Colbert can create ads “promoting” (mocking) conservative candidates. The ads are guaranteed to be funny, and they could also influence 2012 political races. I think that’s a brilliant idea, and I’m glad that the Supreme Court has affirmed Colbert’s (and his fans’) right to engage in this type of political speech. Colbert, in contrast, seems to be mocking his own free of speech rights. By asking us to root against Colbert-the-character’s quest for a PAC, Colbert-the-comedian seems to be implying that it’s ridiculous that the law would allow him to create such a PAC. But it isn’t ridiculous. Colbert should be free to create the PAC, people should be free to give to it, and Colbert should be free to tell people about the PAC on his show.

I think Colbert’s response would be that although Colbert’s PAC will mostly get donations from his fans, the “bad” PACs he is parodying take much larger (and more corrupting) donations from large, for-profit corporations. But this isn’t how free speech jurisprudence works. For censorship to pass constitutional muster, it needs to be narrowly tailored to a compelling governmental interest. Maybe the First Amendment allows Congress to regulate certain kinds of corporate speech, but if so it still requires Congress to do it without censoring other, constitutionally protected speech. And it’s hard to see a plausible rationale for regulating the political speech of the ACLU, the Sierra Club, or (yes) the Colbert Super PAC.

And as much as liberals might not like it, the same point applies to Sarah Palin and Mike Huckabee. They’re not my favorite politicians, and I doubt I’ll like how they spend peoples’ donations. But the fact is that millions of American voters share Palin and Huckabee’s politics. They’re entitled to have their views represented in the political arena, and giving to a PAC run by Palin or Huckabee seems like a reasonable way to do it. There’s nothing alarming or corrupt about them using the soapbox Fox News provides them to inform their viewers about this opportunity to participate in the political process.

Laws that restrict this kind of grassroots political activity—or the use of corporate-owned television networks to promote it—are inconsistent with the First Amendment. If Congress wants to address political corruption problems, it has an obligation to do it without burdening the political speech of people like Stephen Colbert. Colbert doesn’t seem to understand this point, but his antics are proving it anyway.

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Software in the Real World

It’s hard to know how to react when someone you’re criticizing insists you don’t actually disagree. Tyler Cowen is a smart guy, so I’m going to take it as a compliment. And it’s true that very little in Chapter 3 of The Great Stagnation directly contradicts anything I say in my last post. Still, there’s a big difference in emphasis between his chapter and my post, and I think readers of The Great Stagnation are likely to get a misleading impression of how the software industry is affecting the “real economy.”

Cowen draws a distinction between “the Internet”—which he portrays as a kind of playground for white-collar workers—and “the revenue-generating sectors of the economy.” The impression that the software industry is largely producing new forms of leisure is important because a lot of people are concerned with their material standard of living defined in a relatively narrow way. Reading The Great Stagnation, one gets the impression that someone making $50,000 in 2010 lived about as well as someone making $50,000 in 1990 (in real dollars as computed by the BLS) except that the guy in 2010 had more fun when he turned on his PC.

The point of my last post was that the 2010 guy’s $50,000 goes farther because there’s a long list of products that he would have paid money for in 1990 that had free, or dramatically cheaper, digital substitutes in 2010. The money the 1990 guy would have spent on newspaper and magazine subscriptions, books and CDs, travel agents and maps, cameras and film development, and the rest is disposable income that the 2010 guy can spend on other “real economy” goods and services like restaurant meals, housing, travel, etc. Which is to say that the 2010 guy is wealthier, even if we only care about goods and services that were in the “revenue-generating sector of the economy” in 1990.

In Cowen’s account, the difficulty of measuring the wealth produced by Twitter and Facebook helps explain why those companies haven’t measurably increased GDP, but we still have to explain why the rest of the economy hasn’t been growing very fast. My point is that software might actually be reducing measured GDP by driving certain industries out of business. If that’s true, then it’s possible that the rest of the economy actually is growing at a healthy clip, but that this fact is being masked by the rapid implosion of a few unlucky industries.

Cowen’s focus on Facebook and Twitter also gives a misleading impression about opportunities for future software-driven growth. The low-hanging fruit of our generation is not just “the Internet,” but software powered by Moore’s Law. Moore’s Law made the modern Internet possible, but it also gave birth to the personal computer, various consumer electronics devices like iPods and smart phones, electronic financial networks, medical breakthroughs (e.g. medical imaging, computational genomics), and a vast array of embedded systems (computerized fuel injection in cars, airplanes with auto-pilot, industrial robots).

Looking at this list, it’s obvious that software innovation is not necessarily (in Cowen’s words) “interior to the human mind rather than set on a factory floor.” The output of a CAT scan is “interior to the human mind” in the trivial sense that it’s displayed on a computer screen, but the ultimate result—spotting a tumor, say, is clearly a “real world” result. I think people have a skewed intuition about this because the PC is the computing device with which they have the most direct contact. But as computers get cheaper and more powerful, they’re going to get embedded in an ever-growing list of devices, and the distinction between “Internet innovation” and “real-world innovation” will make less and less sense.

Self-driving cars are a good example of where things are heading. They will probably put millions of truck drivers out of work, lowering the cost of almost every consumer product. They’ll make taxicabs drastically more affordable, putting taxi drivers out of work and virtually eliminating demand for off-street parking. They’re likely to have significant environmental benefits, as consumers can order only as much car as they need for any given trip. They are likely to save thousands of lives by reducing accidents. They’re likely to transform the retail sector—how often would you drive to store if a self-driving Amazon-bot delivered your orders in an hour rather than 2 days? And of course they’ll have many other consequences we can’t anticipate.

The wealth created by self-driving technology will not be “in our minds and in our laptops” the way Facebook and Twitter are. By using these sites as exemplars of software innovation, Cowen dramatically undersells software’s potential for creating wealth in the “real economy” and producing our generation’s “low-hanging fruit.”

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The Great Ephemeralization

I recently had the pleasure of reading The Great Stagnation, Tyler Cowen’s excellent “Kindle Single” about the future of innovation and economic growth. Cowen makes the case that, contrary to the right-of-center conventional wisdom, the American economy is in the midst of a decades-long period of mediocre economic growth. Previous generations of Americans enjoyed an abundance of “low-hanging fruit”—cheap land, technological breakthroughs like electricity and the internal combustion engine, rising levels of education, an end to racial and gender discrimination—that allowed rapidly increasing living standards with relatively little effort. But now, he says, the orchard is getting bare. Since the 1970s, big innovations have been few and far between, and this explains the comparatively slow rate of GDP growth in recent decades.

The obvious response is to point to Silicon Valley, where there’s clearly a lot of innovation going on. Cowen anticipates this objection in his third chapter and argues that the IT revolution is overrated as a source of economic growth. Drawing on a previous book, he argues that the Internet is great for “those who are intellectually curious, those who wish to manage large networks of loose acquaintances, and those who wish to absorb lots of information at phenomenally fast rates.” But, he claims, there’s less there than meets the eye. Most people don’t spend enough time on the web for it to significantly improve their standard of living. And in any event, blogs, Facebook and Twitter don’t create jobs or produce revenue for the government, which means that we can’t count on them to drag us out of our current fiscal predicament.

By focusing on “the Internet”—and specifically Facebook and Twitter—Cowen trivializes an industry whose economic effects extend far beyond a few overhyped websites. And Cowen fails to appreciate that information technology innovations have a different economic character than the innovations that drove economic growth in the 20th century. It’s true that software innovations often make a relatively small contribution to measured GDP. But this this is less a reflection of a “great stagnation” than a sign that official economic indicators are a bad way to measure our generation’s low-hanging fruit.

To understand what makes software-powered innovation distinctive, it helps to contrast it with the industrial-age innovations that proceeded it. For most of the 20th century, innovation was embodied in physical products like cars, televisions, washing machines, and airplanes. This style of innovation is relatively easy for government statisticians to deal with. If an economist at the BLS circa 1961 wanted to know how much the television industry was contributing to GDP, he simply added up the prices of all televisions sold to consumers.

Of course, economists aren’t only interested in measuring national output at a single point of time; they want to measure how the standard of living changes from year to year. If total spending on televisions falls, statisticians need to figure out whether this is because consumers are buying fewer televisions or because televisions are getting more affordable. The distinction is crucial because the former represents a decline in national output, while the latter amounts to an improvement in the standard of living. And of course, economists have to be careful about making apples-to-apples comparisons. For example, the switch from black-and-white to color pushed up average television prices, but it would have been a big mistake to record this as a sign of televisions in general getting more expensive.

There are many important subtleties to measuring changes in economic output, and official statistics have tended to overstate inflation (and hence understate growth rates) to some extent. But the important innovations of the industrial era had some common features that made such problems manageable. They came embodied in discrete physical objects with a fixed feature set. And the value of new innovations was roughly reflected by the prices consumers were willing to pay for them. If consumers were paying twice as much for a 60-inch television as a 40-inch one, it’s reasonable to infer that the former is twice as valuable.

Now imagine an alternate universe in which industrial products did not work this way. Suppose we lived in the world of Harry Potter, and one day in the late 1950s RCA hired a wizard to wave his magic wand and transform all of the world’s black and white sets into color sets. This would clearly represent a large increase in the standard of living—a larger increase, in fact, than the non-magical process whereby people have to buy new, more expensive, televisions. Yet the government in the alternate universe would almost certainly have recorded a smaller increase in GDP. Our own BLS would see consumers buying more expensive televisions while in the Harry Potter universe consumers would be happy with the old, cheap ones. Hence, consumers circa 1970 would be wealthier in that universe than in ours, but official GDP statistics would show just the opposite.

Today these magic wands exist. For example, a couple of years ago, Google waved a magic wand that transformed millions of Android phones into sophisticated navigation devices with turn-by-turn directions. This was functionality that people had previously paid hundreds of dollars for in stand-alone devices. Now it’s just another feature that comes with every Android phone, and the cost of Android phones hasn’t gone up. I haven’t checked, but I bet that this wealth creation was not reflected in GDP statistics. And it’s actually worse than that: as people stop buying stand-alone GPS devices, Google’s innovation will actually show up in the statistics as a reduction in GDP.

Cowen writes that the Internet is producing wealth that “is in our minds and in our laptops and not so much in the revenue-generating sector of the economy.” This isn’t exactly wrong, but it fails to appreciate the extent to which the software industry is entangled with the “revenue-generating sector of the economy.” The digital revolution isn’t just introducing novel ways to amuse ourselves, it’s rapidly displacing a wide variety of “revenue-generating” products and services: typewriters, newspapers, magazines, books, maps, cameras, film development, camcorders, yellow pages, music players, VCRs and DVD players, encyclopedias, landline telephones, television and radio broadcasts, calendars, address books, clocks and watches, calculators, travel agents, travelers checks, and so forth.

Paul Graham and Reihan Salam have been popularizing the term “ephemeralization”, originally coined by Buckminster Fuller, to describe this process whereby special-purpose products are replaced by software running on general-purpose computing devices. As the list above suggests, ephemeralization is affecting a growing fraction of the economy. And with technologies like self-driving cars on the horizon, its importance will only grow in the coming decades.

Ephemeralization offers an alternative explanation for the puzzling growth slowdown of the last decade. Every time the software industry displaces a special purpose device, our standard of living improves but measured GDP falls. If what you care about is government revenue, this point might not matter much—it’s hard to tax something if no one’s paying for it. But the real lesson here may not be that the American economy is stagnating, but rather that the government is bad at measuring improvements in our standard of living that come from the software industry.

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Mueller: Supporting Mobile Merger is “Insane”

Milton Meuller makes the case against the AT&T/T-Mobile merger:

Let’s begin at the beginning and ask why this merger is happening. It’s not as if AT&T is gaining dominance the way Google gained it in search and advertising, or the way Intel did in chips: i.e., through low prices, superior products and customer loyalty. No, last time I looked AT&T was the carrier with the lowest customer satisfaction ratings, some of the highest prices and one of the weakest network performance metrics. In my opinion there is no reason for this merger to take place other than to make life easier for AT&T by reducing competitive pressures on it. AT&T seems to be driven by the following calculus. It can either grow its services and its network under the harsh constraints of market pricing and competition, or it can attempt to reduce the field to an oligopoly with tacit price controls by using its size and financial bulk to eliminate a pest who keeps downward pressure on pricing and service requirements. I think it is rational for AT&T to try to get away with the latter. I think it’s insane for free market oriented thinkers to support it.

I’m still mulling over the merger, but I have a lot of sympathy for Mueller’s argument.

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Bitcoin’s Collusion Problem

Yesterday I questioned whether we should expect demand for Bitcoins to be stable over the long run. Today I want to look at the supply side. A constrained supply of money is important to a currency’s stability. One of Bitcoin’s key selling points is that the number of Bitcoins issued will never exceed 21 million. But this promise isn’t credible. To understand why, we need to dig a little bit into how the protocol works.

The Bitcoin peer-to-peer network can be thought of as a giant, shared accounting ledger. Whenever someone makes a Bitcoin transaction, the record of this transaction is submitted to the various nodes in the network. At fixed intervals, each node bundles up all the transactions it has seen into a data structure called a “block” and then races with the other nodes to solve a difficult mathematical problem that takes the block as an input. The first node to solve its problem (the problem is randomized in a way that gives each node a roughly equal chance) announces its success to the other nodes. Those nodes verify that all the transactions in the new block follow all the rules of the Bitcoin protocol, and that the solution to the mathematical problem is correct. (verifying solutions is much easier than finding them) Once a winning solution is found, all nodes then treat the transactions encoded in the winning node’s block as new entries in the global transaction register.

The system has a clever incentive system: each node is allowed to insert a fixed reward (currently 50 Bitcoins) for itself into the block it is working on. If it “wins” the race for a round, then this reward becomes part of the official transaction history. Effectively, the winner of each race gets to “mint” some Bitcoins for itself as a reward for participating in the transaction-verification process. The creator of the Bitcoin protocol established an expoentially decreasing schedule of rewards. If this schedule is followed, no more than 21 million Bitcoins will ever be issued.

The limit is a social convention baked into the BitCoin software. If a rogue node tries to give itself a larger reward than the protocol allows, the other nodes are supposed to reject its proposed block. But that only works if most nodes are enforcing the rules. If Bitcoin became a “real” currency, nodes would face a tremendous temptation to collude in order to give themselves larger rewards.

If a group of nodes colluded to change the rules (say, awarding themselves 100 Bitcoins rather than 50 for “winning” a round), the result would be a “fork” of the Bitcoin network. Nodes that enforced the original rules would reject blocks with the higher rewards, effectively expelling them from their network. The “rogue” nodes would recognize one another’s blocks, and would effectively establish a second, rival Bitcoin network. Theoretically, these different networks could continue in parallel indefinitely, but it’s likely that relatively quickly one of them (probably the larger one) would come to be regarded as the “real” Bitcoin network and cash spent on the other network would become worthless.

So the question is whether it would be possible for a critical mass of nodes to collude to change the rules. And I think the obvious answer to this question is yes, for two reasons. First, the Bitcoin software itself offers a convenient collusion mechanism. If the Bitcoin protocol is anything like other network protocols, a handful of clients is likely to account for the overwhelming majority of nodes at any given time. That means that convincing the creators of the top two or three Bitcoin clients to change their implementations would be enough to effectively change the protocol.

Second, collusion will grow easier as the network grows and becomes more professionalized. Bitcoin supporters are quick to point out that their system wouldn’t require ordinary consumers to run their own Bitcoin nodes. They predict that as the network grew and the resources required to run a node increased, that nodes would increasingly be run by commercialized entities who made money by providing “eWallet” services to ordinary Bitcoin users.

We might call organizations that are in the business of running Bitcoin nodes and processing Bitcoin transactions “banks.” And we could imagine these banks forming a membership organization whose primary function is to control the size of the Bitcoin money supply. It would announce changes to the Bitcoin protocol that expand the supply of Bitcoins at the desired rate. Member banks would agree to change their software accordingly. We could call this entity a “central bank.”

So one of Bitcoin’s key selling points—a permanently fixed supply—is basically illusory. The supply of Bitcoins, like the supply of every other currency, will be controlled by the fallible human beings who run the banking system. We already have an electronic currency whose quantity is controlled by a cartel of banks. If you’re a libertarian, you might think the lack of government regulation is an advantage for Bitcoin, but it strikes me as highly improbable that the world’s government’s would leave the Bitcoin central bank unregulated. So I don’t see any major advantages over the fiat money we’ve already got.

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The Bitcoin Bubble

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.

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Our Absurd Immigration System

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.

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Urbanism and Limited Government

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.

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High-Stakes Testing vs. Bottom-up Education

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.

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Online News as a Disruptive Technology

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.

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