Against Monopoly

defending the right to innovate

Monopoly corrupts. Absolute monopoly corrupts absolutely.

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Only a note about "internet neutrality": I'm not sure we need laws for that, but seeing it as a "last mile" issue completely misses the point. The main concern is for big "backbone" providers, which are few and own big and fairly expensive communication networks.
Turning back to the stimulus proposals, the big joker is the 91 billion in aid to the states. This is a good way to get money spent right away on useful things. Unfortunately the states have been less than provident in budgeting, and if we do this we will wind up like Argentina or Brazil where the states spend money, but the Federal government picks up the tab. Needless to say this makes it impossible to balance a budget in those countries and has led to enormous long term economic problems. If we believe that the states are "too big to fail," then at the very least the Federal government needs to behave like the old bad IMF - tying any aid to reforms that will get their fiscal house in order.

While this is true, there is a rationale for aiding the states, given by the fact that (most, I think) states have balanced-budget rules that require them to balance their budgets every year. Some states have rainy day funds, but these are not funded nearly enough to make up for the shortfall in revenues caused by the recession. It makes sense for the states to be able to smooth things over time, without having to, e.g., fire 15,000 teachers and then try to hire them back in a couple of years (NY State).

Having said that, fiscal discipline is key especially for the states, who tend to "waste" a lot of money in various ingenious ways. One solution would be for the Federal govt to lend the money to the states, instead of simply giving it away, so that states can pay it back in good times and have an incentive to minimize waste and pork-barrel.

In general, I agree with the comments made by Boldrin & Levine. Government spending rarely accomplishes what it was intended to accomplish. They also make an extremely valid point that by the time the dollars hit the economy, the economy is usually already recovering. We must also remember that sooner or later someone must pay the piper. At this point, it is likely that our grandchildren will still be paying for the profligate spending of the last 40 years.

What surprises me is that Boldrin and Levine throw in patents out of the blue. On a scale of 1 to 10, with 10 being irresponsible government spending, people living beyond their means, and Sarbanes-Oxley (which, using a similar technique for estimating that others have estimated for the cost of patents (I disagree with the methodology, but since the methodologies were consistent between estimating the market affect of patents and the market affect of SOX, seems appropriate for comparison purposes), is more than $1 TRILLION), patents are relatively negligible, perhaps a 2, maybe a 3 if you throw in every possible effect, real and imaginary. Is it not better to focus on things that have hundreds of billions of dollars in affect rather than something that affects a few billion dollars, and for which there are some positive benefits?

Most economists think there is adequate competition over the backbone; in addition the the fiber network was heavily overbuilt, so it isn't that difficult to enter the industry - Google constantly threatens to do so. You can find some information about backbone providers here
In addition to the rent seeking angle, David and Michele make a good point that is too often ignored, namely the necessity of firms and individuals repairing their broken balance sheets by saving more. If the government taxes something (like labor), less of it is supplied, and if it lowers the tax on something (like labor), more of it will be supplied. (The devil is in the empirical details, but the larger theoretical point remains.) Reducing the tax on labor should be done posthaste.

Another point too often overlooked is the Austrian point made by Mises and stressed again and again by Hayek, namely that the business cycle is caused by government intervention in capital markets. When the State over issued Treasuries (like it did in the 19th century before the central bank era, at least in the U.S.), or expanded the monetary base (when central banks had a monopoly of supplying money), this caused the loan rate of interest charged by banks (and shadow banks, which until a year ago accounted for 70-80% of loan volume in the U.S.) to fall below the natural rate of interest (the rate that clears the market for investible resources). This induced entrepreneurs to ramp up their demand for loans, which led them to overinvest in projects that were later revealed to be malinvestments. Sub-market interest rates also caused the real estate and mortgage booms, and caused consumers to save too little and consume too much. They used their home equity as ATM machines, maxed out their credit cards, and lined up for student loans. The private equity guys and LBO artists also got into the act thanks to interest rates that were too low, and their chickens have been coming home to rest.

The latest boom and bust cycle, like its predecessors, was caused by the government forcing interest rates below their free market level. This prevented the rate of interest from performing both its microeconomic function of clearing the various capital markets, and, crucially, its macroeconomic coordinating role.

In a few years, if the New York Times hasn't gone bankrupt, look for Paul Krugman to write a column arguing either that the stimulis didn't work because it was too small and therefore wasn't actually tried (reprising E. Cary Brown's line regarding fiscal policy in the Great Depression); or that it did work (assuming the economy recovers, which it will some day as the malinvestments are washed out), and was therefore just what Dr. Keynes would have ordered (even though the economy could have recovered anyway and might have recovered more quickly without the stimulis--he won't mention this possibility).

Yesterday he hit a new all time low for hypocrisy (even by his standards) in his article "Bailouts for Bunglars". He was the first person calling for the banks to be bailed out, only he wanted it done by capitalizing them the way Gordon Brown was trying to do in the U.K., instead of the government buying their bad assets. Bailouts, just for Mr. Krugman's information, by definition go to bunglars (like with Chrysler's first bailout in 1980). They don't normally go to successful industries and profitable firms (okay, some of the bailout money is going to profitable banks that shouldn't be getting it, but most of it is going to shore up the capital base at other banks that lost money).

So when he gets all worked up over the fact that bunglars got bailed out, what's his point? He was always for the bailout, so therefore he was for bunglars getting bailed out from the getgo.

The only way to solve the problem is laissez faire. Get rid of the Fed, the worst monopolist of all, and allow freedom in the supply of money and banking. This means a real gold standard (not the phony gold exchange standard) and free banking. Freedom of bank entry, and freedom of supplying demand deposits and note issue--these are what we need to prevent future boom and bust cycles. And bye bye bailouts.

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