Henderson WSJ Op/Ed on 2020 Nobel Prize

 

The 30-day period has passed and so I’m now able contractually to post my op/ed on Milgrom and Wilson.

 

Thank These Nobel Laureates for Your Cellphone

Economists Paul Milgrom and Richard Wilson get the prize for devising spectrum auctions.

On Monday the Royal Swedish Academy of Sciences awarded the Nobel Prize in Economic Sciences to two American economists at Stanford, 83-year-old Robert B. Wilson and 72-year-old Paul R. Milgrom. The citation was “for improvements to auction theory and inventions of new auction formats.”

Auction markets range from selling items on eBay to the sale of billion-dollar assets such as radio licenses and electromagnetic spectrum by the Federal Communications Commission. Messrs. Wilson and Milgrom did much of their theoretical work on auctions from the 1960s to the 1980s. In the early 1990s, the FCC decided to stop giving away valuable spectrum and sell it instead. An FCC economist named Evan Kwerel worked with Messrs. Wilson and Milgrom to help design an auction for both licenses and spectrum.

In its technical paper justifying the awards, the Nobel Committee points out a major problem with using taxes to fund government programs: taxation distorts. The term economists use is “deadweight loss,” a loss that is not offset by a gain to anyone. Economists have estimated that raising $1 in taxes doesn’t cost society only $1; it costs somewhere between $1.17 and $1.56. The extra 17 to 56 cents is deadweight loss. The committee notes that by auctioning off major electromagnetic assets, the federal government avoided having to tax as much.

This isn’t to say that the ideal auction is one that maximizes government revenue. One way to maximize auction revenue is for the FCC to act like a monopolist and hold spectrum off the market. But what matters most is that spectrum gets into the hands of the most-productive users. As former FCC chief economist Thomas Hazlett, now at Clemson University, and his co-author Roberto E. Muñoz of the Universidad Técnica Federico Santa María have pointed out, the gains from efficient allocation swamp the gains in government revenue. The 2017 wireless spectrum auction, for example, redirected spectrum from broadcast television to cellphone companies. If you’re reading this on a cellphone, you can thank Messrs. Milgrom and Wilson.

Ronald Coase, who won the Nobel Prize in 1991, advocated auctioning off spectrum in a 1959 article. But governments tend to prefer to hand things out; it makes them popular and gives officials power. One of the few benefits of the large federal budget deficits in the 1980s and early 1990s was that the federal government started looking for ways to raise more money. Auctions were one solution.

But what do you do when some license holders are keeping spectrum from being redeployed to more efficient uses? The FCC asked Mr. Milgrom and a team of economists to design an auction to get over-the-air broadcasters to relinquish their spectrum rights voluntarily. Then the FCC sold the rights. The gain to the federal government was $9.7 billion. The gain to consumers was many times greater.

The two winners will split 10 million Swedish kronor, which is about $1.1 million at today’s exchange rates. But as George Mason University economist Alex Tabarrok notes on his blog Marginal Revolution: “The money won’t mean much to these winners, who have made plenty of money advising firms about how to bid in the auctions that they designed.” Mr. Milgrom advertises that his company saved Comcast and its consortium, SpectrumCo, nearly $1.2 billion. This is a potential conflict of interest.

Still, the auction that Mr. Milgrom helped design is better than an alternative proposed by Microsoft economist Glen Weyl. In a recent critique of Mr. Milgrom’s role in FCC auctions, Mr. Weyl argues that a better way of allocating electromagnetic spectrum “is analogous to the way that urban areas address the ‘complex interference patterns’ that motivate zoning rules, such as that one building may block another’s view.”

Such a method, Mr. Weyl admits, would “involve a complex and messy web of democratic participation in zoning proceedings, legal disputes with associated liability findings adjudicated by courts and quasi-markets operating in the shadow of these legal constraints.” Mr. Weyl doesn’t point out that his method has no real chance of allocating resources to the highest-value uses. And a lot of the value would dissolve during the rough-and-tumble political process. I invite Mr. Weyl to California, where developers deal with this “complex and messy web” almost daily. The result: Very little new housing is built, and middle-income people are priced out of the market.

The Nobel Prize is sometimes given for contributions that are technically interesting but of low value. I argued on these pages last year that the 2019 prize for work on poverty fell into that category. But this year’s winners helped create huge value for producers, consumers and, indirectly, taxpayers.

Mr. Henderson is a research fellow with Stanford University’s Hoover Institution.

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Zoom and the Society of Meddlers

One potent argument for free markets is that they make individual liberty and autonomy possible. To use an example from Milton Friedman’s 1962 book Capitalism and Freedom, it is unlikely that both the Wall Street Journal and the Daily Worker would have equal access to newsprint if paper were allocated by government instead of markets. Same for other means of communication. But is it true that free markets always work in the impersonal, non-discriminatory way implied by this argument?

One problem is the following. If society is populated by meddlers—busybodies who are intent on interfering with other people’s preferences and choices—even free markets may fail to respond to some individual preferences. Businesses could be led, by their own self-interest, to obey the meddlers’ mob for fear of being commercially “canceled” (see my Econlog post “The Political Firm”).

We get a taste of this possibility not only with the social networks but also with Zoom’s conferencing service, as documented by the Wall Street Journal (“Zoom Video Tackles Tricky Role of Policing Its Service,” November 3, 2020):

Zoom said users may not use its service to break the law, promote violence, display nudity or commit other infractions. … In cases where Zoom has taken action and blocked a public event, the company has said it acted once it became aware of a virtual gathering that would transgress its rule or local laws. … Zoom in September blocked the use of its service for a webinar at San Francisco State University. The meeting was due to feature Leila Khaled, a member of the Popular Front for the Liberation of Palestine, which the U.S. government has designated a terrorist organization. … Zoom also blocked a series of follow-up Zoom webinars in October organized, in part, by a pro-Palestinian group in conjunction with staff at several U.S. and overseas universities to address what they said was censorship by the company. … The Council on Foreign Relations in September held a virtual meeting with Iran’s foreign minister. The minister was sanctioned by the U.S. last year, so the meeting would have violated Zoom’s rules. It allowed the meeting to take place after the think tank showed it had approval from the U.S. government for a prior meeting with the minister.

This case suggests many reflections. This is another example showing how a government’s “international sanctions” are in fact bans against its own subjects (see my posts “New Sanctions Against Americans” and “American Sanctions: Why Foreigners Obey”). Note that American spies may not be happy, for what is a better way to learn about threats to “national security” than to let the authors of the threats discuss them openly?

To justify its discrimination against some customers, Zoom invokes “local laws,” as it does in China. But it is not only laws that count; the meddlers’ mob is visible behind “nudity,” “other infractions,” or wokism. A century or two ago, if not more recently, Zoom’s services might not have been made available for meetings of individuals among the despised minorities of the times. Which brings us back to our original question: Can free markets help solve the social-meddling problem? The question is particularly pregnant since we cannot undermine the property rights of private owners of medias or other companies without dire future consequences.

Against the claim that free markets cannot prevent meddling by opinion mobs, a counter-argument is that as long as market entry is not forbidden by law, entrepreneurs with minority tastes or simply armed with naked self-interest will come to the rescue of socially oppressed people. At the limit, even if the state enforces the meddling mob’s tastes, smuggling and black markets (including their virtual forms) will offer needed alternatives. As Étienne de la Boétie would say, private vices are public virtues, the limit being in behaviors that are unanimously (or perhaps nearly unanimously) rejected such as murder and theft.

It is true that when private entrepreneurs cater to minority tastes and values, the beneficiaries may have to pay a supplement for that. Alternatives to Zoom may not, for a while, be as cost-effective. People discriminated against under McCarthyism might have found themselves in lower-paying jobs (another Friedman example) than they would otherwise have. Another way to see this is that if a large number of people show a “taste for meddling” (analogous to Gary Becker‘s “taste for discrimination“), that is, if we live in a society of meddlers, free markets will not completely eliminate the handicap of individuals who don’t share the preferences of the meddling majority. Entrepreneurs must choose between the cost for them of shunning the untouchables and the cost of “canceling” by the meddlers.

However, for the social eccentrics or pariahs–whoever they are as discriminatory fashions come and go–the cost of satisfying their preferences is still higher if, instead of social pressures, they have to deal with government bans and punishments. Markets are not perfect but political processes are even more imperfect. Overcoming private discrimination is not easy but fighting official discrimination (called “apartheid” in race relations) is more difficult. It is surprising how many people think that the government will protect minorities against majority prejudice while, during nearly all of mankind’s history, political authorities have amplified mob prejudice instead.

Economic theory suggests that a society of meddlers, like ours looks like, cannot be as economically efficient as a society of free-minded individuals and free enterprise. The reason is that economic efficiency is defined in terms of the satisfaction of individual preferences.

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Illinois Restaurants Collude to Expand Output

 

Seventy local businesses met Thursday night, agreeing to keep serving customers indoors despite a new state order, a Bradley restaurant owner said.

Thomas Spellman, owner of Hoppy Pig, said his restaurant will continue serving patrons inside, defying Gov. J.B. Pritzker’s new order on some regions to cease indoor dining to lessen the spread of the coronavirus.

“We have families. I have forty employees, you know, they have families, they have houses and they have kids and they have to pay for school,” Spellman said. “The government’s not paying for them. We don’t want the government to pay for us. We just want to do business the way we do business.”

This is from Chris Coffey, “70 Suburban Businesses Meet, Agree to Continue Serving Customers Indoors Despite State Order,” nbc chicago, October 23, 2020.

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Henderson on Nobel Winners in Wall Street Journal

In its technical paper justifying the awards, the Nobel Committee points out a major problem with using taxes to fund government programs: taxation distorts. The term economists use is “deadweight loss,” a loss that is not offset by a gain to anyone. Economists have estimated that raising $1 in taxes doesn’t cost society only $1; it costs somewhere between $1.17 and $1.56. The extra 17 to 56 cents is deadweight loss. The committee notes that by auctioning off major electromagnetic assets, the federal government avoided having to tax as much.

This isn’t to say that the ideal auction is one that maximizes government revenue. One way to maximize auction revenue is for the FCC to act like a monopolist and hold spectrum off the market. But what matters most is that spectrum gets into the hands of the most-productive users. As former FCC chief economist Thomas Hazlett, now at Clemson University, and his co-author Roberto E. Muñoz of the Universidad Técnica Federico Santa María have pointed out, the gains from efficient allocation swamp the gains in government revenue. The 2017 wireless spectrum auction, for example, redirected spectrum from broadcast television to cellphone companies. If you’re reading this on a cellphone, you can thank Messrs. Milgrom and Wilson.

This is from David R. Henderson, “Thank These Nobel Laureates for Your Cellphone,” Wall Street Journal, October 12, 2020 (October 13 print edition.)

Under my contract, I’m allowed to quote 2 paragraphs from my article.  I’ll post the whole thing in 30 days.

By the way, as an economist friend pointed out on Facebook, I was one of the few to note the potential conflict of interest in Milgrom both helping design the auction and consulting to a company that bid in the auction. I responded that I wouldn’t be a good card-carrying economist if I hadn’t noted that. Economics is all about incentives. As I wrote in “Hooked on Economics,” Chapter 2 of The Joy of Freedom: An Economist’s Odyssey, I noted in all my reading of economics while a math major and then in all of my reading post-Bachelor of Science and pre-UCLA graduate school that the unifying theme was incentives.

 

Here’s the article on “Auctions” in David R. Henderson, ed., The Concise Encyclopedia of Economics.

HT to Alex Tabarrok and Lynne Kiesling for giving a quick read to my draft before I sent it to the Wall Street Journal. Also to my wife, Rena Henderson, for a quick edit. All of them turned it around in less than 25 minutes. Also thanks to Tom Hazlett for checking the paragraph on his findings. He did so while waiting to board a flight.

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More Capital Per Worker Makes Workers More Productive

 

In a recent blog post, I wrote:

Aside for non-economists: Why would reductions in income tax rates on corporations and on high-income individuals even be expected, at a theoretical level, to increase real wages? By increasing the incentive to invest in capital. The greater the capital to labor ratio, the higher are real wages.

Commenter Robert asked:

Could someone expand on this a bit for me? Does investing in capital, mean investing in capital goods (i.e., land, machinery, tools, etc)? I don’t understand why that would necessarily lead to higher real wages.

Commenter Laron gave a nice succinct answer:

The capital goods like machinery increase labor’s productivity, which increases wages. Others can chime in with more detail or to correct me tho.

Here’s what the article on “Capital Gains Taxes” in The Concise Encyclopedia of Economics says about the issue:

Between 1900 and 2000, real wages in the United States quintupled from around fifteen cents an hour (worth three dollars in 2000 dollars) to more than fifteen dollars an hour. In other words, a worker in 2000 earned as much, adjusted for inflation, in twelve minutes as a worker in 1900 earned in an hour. That surge in the living standard of the American worker is explained, in part, by the increase in capital over that period. The main reason U.S. farmers and manufacturing workers are more productive, and their real wages higher, than those of most other industrial nations is that America has one of the highest ratios of capital to worker in the world. Even Americans working in the service sector are highly paid relative to workers in other nations as a result of the capital they work with. In their textbook, Nobel laureate Paul Samuelson and William D. Nordhaus noted: “Because each worker has more capital to work with, his or her marginal product rises. Therefore, the competitive real wage rises as workers become worth more to capitalists and meet with spirited bidding up of their market wage rates.” The capital-to-labor ratio explains roughly 95 percent of the fluctuation in wages over the past forty years. When the ratio rises, wages rise; when the ratio stays constant, wages stagnate.

The quintupling in the above is certainly an underestimate because the Consumer Price Index, used to adjust for inflation, overstates inflation.

A way to think about it is with a person on a desert island catching fish. If he does it with his bare hands, he can catch, say 2 fish a day, enough to keep from starving. But if he fashions a stick that can spear the fish, he can catch, say 4 fish a day. So that one piece of capital, the spear, has doubled his productivity. His real wage has doubled.

Then Robert followed up:

Thanks Laron. That was kind of what I was assuming was meant in the quote. I don’t know if I fully trust a business to return higher productivity back to workers in the form of higher salaries, but I can see how and why that could happen.

Here’s why it would happen. A worker becomes more productive, not just with his current employer but also with other potential employers. So if an employer does not pay the employee an increased wage for increased productivity, another employer will offer more than the current employer. That will happen until the marginal revenue product (the marginal revenue produced by the employee’s marginal product) equals the wage.

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Mazzucato and “Climate Lockdowns”

“In the near future, the world may need to resort to lockdowns again — this time to tackle a climate emergency.” Certainly, Mariana Mazzucato has a taste for striking words. In her latest column for Project Syndicate, Mazzucato argues that

Shifting Arctic ice, raging wildfires in western US states and elsewhere, and methane leaks in the North Sea are all warning signs that we are approaching a tipping point on climate change when protecting the future of civilization will require dramatic interventions.

 

This is the scenario Mazzucato works with. What are the odds it will come by? When could that happen? What are the events that may trigger it? Mazzucato seems to assume that this is almost inevitable if things “go on” as they did in the past, namely if we continue to have economic growth dependent on fossil fuel. Still, more than a scenario this looks like the background story of the movie “Interstellar”: in that movie, a team of scientists was (treacherously) contriving to send some humans up in space in order to perpetuate humanity. Here we have Mazzucato suggesting governments should work to “limit private-vehicle use, ban consumption of red meat, and impose extreme energy-saving measures, while fossil-fuel companies would have to stop drilling.”

That the private sector can cope with such a challenge is a hypothesis Mazzucato does not even consider. Such a sad scenario cannot possibly be affected by human ingenuity, at least if supported by private shareholders.

Mazzucato’s piece is simply an exercise in “never letting a good crisis go waste”. She maintains that Covid-19 is “itself a consequence of environmental degradation: one recent study dubbed it the disease of the Anthropocene.” Moreover, she says, “climate change will exacerbate the social and economic problems highlighted by the pandemic. These include governments’ diminishing capacity to address public-health crises, the private sector’s limited ability to withstand sustained economic disruption, and pervasive social inequality.”

The key sentence in the article is: “These shortcomings reflect the distorted values underlying our priorities.”

Virtually all problems, in Mazzucato’s worldview, reflect the fact the priorities in the world of production are attuned to people’s demands. In a capitalist system, there are no other “values underlying our priorities” than the perceived necessities of people which become demand for goods and services.

This is the essence of Mazzucato’s view:

Addressing this triple crisis requires reorienting corporate governance, finance, policy, and energy systems toward a green economic transformation. To achieve this, three obstacles must be removed: business that is shareholder-driven instead of stakeholder-driven, finance that is used in inadequate and inappropriate ways, and government that is based on outdated economic thinking and faulty assumptions. Corporate governance must now reflect stakeholders’ needs instead of shareholders’ whims. Building an inclusive, sustainable economy depends on productive cooperation among the public and private sectors and civil society.

This nicely summarizes the evolution of Mazzucato’s views, from her first to her second book. In her first book, she advocates an “entrepreneurial state”. In the second she does call for going beyond capitalism founded upon “shareholder value”. I think this makes sense. If the state is going to fund or sponsor innovative companies, they will nonetheless have to compete in a world of private business seeking positive profits — and that may show either the virtues of government-led capitalism or its weaknesses. So, why not allow both the government and the private sector reject the profit motive, which means the traditional metrics of success and failure too?

Note that in Mazzucato’s piece there are no words of concern for low-income countries, where relatively more “polluting” technologies may be the only ones available, let alone economical, for the time being.

I think this piece is very useful. It perfectly epitomizes an attitude which is spreading in some intellectual quarters: use the Covid19 crisis to make some changes permanent, hoping for a world in which people travel less, trade less, rely more on the government. Those on the other side of the debate should take any available opportunity to emphasize that the quarrel is not between those who want to use government capital to satisfy people’s needs, and those who want to use private capital to satisfy people needs: but between those who want the economy to serve the needs of the people, and those who want the economy to supply those goods and services some rulers believe the people should consume.

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The Decline of Competition?

The title of this post is the title of my latest piece for Hoover’s Defining Ideas, published August 13.

Here’s one of the opening paragraphs:

Are these authors and commentators right? What is their evidence? More fundamentally, what do the words “monopoly,” “market power,” and “competition” mean, and what monopolies or forms of market power should we worry about? Also, when we do worry about monopoly or market power, what are the appropriate policies to deal with it? It turns out that economists over the last 200 years have carefully considered many of these issues. Unfortunately, some of their insights have been lost, and one main reason is that many of those who worry about monopoly have a static, rather than a dynamic, view of competition.

And later:

But there are two major problems with that measure [the percent of revenues of the top 50 firms in an industry.] I’ll illustrate the first one by highlighting an industry referenced in Obama’s CEA report. A table in the report shows that the top 50 firms in the second largest U.S. industry, retail trade, earned $1.56 trillion in revenue in 2012. Their share of revenue increased from 25.7 percent of industry revenues in 1997 to 36.9 percent, an increase of 11.2 percentage points.

Did any major change in retail trade happen between 1997 and 2012? Yes. It was called Amazon. Before Amazon became important, what typically mattered for you as a retail customer was the amount of competition in your local market. So, if you lived in San Francisco and wanted a lawn chair, you might go to Sears (remember them?), Home Depot, or your local hardware store. But after Amazon came into being, you had another major choice: saving a lot of time traveling from store to store and, instead, sitting at your desk or kitchen table, or even lounging on your old lawn chair, and ordering from home. Not only did you save time but also the odds are that you got a lower price. In short, Amazon made the relevant market for you much more competitive. And it did that even while, at times, wiping out local competitors.

Read the whole thing.

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The Coming Renaissance in K-12 Education

 

If you have school-age children, you may be wondering if they’ll ever get an education. On Tuesday the American Federation of Teachers, the second-largest education union, threatened “safety strikes” if reopening plans aren’t to its liking. Some state and local governments are insisting that public K-12 schooling this fall be conducted online three to five days a week and imposing stringent conditions on those students who actually make it to the classroom.

Yet there are three reasons to be optimistic about the future of education. First, many parents will be more prepared to home-school their kids than they were in the spring. They or their hired teachers will do a better job of educating children, in many cases, than the public schools.

These are the opening paragraphs of my op/ed “The Virus May Strike Teachers Unions.” Wall Street Journal, July 29 (July 30 print edition.)

I’ll post the whole thing 30 days from now.

Actually the title the Journal gave it is a little misleading. My focus in the op/ed is not so much on teachers’ unions as it is on idea that a lot of parents will find that the private educational options they choose for their children are superior to mediocre government schools. Therefore, I argue, when the pandemic ends, there will be a substantially larger home school sector and more push for charter schools.

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