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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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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