Category: Economics

Many have taken the position that pure Net Neutrality is essential for an open Internet.  Today the FCC announced that they will not be requiring a pure Net Neutrality solution, but what they will require is not clear.  And, to quote Ross Perot, the devil is in the details.
Traditionally, on the Internet there has been the concept of “peering”.  This means that if AOL and Hotmail were sending each other a fairly balanced amount of traffic, they wouldn’t owe each other any money.  But if a site was sending a lot more traffic into your site than you were sending to it, that site would owe you “peering fees”.
Imagine this.  A small city builds a set of roads that is adequate for its normal traffic.  The normal traffic of its citizens travelling to other cities is balanced by citizens visiting from other cities.  At some point, another city starts sending a massive number of trucks into the small city, jamming the roads so the normal traffic can’t get through.  Traditionally on the Internet, the other city would help pay for the small city to widen and maintain its roads, since the other city is making money selling furniture (or whatever) to the citizens of the small city.
This system worked reasonably well when the “cities” were distinct in purpose; there were residential cities (access providers like AT&T and Comcast) and commercial cities (Netflix, Amazon, Google, etc.)  But now the residential cities want to be the providers of stuff as well, and they want to use the peering fees, and sanctions for not paying the peering fees, to disadvantage the commercial cities.  As a result, sites like Netflix want to stop paying peering fees.
Pure Net Neutrality advocates think we should require access providers never give preferential access to any site, nor charge any other site for the demands that its traffic put on their network.  That, in effect, means they must provide whatever level of bandwidth is required for any arbitrary application on the Internet.  This requirement seems overreaching to me.
When Netflix came online, the bandwidth at many access providers increased more than a thousand times what it was before.  Streaming movies have many orders of magnitude more data than email or normal websites like Facebook and Google.  And that was after YouTube had greatly increased the bandwidth people were using before that.  These increases required access providers to do massive upgrades to prevent the streaming movies from slowing down all the other traffic, and/or for them to restrict how much bandwidth Netflix and YouTube were using.  And Netflix is not the last Internet application that will require an increase in bandwidth.  I suspect that an understanding of these factors has caused the FCC to be uncomfortable with a pure Net Neutrality position.
That said, we need to do something.  For example, I have AT&T U-verse for my Internet access provider.  AT&T wants me to buy movies from them rather than getting them from Netflix.  They should not be able to use the fact that I get my access from them to disadvantage Netflix or other sites, but they will if they get the chance, as any competitive company would.  Netflix should help pay for the extra bandwidth, but they shouldn’t be taken advantage of.  I’m not sure there’s a good way for the FCC to balance this.
It’s a thorny problem.  I don’t think a naïve pure Net Neutrality approach is the right solution, but we need something.  A decent solution might be to re-regulate the former phone companies and other access providers, banning them from providing commercial services, but guaranteeing them a good rate of return.  I’m aware, however, that will never happen.

Jobs, Jobs, Jobs!

No, I’m not talking about Steve.  This is an Op/Ed piece I wrote and submitted to the Los Angeles Times this week, when a guy much more well known than me will be giving a speech on the same topic.  I don’t begrudge the Times the fact they elected not to run it.  Lots of other folks are writing about the issue as well, and their dance card for this week might have been full.  But I advocate a different approach from what you have probably been hearing.  Here is the piece in its entirety.


As we await President Obama’s Jobs speech and Speaker Boehner’s address on the same topic a few days later, many of us are afraid we will, again, just hear the same tired positions.

President Obama is expected to echo liberal economists, who believe the best way to stimulate the economy and job growth is to put money in the pockets of people at the low end of the economic scale. This approach, they argue, works because lower income folks spend it immediately, having a variety of unmet needs. These economists often suggest extending unemployment benefits and reducing payroll taxes as a way to do this. Critics object to giving more money to people who are not working or not paying much in income taxes, because it has the unintended consequence of paying people not to work hard.

Speaker Boehner is expected to echo conservative economists who believe that the best approach is to reduce taxes on business and people at the high end of the economic scale. Advocates of this approach argue that lower taxes increase investments and allow businesses to expand, hiring more people. Critics of this approach argue that often the money is not invested in creating jobs, or is invested in creating jobs overseas, and that it takes a long time to have an effect in any case.

While both of these approaches can positively affect the economy, neither has an immediate and lasting effect of creating jobs. But there is a third approach no one seems to be talking about.

Thanks to Federal Reserve policies, banks and large corporations have unprecedented access to capital in the form of loans, at or near a 0% interest rate. These entities have been reluctant to get ahead of the economy, and have, for the most part, left the cash in the bank or used it for mergers and acquisitions. Mergers and acquisitions usually result in fewer jobs as operations are consolidated, not in adding new ones.

Existing small businesses that want to expand and entrepreneurs who want to start new businesses have not had the same access to capital. As current conditions cause banks to remain cautious, small businesses actually have less access to capital today, not more.  The vast majority of employers (99.7%, according to the Small Business Administration) are small businesses. They employ over half of all private sector employees, and have generated 64% of net new jobs over the past 15 years. Unlike larger firms, who are responsible for being careful with stockholders’ money, these businesses will take a risk, expanding and hiring in advance of economic growth. In short, they are exactly what the economy needs in order to start a robust job recovery, but they have no access to investment or loans that would let them do that.

Over the past few years there have been some modest expansions of the Small Business Administration, but the best way to accelerate a sustainable jobs recovery is to significantly expand their programs. In response to the current jobs crisis, the SBA should be guaranteeing more loans to small businesses, and it should start a program to work with banks for them to provide better access to business loans. Many banks do not participate in this program at all. It should expand its programs to underwrite loans to buy businesses and business real estate.

The SBA should also expand its MicroLoan program, which provides loans less than $50,000 to start micro businesses, and consider increasing the MicroLoan maximum to $100,000. The SBA should consider reviving its “Participating Securities” Small Business Investment Company program (investing in venture capital funds), or at least further expand its “Debenture” SBIC program, which will increase the pool of venture capital. These simple measures will directly spur immediate and sustainable job growth.

Some of the loans will not be paid back, as has always been the case. But many of them will, making this proposal likely have a lower impact on the federal budget than the expected plans from the president and the speaker, both of which will increase the deficit.

America has plenty of entrepreneurial spirit. There are four business incubators in the greater Los Angeles area and others in every major city in the country, filled with entrepreneurs eager to create the jobs of the future and employ the unemployed workers of today. Thousands of small businesses would employ more people if they could get a loan to expand. Tens of thousands of the unemployed want to start their own businesses. All we have to do is give them access to capital, and a larger Small Business Administration, at least until we are out of the woods, is our best vehicle to make that happen.

The New Famine

Today we are facing an economic famine.  Not a shortage of food, but instead a shortage of credit in exactly those parts of the economy that can drive a recovery. 

Consumers have had their credit cards cancelled or the interest rates on them greatly increased.  Small businesses find it impossible to get lines of credit to expand.  And homeowners, despite efforts by the government, cannot get their homes refinanced.  This has caused consumer spending, small business expansion and the housing market to stagnate.  Economists tell us that these are the areas of the economy that need to heat up if we are to have a robust recovery. 

Admittedly, in the past (particularly in the housing market) we extended credit to people who were not credit worthy.  I’m not arguing we should go back to that policy, but today we are denying many consumers, small businesses and homeowners who are creditworthy the credit they need to expand our economy.

Amartya Sen was awarded the Nobel prize in Economics for his work showing that there has never been a food famine in a democracy.  He found that when governments are accountable to the people, they find a way to avoid famine, even when terrible events occur.

Let’s take as an example the great Irish potato famine in the mid 1800s.  During the famine, Ireland grew enough potatoes to feed all of its people.  But the landowners, responding to market forces, exported most of the potato crop.  Other countries had the money to buy the potatoes, while farmers, wiped out by the blight, did not.  History tells us that if the government had been accountable to the Irish people (Ireland was ruled by Britain at the time and had no representation), the government would have found a way to buy potatoes from the landowners and get them to the people who were starving.  The landowners were not evil; they were just running their operation as a business.

In a similar way, the banks today are not evil; they are just responding to market forces and running their businesses.  But while they can borrow money from the government for no or almost no interest, for a variety of reasons (some of them our stricter banking standards), it is better for them, from a business perspective, to put that money into very safe investments.

We need our government to do what it would do in a food famine, to find a way to move resources, in this case credit, to the areas that are starving.  Unlike a stimulus that peters out once the money is spent, this credit can create a sustainable recovery.  And if the government is unwilling or unable to do that, we need to hold them accountable, just as we would if there were a food famine.  Perhaps then, we can look forward to a day when we can say no economic famine ever occurs in a democracy.