Archive for the ‘economics’ Tag

Why Worry about Income Inequality?   1 comment

I’m not rich by Alaska standards. I make less than the median Alaska income. That means I’m wealthier than 99% of the world’s inhabitants.

Image result for image of a snap recipient indulgenceIs that unfair? Hmm ….

Well, I can tell you that living at less than the median Alaska income presents challenges for my family. We aren’t as rich as some of our neighbors. There’s a man in this town who makes millions of dollars a year.

Is that unfair? Hmm ….

If I were to make somewhat less … let’s say so I’m in the 1% worldwide, I couldn’t afford to live in Alaska. So if you took the income of the people who live here and distributed it to all the “poor” people in the world, what would happen? People in Alaska would starve and freeze without shelter or fuel.

Would that be fair? Hmm ….

I make a whole lot more money and live in a nicer home than my working class parents did.

Is that fair? Hmm ….

My parents were always able to feed me. My mother’s parents, at the height of the Depression, struggled with that.

Is it fair that I grew up without going hungry, but my mom got rickets as a child? Hmm ….

So, then I think about all the “poor” people in the US who own cars, live in nice apartments, are able to buy food with SNAP benefits, and afford $100 a month smart phones, but they don’t actually work for their living.

Is that fair? Hmm ….

We have to careful not to confuse income inequality and poverty. Standards of living are increasing, albeit unequally, in most of the world. Developing countries are particularly benefiting handsomely from declining barriers to trade and movement of capital. That’s why inequality between countries is actually shrinking. As for inequality within countries, enrichment at the top has not caused mass impoverishment.

The market economy is not a zero-sum game, where someone’s gain must come at someone else’s expense. “The rich get richer and the poor get poorer” is a synopsis of the socialist critique of the market system, implying the perceived inevitability of what Marx called the Law of Increasing Poverty.

But, guess what? It’s a myth unsupported by empirical evidence. Absent government interference in the marketplace, the poor in most developing nations are gaining ground even as those at the top end of the income spectrum are also amassing greater fortunes. Poverty is reducing all across the world.

So what difference does it make if  your neighbor has a million dollars he won’t share with you if you’re making a real income far in excess of your basic needs?

Oh, right, fairness …. It’s not fair. Why can’t he give up some of it so I can be even richer?

Maybe because I didn’t earn it, but also maybe because he’s going to take that money and provide a job that will someday make my kid far wealthier than I ever hoped to be. But if I rob him of that money he earned, he won’t create that job because: a) without resources nobody can create jobs, and b) why should the victim feel beholden to the one who robbed him?

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Have We Lost Our Minds?   2 comments

I like my house. When we first bought it, it was painted grey, which I didn’t like so much because on rainy days or winter days (and we have a lot of winter days), it just looked sad and depressed. Besides, the previous owners had messed up on the application so it was peeling less than two years after they painted it. So we power washed off the grey, re-primed and painted the house a kind of dark peach with green trim and it now looks more cheerful no matter what month of the year you see it. I am told by a neighbor who knows the folks we bought the house from that the wife doesn’t like our color choices and that’s okay because she no longer owns the house and we do. She can paint the house she owns any color she likes and I won’t critique it — though I was awfully glad when the new owners of the house across the street painted their black house (with red trim) a nice brown with white trim. I complimented them on the paint job, though I never said word one about the red-on-black scheme to the previous owners, because it was their house and not mine.

But imagine how I would feel if I came home one day and discovered that a renowned artist whose paintings were considered art treasures by experts had graffitied my house. Imagine if it were your house and that happened.

It’s my property, so — unless I really, really liked the graffiti, I’d immediately start cleaning the images from my house. So would you, I suspect. If they didn’t ask my permission, I’d want to sue them for whatever it cost me to restore my house to its preferred condition. You would too.

Then imagine that a few days later, you find you are being sued for breaking a law that protects public art of “recognized stature”. Because the artist who tagged your house is considered by someone to be a great artist, you must pay $6.7 million for whitewashing graffiti from your home.

That’s exactly what happened to Jerry Wolkoff, a Queens real estate developer, when he whitewashed dozens of graffiti murals at the 5Pointz complex, violating the Visual Artists Rights Act, “which has been used to protect public art of “recognized stature” created on someone else’s property.”

Wolkoff purchased the 200,000 square-foot former factory buildings in the 1970s for $1 million. Graffiti artists approached him in the 1990s, asking if they could display their art on the vacant five-story building. Wolkoff agreed. He wasn’t using the buildings and it seemed like a community-friendly thing to allow. In November 2013, Wolkoff decided to demolish the building in favor of new stores and apartments. He contracted painters to whitewash the decades of graffiti away under the cover of night to avoid conflict.

“It’s like a Band-Aid, I just wanted to take one rip off in one time. I felt it was best for them and I,” Wolkoff said. “I had tears in my eyes when I painted this morning.”

Okay, he probably shouldn’t have sneaked behind folks’ backs, but given them a chance to photograph and otherwise document what is ordinarily considered temporary works of art, but he knew what would happen — a long, drawn-out battle over the demolition which would harm his company’s bottom line. Twenty graffiti artists filed a lawsuit against the developer and in March 2017, Judge Frederic Block of U.S. District Court in Brooklyn ruled that their case could go to trail.

The New York Times declared this a great victory for the New York artist community and, indeed artists everywhere. I’m going to mea culpa here and admit that my daughter is a graffiti artist. After a close encounter with an angry building owner when she was 18 that resulted in having to clean his building to avoid jail, our beautiful anarchist renaissance woman now asks permission, often taking suggestions from willing participants, and then takes photos because she knows such art is temporary and adhered to other people’s property. When she travels back through a town, she looks for her murals and is always pleased when she finds them, but she also accepts that one day they may be gone. I haven’t had an opportunity ask her what she thinks of this. If she agrees with the artists, I expect her to change her mind after we’ve discussed it.

Wolkoff contended the graffiti artists knew that it wasn’t a permanent thing and one of them even admitted that in the press. Wolkoff granted only temporary permission. As the area around the complex was redeveloped, it should have been obvious to everyone that he was going to redevelop it and make some money from his investment. After all, it was his private property and he should be able to maintain his property as he sees fit. The fact that he knew announcing demolition would cause a court battle with the people he’d been so generous to for decades says he’d been thinking about how to resolve this issue for a long time before he took action. He had provided them with a place to legally do their particular kind of art and his decades-long willingness to provide that blank canvas for them helped to shift perceptions about graffiti and establish it as a celebrated folk art. Maybe they should have thanked him for that opportunity. Instead, in November 2017, a jury found the developer had violated the Visual Artists Rights Act in 45 cases and awarded the artists $6.7 million — the maximum damages possible.

Have we lost our minds?

 

It is essential for society to have a legal framework that doesn’t undermine private property rights. This happened in the United States where we are supposedly protected by the Fifth Amendment.  This wasn’t communist China where the government has granted itself the author to violate the liberties of its people. This is the United States where we’re supposed to be secure in our persons, property and papers. And a federal judge handed down this ruling.

Some people would argue that this is just a minor inconvenience to a rich developer. We all have to follow certain rules to live in society. He held onto those buildings for years without making substantial money from them, renting them to artists and small manufacturers. He could have developed the interiors and left the graffiti in place. People like graffiti … or if they don’t, they should recognize it as folk art that must be protected … Right?

In order for society to achieve economic prosperity there must be a legal framework that doesn’t undermine property rights. Take a look around the world and you find that the wealthiest nations have strong private property rights protection while the poorest nations do not. If I can come home tomorrow and there’s graffiti all over my house that undermines not only my resale value, but my neighbors’ property values, and I’m not allowed to correct the defacement of my property, that’s a problem … not just for me, but for everyone who owns a home or building or anyone who might want to in the future. One man’s folk art is another woman’s defacement and it is our property, not the graffiti artists’.

But in America today, you can actually find people who have no understanding of what private property rights mean. There’s three dimensions.

  1. The exclusive use of a resource
  2. The right to services or utilities rendered by it
  3. The right to exchange it at any price one considers appropriate.

Here’s a nice link for a deeper discussion of the topic. What happens when these rights are somehow restricted, limited or flagrantly violated by law?

The answer is found in the incentives those laws have created. From an economic point of view, an incentive is a potential pecuniary reward that moves someone to do something. When economists say that incentives matter, they mean that a legal framework that establishes the right incentives will result in economic growth and prosperity while the wrong incentives can lead a country into inescapable poverty. If you think this is just economic theory divorced from reality, Venezuelans might beg to differ since they’re living in the real-life consequence of price controls that violated their property rights..

There are many ways to violate property rights and governments do it a lot. Excessive tax burdens, regulations limiting the right to use your property (as happened to Jerry Wolkoff) or asset seizures by government are blatant violations of private property rights that end up depriving economic agents of incentives to create wealth, thereby demolishing one of the most fundamental pillars of prosperity.

Private property rights are incredibly important for any kind of prosperity … or for that matter, liberty … to exist.

So, again, I ask the question – have we lost our minds?

Electric Car Math   5 comments

These are Fairbanks, Alaska figures.

According to Plug In America, a quality electric car (a Tesla) uses 32 kwh to go 100 miles. For the record, 100 miles is less than one-third of the way to the nearest city in Alaska. I am so looking forward to stopping overnight on my way to Anchorage since the Tesla only has a 300 mile range.

Coincidentally, my car needs to be filled about every 300 miles. $2.38 a gallon for gasoline. I know, we produce the oil, so why is gasoline so expensive here. Nobody can give us an adequate answer. Economies of scale are the explanation given, but we produce the oil, so you’d think we’d get a break on reduced shipping, but apparently not.

Image result for image of tesla carElectricity is 27 cents a kilowatt hour in Fairbanks. So to travel 300 miles in a Tesla would cost me $26.00.

My car holds 18 gallons and can take me 300 miles. That’ll set me back $43. Oh, the cost is half, so get an electric car. But ….

BUT … I need a heater or I’ll die in Alaska’s frigid temperatures. Running a heater in a gasoline engine hardly reduces the gas mileage because it’s excess heat off the engine. Running a heater in a Tesla does reduce the range … by 50%. If I wanted to drive to Anchorage, 380 miles away, I’d have to stop for gasoline in Wasilla. That would take 15 minutes (half an hour if I decide to grab some food and use the facilities) and I’d be on the road again. I would not stop to sleep along the way as it only takes about seven hours to drive 380 miles.

Image result for image 2005 ford taurus covered in snowIf I was driving a Tesla in the winter, with only 150 mile range, I’d have to stop in Healey and Wasilla and sleep overnight – $120 per night for the hotel, $60 a day for meals, and two nights of my time since it takes a Tesla 9.5 hours to achieve a full charge (assuming it can do that when it’s -30 out). So what I save in gasoline over driving electric, I more than make up in other costs.

A $400 trip to Anchorage (round-trip – gasoline, meals and assuming a decent hotel) would become a $1300 trip in an electric car, plus add four days onto my trip.

So please stop telling me about how much money I would save with an electric car versus my gasoline car. Yes, commuting to and from work in a warm climate saves you money, but those savings evaporate in a cold climate and become a liability if you need to travel any distance.

 

Posted February 8, 2018 by aurorawatcherak in economics, Uncategorized

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American Empire   Leave a comment

The year 2017 saw the beginning of the end for the US empire. I bade it farewell after Trump refused to sign the Paris Accord. I was fully in agreement that he shouldn’t. It hadn’t been authorized by Congress and it isn’t supported by most Americans who instinctively or knowledgeably understand that it would devastate our economy and drive us into third-world status within just a few years. But not signing the Accord meant the world would begin to look elsewhere for the next leader of the free world and I think that’s a good thing.

Britain survived its fall from the Most High status and we will too. In the long run, I think it will be better for us, but let’s just look at history first. We replaced the UK because we were more productive and forward thinking. Now that China has starting to ecclipse us, just like the UK before us, we don’t want to go quietly into that good night. Like any dying empire, our leaders are becoming increasingly ruthless, hoping to keep up appearances.

Image result for image of american empire

I know people who think our refusal to lead on “climate change” is what is causing this failure. Yeah, I don’t think so. Climate change — at least, the “human causation of climate change — will be disproven in a decade or so and whether or not we’d led the charge to roll back carbon emissions to 1930s levels would not have made the slightest bit of difference — at least not for the US. We are already lagging behind because of the extreme financial cost of warfare. It, not climate change, will be the death knell of the American empire. Since the start of the 21st century, we’ve invaded more countries than at any other time in our history. We appear to be in a perpetual state of both military and economic war.

Our combativeness, which has grown under every president since World War 2 ended is starting to make other major powers nervous and they’re now seeking to counter US aggression. Maybe they hoped we’d entangle ourselves in climate-change redtape and that would slow us down. Certainly they were hoping that the globalized economy would counter our aggression. But in reality, it is our aggression that has provided the rope that is hanging us. We’re not done yet, thanks to our somewhat unnatural alliance with the ill-conceived “United States of Europe.” That experiment is already stumbling and likely to fragment, but its leaders are hoping their alliance with the US will strengthen the EU. Meanwhile, the other major powers of the world are going full steam ahead to ensure that, when the US and EU run out of gas,  the rest of the world will carry on independently of the dying dual empires.

Understand, they aren’t merely waiting around the sidelines for the collapse to come so they can take their turn at the top of the global pecking-order. They are actively preparing their position to, as seamlessly as possible, take the baton and run.

There’s history here, of course. If we don’t learn from history, we’re destined to repeat it. So let’s learn from it.

Since the Bretton Woods Conference in 1944, the US dollar has reigned supreme as the world’s default currency. In 1944, the US held more gold than any other country, but in 1971, the US went off the gold standard, and since then, the dollar has been a fiat currency. The US has become increasingly cavalier in its abuse of the dollar—often at the expense of other countries.

Russia and China finally got tired of that and created the largest energy agreement in history not based on the US dollar. All trade between the two countries will be settled in the ruble and the yuan. Russia has since been active in creating agreements with other fuel customers, also bypassing the dollar. In creating these agreements, the Asian powers have unofficially announced the demise of the dollar in petroleum trading. For decades, the US has applied its muscle to other countries, using the strength of our dollar. So, the Sino-Russian agreement will likely end the US monopoly of price fixing in oil trading, but it will also to create a decline in US power over the world, generally.

To this end, Russian created its own SWIFT system. The official system, located in Brussels but controlled by the US, controls the vast majority of economic transactions in the world, but in recent years, the US has barred, or threatened to bar, other countries from the SWIFT system, effectively making it impossible for banks to transfer money and, by extension, causing the collapse of their banking systems. Russia got tired of that also and created its own. It’s entirely likely that, if Russian trading partners (Iran, for example) are barred from the use of the Brussels SWIFT (or even threatened to be barred), Russia would extend the use of its SWIFT to them.

That takes power away from the US. Provided Russia doesn’t use its system as a tool of intimidation, other countries may well flock to it, forcing the United States to interface with the new system or lose trade with those countries.

Meanwhile, China and Russia have been expanding their economic powers dramatically and have periodically complained that their seats at the IMF table are unrealistically low, considering their importance to world trade. In 2014, China officially replaced the US as the world’s largest economy, yet the IMF has consistently sought to minimize China’s place at the table. Can’t really blame them for being irritated by still being stuck at children’s table when they have a grownup economy.

The West believes that it is holding all the cards and that the Chinese and other powers must accept a poor-sister position, if they are to be allowed to sit at the IMF table at all. The West does not appear to recognize that, if frozen out, the other powers have the ability to create alternatives. As with the SWIFT system, the Asian powers have reacted to US overreach, not by going away licking their wounds, but by creating a second IMF.

The Russian State Duma (the lower house of the Russian legislature) have now created the New Development Bank. It will have a $100 billion pool, to be used for the BRICS countries. Its five members will contribute equally to its funding, instead of how the US slowly bankrupts itself by being the primary contributor to the system in controls. The BRICS bank will be centered in Shanghai. India will serve as the first five-year rotating president and the first chairman of the board of directors will come from Brazil. The first chairman of the board of governors is likely to be Russian Finance Minister Anton Siluanov. It’s therefore structured to be truly multinational, instead of a western monopoly of power.

In creating all of the above entities, the BRICS will, in effect, have created a complete second economic world. So much for Mutually Assured Economic Destruction. And thank God!

In the latter days of the British Empire, the British seemed to be under the illusion that, even as their power base crumbled, maybe they could retain control by threats and bluster. The UK was utterly wrong and only succeeded in alienating trading partners, colonies, and allies by doing so.

The same is happening today. China, Russia, and the rest of the world, when faced with American threats and bluster, will not simply fold their tents and accept that the US must be obeyed. They will, instead, create alternatives. And they are doing so exceedingly quickly and with unexpected competence. At this point, the overreach of the US is not only enabling other powers to rise, it is forcing their hand to literally create the next full-blown empire.

Wouldn’t it be so much better, Americans, if we accepted our declining status, pulled back much of our far-flung empire and fortified our position in the coming changing environment? It took England generations to become healthy once more because they refused to accept reality. Let’s return to what we were in the 19th and early 20th century – not an empire, but a highly productive nation of innovative and freedom-loving people with largely friendly trading relationships all over the world. Then we don’t have to worry about being dragged off our pedestal. We can simply go about our business and not give other countries reasons to hate and attack us.

I know, unrealistic. If we let go of our position in the world we won’t be great anymore and we can’t have that. The horror!

Dangers of Government Control   Leave a comment

We are a nation of 325 million people. We have a bit of control over the behavior of our 535 elected representatives in Congress, the president and the vice president. But there are seven unelected people who have life-and-death control over our economy and hence our lives — the seven governors of the Federal Reserve Board.

The Federal Reserve Board controls our money supply. Its governors are appointed by the president and confirmed by the Senate and serve 14-year staggered terms. They have the power to cripple an economy, as they did during the late 1920s and early 1930s.

Their inept monetary policy threw the economy into the Great Depression, during which real output in the United States fell nearly 30 percent and the unemployment rate soared as high as nearly 25 percent. The most often stated cause of the Great Depression is the October 1929 stock market crash. Little is further from the truth. The Great Depression was caused by a massive government failure led by the Federal Reserve’s rapid 25 percent contraction of the money supply.

The next government failure was the Smoot-Hawley Tariff Act, which increased U.S. tariffs by more than 50 percent. Those failures were compounded by President Franklin D. Roosevelt’s New Deal legislation. Leftists love to praise New Deal interventionist legislation. But FDR’s very own treasury secretary, Henry Morgenthau, saw the folly of the New Deal, writing: “We have tried spending money. We are spending more than we have ever spent before and it does not work. … We have never made good on our promises. … I say after eight years of this Administration we have just as much unemployment as when we started … and an enormous debt to boot!”

The bottom line is that the Federal Reserve Board, the Smoot-Hawley tariffs and Roosevelt’s New Deal policies turned what would have been a two, three- or four-year sharp downturn into a 16-year affair.

Here’s my question never asked about the Federal Reserve Act of 1913: How much sense does it make for us to give seven unelected people life-and-death control over our economy and hence our lives?

While you’re pondering that question, consider another: Should we give the government, through the Federal Communications Commission, control over the internet?

During the Clinton administration, along with the help of a Republican-dominated Congress, the visionary 1996 Telecommunications Act declared it “the policy of the United States” that internet service providers and websites be “unfettered by Federal or State regulation.” The act sought “to promote competition and reduce regulation in order to secure lower prices and higher quality services for American telecommunications consumers and encourage the rapid deployment of new telecommunications technologies.”

In 2015, the Obama White House pressured the FCC to create the Open Internet Order, which has been branded by its advocates as net neutrality. This move overthrew the spirit of the Telecommunications Act. It represents creeping FCC jurisdiction, as its traditional areas of regulation — such as broadcast media and telecommunications — have been transformed by the internet, or at least diminished in importance.

Fortunately, it’s being challenged by the new FCC chairman, Ajit Pai, who has announced he will repeal the FCC’s heavy-handed 2015 internet regulations. The United States has been the world leader in the development of internet technology precisely because it has been relatively unfettered by federal and state regulation. The best thing that the U.S. Congress can do for internet entrepreneurs and internet consumers is to send the FCC out to pasture as it did with the Civil Aeronautics Board, which regulated the airline industry, and the Interstate Commerce Commission, which regulated the trucking industry. When we got rid of those regulatory agencies, we saw a greater number of competitors, and consumers paid lower prices. Giving the FCC the same medicine would allow our high-tech industry to maintain its world leadership position.

Source: Dangers of Government Control

Walter E. Williams is the John M. Olin distinguished professor of economics at George Mason University, and a nationally syndicated columnist. To find out more about Walter E. Williams and read features by other Creators Syndicate columnists and cartoonists, visit the Creators Syndicate web page.

Copyright © 2017 Creators.com

RIP Sam’s Club   Leave a comment

Sam’s Clubs around the country are being closed, proof positive — according to some of my Democratic friends, that the economy is not doing as well as people think it is.

Image result for image of sam's club closingSam’s doesn’t mean that much to me. We used to be members, but when we stopped spending on credit, we went through a couple of years where we couldn’t afford Sam’s in our budget and by the time we could afford to budget for it again, we were out of the habit of using them. We’d started buying bulk at a local feed store and we’d discovered the Internet, so Sam’s was redundant.

I do acknowledge that it will be hard for some people to lose Sam’s. Small businesses who need bulk items – cups, coffee, etc. – will feel the pinch. Big families who buy bulk. A friend of ours who is a meat connoisseur who buys his meat in primals and does his own butchering. But for our family, it really wasn’t worth the membership. And 150 people lost their jobs here locally and in a community of only 100,000 people, that’s a hit.

But why did Sam’s close? According to our newspaper here, Sam’s nationwide is restructuring and that’s a complicated story. It belongs to the same corporation that Walmart and Walgreen’s belong to. Although Sam’s has not been unprofitable, it has not been growing as fast as Walmart and the fact that about 12 of the closed locations will be turned into e-commerce distribution centers, suggests Sam’s is looking into the future. These new centers will help Sam’s Club build out its e-commerce capabilities by giving it a wider fulfillment network, potentially helping it get online orders delivered to customers faster.

Increasing its commitment to e-commerce may help Sam’s Club compete with wholesale rivals like Cosco and Boxed. E-commerce is becoming more of a focus in wholesale retail, and if Sam’s Club doesn’t invest in it, the company may get left behind. Costco is a major competitor to Sam’s Club (and there’s one in Anchorage, but not in Fairbanks), and in its most recently reported quarter, its e-commerce comparable sales jumped nearly 44% year over year. Additionally, Boxed, an e-commerce only wholesale startup, is starting to establish itself. Sam’s Club’s e-commerce gross merchandise value (GMV) has been between 20% and 29% year over year in recent quarters, Sam’s Club told Business Insider Intelligence. These new fulfillment centers may help the company strengthen this growth, as it looks to better compete in wholesale online.

Turning physical stores into distribution centers is also way for Walmart to leverage its brick-and-mortar network. Walmart has a virtually unmatched brick-and-mortar network — its CEO has estimated that it has a brick-and-mortar location within 10 miles of 90% of the US population. The retailer has made efforts to entice consumers to pickup online orders in-store, but turning underperforming stores into full-blown e-commerce distribution centers as Sam’s Club is doing is another way to take advantage of its proximity to its consumers. If Walmart, and Sam’s Club, hope to thrive online, they’ll need to offer fast delivery times to rival Amazon, and having e-commerce distribution centers close to customers should help with that.

Just as the Piggly Wiggly’s ran the full-service grocery store out of business, online e-commerce is sucking away the business of physical locations. But Amazon isn’t a monopoly yet and it is struggling with its network (hence, it’s desire to build a second HQ). If Walmart moves into ecommerce in a big way, utilizing former Sam’s Club locations as fulfillment centers, it potentially becomes a major contender against Amazon.

It sucks for Alaska because we have to pay individual shipping rather than allowing Sam’s to spread that cost in bulk, but we can still use Cosco, which is in Anchorage and has been suggesting for years that it might move to Fairbanks. They no longer have any competition here, so they just might. And, if they don’t, a local trucking company is advertising that they will be doing twice-a-month 380-mile runs with people’s personalized shopping lists. Yeah, it’s the return to the full-service grocery store.

Ultimately, Sam’s Club is an example of creative destruction. By closing many of their locations, they allow their parent company to become healthier and better able to face the changing needs of a 21st Century society. In 10 years, people will wonder why we went through all the hassle of traveling to a big warehouse to pick up stuff, wandering by stuff we don’t need, but then decide to buy, then try to fit it into our cars when we can now just make our selections online and have it delivered to our door by freight drone.

Posted January 20, 2018 by aurorawatcherak in economics, Uncategorized

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Stealing From Your Neighbor Through Subsidies   Leave a comment

In 2017, the Montana Public Service Commission approved (4 to 1) the renewal of Commnet Wireless’s Eligible Telecommunications Carrier (ETC) certification, authorizing that company to receive a federal “Lifeline” subsidy of $34.25 for every customer on the Northern Cheyenne Reservation – an amount sufficient to render their service free to most users. Previously, this same company received $2.2 million in Universal Service Fund (USF) “high cost” subsidies to build their infrastructure in Rosebud County. This subsidy paid for all of their capital costs in establishing their business, debt-free, while producing for them a tidy annual profit of almost $1 million.

Image result for image of fiber optic cableIt seems that Commnet Wireless is “living the American Dream” – at everyone else’s expense. But that’s not a rare circumstance.

 

The Universal Service Fund was first created by Congress in 1934 then greatly expanded under the Telecommunications Act of 1996 (Clinton was President). It is funded by a dedicated federal tax on consumer phone bills. This, ironically, makes the very services Congress wishes to expand less affordable, especially to lower-income Americans. The program is premised on the belief that an ever-expanding set of telecommunications services are the “right” of all citizens, and should thus be made “universal” by the generosity of Washington’s re-distributional political class.

The program started with landlines, then expanded to wireless and is now being applied to broadband — and not just any broadband, but high-speed fiber-delivered broadband. The Lifeline program gives away free cell phones and subsidizes low-income and tribal households. The Connect America Fund and “High Cost” programs directly subsidize telephone companies, as well as schools, libraries and rural health care facilities to provide “free” Internet. USF’s total annual budget is currently $10.5 billion, or $84 per American household.

That’s a month of Internet at my home, where I can’t get high-speed broadband because the infrastructure doesn’t exist. We can get “high-speed” DSL that drops out 2-3 times a day because people are making phone calls or cable Internet which is slower than high-speed fiber. I’ve never lived anywhere that offered high-speed broadband because our local Internet providers just don’t see a profit in providing it and permitting laws don’t allow competition. So do I have a “right” to high-speed fiber-delivered broadband? I haven’t died without it up to this point and we’ll pursue that thought further down.

Like all federal programs, USF proceeds blindly with the assumption that shoveling federal dollars at something automatically produces the desired outcomes – outcomes that would not otherwise happen if people were left to spend more of their own money, and the marketplace was allowed to respond to human needs and desires absent government intervention. It’s not surprising to learn then, that the FCC has never reliably measured to what extent the subsidized telecommunications services would have expanded just as much – or more – into the targeted high-cost areas, without any subsidies needed – and done so at lower cost. Dollars spent are considered a successful outcome regardless of actual outcomes.

In Alaska, rural villages and the Native corporations that they own came to the conclusion that, since the cities don’t have fiber-based high-speed broadband yet, the villages would have to provide it for themselves. Internet is currently provided via satellite and it sucks. Several corporations made a decision to contract with Anchorage-based Quintillion for a land- and sea-based fiber-optic cable network with an overall capacity of 30 terabits per second. Each of the five communities in the network currently will have access to up to 200 gigabits of data per second. If demand increases, the capacity can be increased according to Quintillion. It went live December 13. Four other villages will be added this coming summer.

This is a side project to a planned Tokyo to London fiber cable. It’s being financied by Leonard Blavatnik, one of the world’s wealthiest individuals, through the Cooper Investment Fund, but there are also Alaska-based investors including subsidiaries of Native corporations Arctic Slope Regional Corp. and Calista Corp, two of the largest “private” companies in Alaska. Eventually, this cable is expected to provide fiber-delivered Internet to Fairbanks and Anchorage.

So what do we learn from that? The time has come to re-think wealth transfer schemes like the USF, that eliminate price signals, supplant the free market, and create the net effect of increased government dependency and a culture of entitlement. As with any other good or service in a free economy, consumer demand for rural high-speed broadband should be based on the willingness of consumers to pay for the full cost of that service – not based on political pandering that subsidizes one man at another’s expense. A shell game with predetermined winners and losers, lacking any credible metrics and amounting to little more than a glorified multi-billion dollar welfare program.

Saying we “want” something as long as somebody else pays for it is not “demand”. Currently, broadband build-out into high-cost areas is based almost entirely on artificial demand – created by subsidy – rather than on true demand, created by value-seeking consumers in the marketplace, responding to the price signals of true cost. If consumers in outlying areas value fiber-delivered high-speed internet enough to pay the full cost, then we have genuine demand and the market will see to it that these services are provided – without any government involvement.

If consumers are unwilling to pay the true cost, then demand does not exist, and presumably won’t exist until private enterprise finds ways of delivering better service at a lower price. But that incentive disappears when the government steps in. Saying we “want” something as long as somebody else pays for it is not demand. It is little more than theft dressed up by the agency and power of government. Personal responsibility – the foundational principle of a free society – is replaced with “but I want it, so you should pay for it.”

According to my research, you can get high-speed broadband for $30 a month in New York City. Here in Alaska’s second-largest city, I can get slower cable-based Internet for $100 a month — actually, I could get cable Internet for as low as $60 a month, but you can’t watch Netflix without going over the monthly limit. Of course, we don’t have high-speed broadband because the current cost for building broadband or wireless infrastructure into rural and low-population areas is obviously higher on a per-customer basis – perhaps 50 to 100 percent more. One of the fundamental principles of sound economics is the alignment of benefits with costs. When you subsidize a good or service, you can no longer know what people are actually willing to pay as consumers because the government has gotten somebody else to pay for them.

This arrangement tends to convince rural customers that the full price is “unjust” to those who have chosen to live in the country. At the same time, it obstructs the very progress that would bring lower prices about. The subsidized companies have a reduced incentive to economize and to innovate since their profit is all but guaranteed without it.

Public service commissioners everywhere need to understand that it is not the job of the state commissions to rubber stamp federal programs that evidence shows are harmful in the long run to the people they serve. Subsidies like USF produce obvious beneficiaries. Government giveaways always do. They are highly visible. The market-driven benefits produced by those same dollars, left in the hands of those who earned them, are always far greater, but cannot be specifically identified. They become the opportunities lost, the blessings of liberty that were aborted before their birth.

Thus, government creates an illusion of value and benefit, when in reality all it has done is substitute government spending for spending in the marketplace by the frugal, self-interested, wage-earning consumer. The fantasy of a net benefit is bestowed on the person who wasn’t involved in the working or the earning – convinced by politicians that he had it coming all along. Surely, high-speed broadband is in the Constitution somewhere.

Once established, climbing out of the Subsidy Entitlement Pit is never easy. The smoke and mirrors of perceived benefit are so effective, that it becomes very difficult for elected officeholders to do the right thing, by choosing freedom over political security. It is far easier to avoid criticism and “go with the flow.”

To be sure, doing the right thing and doing the easy thing are rarely companions that walk the same path. Doing the right thing requires an extra measure of principle, courage and integrity, something most politicians and government workers lack.

What this comes down to is not just an economic consideration, but also the need to educate people on just what is a “right”. I have no right to anyone else’s stuff. I only have a right to what I can produce myself or trade with others from what I can produce myself.

So, for example, I am a writer and administrator. I make money from both of these endeavors. I can take the money and buy stuff with it, stuff that someone else has produced. One-hundred dollars of my earnings go every month to my cable provider to provide Internet service. I don’t have cable television or this would be the biggest bill in my budget. I get what I get. From the perspective of someone with fiber-delivered high-speed broadband, my Internet service is clunky. But would I be willing to pay $200 a month for fiber? No way! I simply don’t have that sort of wriggle room in my budget. If it were available for that cost, I would continue with the service I have now because I make choices of what to do with my money.

My neighbor says he wants high-speed Internet, but he isn’t willing to pay $200 for it. So, he petitions the cable company and the city government to apply for ETC funds. Pretty soon, my cable bill increases because the company is trying to finance fiber. Also my telephone and cable bill taxes increase. Now, even though I have elected to stay with ordinary Internet service because I don’t want to pay for fiber, I am paying for my neighbor’s fiber.

That’s theft. And there is no scenario where you can say that you have a right to steal from someone else, even if you do it through a government program.

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