April 23, 2017

Don’t Make the Internet Safe for Monopolies

This week I’m going to Washington to argue against regulating Internet access as if it were phone service. Twenty years ago I was there for the same reason. My concern now as it was then is that such regulation will damage the economy and reduce opportunity by stifling innovation and protecting the current dominant players from the startups which would otherwise threaten them.

At that time the proponents of Internet regulation were most regional monopoly telephone companies, who were regulated themselves (and very comfortable living in a regulated environment). The then small Internet industry (including me) argued that startups were not monopolies and could not afford the batteries of lobbyists and regulatory compliance lawyers needed to survive in a regulated world. “Imagine,” we said, “if each new Internet app had to be approved by some commission or another”.

Fortunately Federal Communications Commission (FCC) Chair Reed Hundt, a Democrat appointed by Bill Clinton, and a majority of commissioners agreed with us. The Commission policy on Internet regulation became one of forbearance. The monopolists were right to worry. The Internet was disruptive. If they had won, there would be no such thing as Skype or Vonage; calls to China would still be $3.00 minute; and 800 numbers might still be more important than websites for shopping. Google, Netflix, Facebook, and Amazon wouldn’t be the companies they are today.

Hundt’s successor William Kennard, also appointed by Clinton, listened carefully to all arguments and continued the policy of benign forbearance. Innovation flourished. When Bush was elected,  Internet folk were afraid that his FCC appointees would be more responsive to telco lobbying. We could no longer argue that the Internet was a fledgling industry but could and did argue the public benefits of innovation and rapidly evolving business models. Michael Powell, Bush’s first appointee as FCC Chair, and the Commission debated and then issued the “Pulver Order” declaring that Voice over IP was not a telecommunications service. That meant in practice that the FCC, whose mandate only extends to telephony services, would have no reason to regulate the Internet.

The FCC did NOT regulate the Internet from then until now. However, in the waning days of the Obama administration, the FCC promulgated a regulation saying that Internet access is a telecommunications service (regardless of whether voice over IP is involved.). Therefor the FCC has the right to regulate Internet access as it used to regulate monopoly phone service. Big reversal.

Those who now want regulation are Google, Facebook, and other major Internet players. They are good marketers so this regulation is called “Net Neutrality”. Who could be against a neutral Internet where all bits are equal? Ironically it is the telcos and cable companies (ISPs) who are on the other side and against reregulation; they are the ones who will be regulated.

There are four major things wrong with the “Net Neutrality” regulations as promulgated (they are not yet in effect):

  1. All users of the Internet as well as the economy itself will suffer if regulation is used to throttle innovation – that’s as true now as it ever was.
  2. This regulation protects the powerhouse incumbents – Google, Facebook et al – from effective and needed competition. It protects them on one side from rich ISPs (why?) and on the other side from would be new providers of Internet access (think mesh networks, access from drones, whatever) who won’t be able to satisfy the regulations made for the technologies they are obsoleting.
  3. There is probably no legal justification for the FCC regulating the Internet. FCC has jurisdiction over basic telecommunications service. They said the Internet isn’t such a service for years; just saying it is all of a sudden a basic telecommunications service doesn’t make it so.

Google may yet regret its call for regulation of any part of the Internet value chain. A Wall Street Journal story last week says that Google is working on an ad-blocking filter for its Chrome browser. Will the FCC next declare browsers a telecommunication service and require browser neutrality?  

With all due respect to many people I respect who support the “Net Neutrality” regulations, I’m as much against regulating the Internet now as I was 20 years ago although I no longer have any direct financial interest except as a consumer. I hope both that the legal challenge to this extension of the FCC’s reach will continue and that the current FCC will undo the harm that its immediate predecessors did and return to the policy which has so successfully supported economic growth and innovation for the last twenty years.

See https://www.bna.com/pai-engages-silicon-n57982087000/ for a Bloomberg story on this issue.

April 20, 2017

Net Neutrality. What’s It All About?

The fear is that your Internet Service Provider (ISP) will be able to determine what Internet content you get to access or at least make it more expensive or less convenient to access some content than other content. Most Americans get their fixed line Internet access from either a phone company or a cable company. Former phone companies like AT&T (owns DirecTV)  and Verizon (buying Yahoo) are increasingly in the content business, and cable companies like Comcast have always owned and controlled content.  Why wouldn’t an ISP favor their own content over that from Netflix or Amazon or YouTube? They could, for example, prioritize the packets which carry their own shows over packets from others; you would have a good experience watching content from the ISP and a lousy experience with content from others – constant freezes and stutters. Yuk!

So is this a credible threat? Do we need a law or regulation to protect us? Google and Amazon and Netflix think we do; they lobbied successfully at the end of the Obama administration to have the Federal Communications Commission (FCC) promulgate a regulation protecting “net neutrality” which essentially mandates that at least wireline ISPs treat all traffic equally and that the FCC gets to decide exactly what this neutrality means. Obviously these companies have a commercial interest in protecting themselves against “ discrimination” by ISPs who have ambitions to sell search and content. But an argument motivated by commercial interest doesn’t have to be wrong in terms of the public interest.

Not surprisingly the ISPs argue that their Internet access business, which has been unregulated so far, should remain unregulated. They say that there have not been proven instances of any such discrimination, that consumers would simply switch away from them if they interfered with customers’ content choices, and (somewhat contradictorily)  that they invested in their networks so they should be able to use them profitably. If they are regulated, they say, they won’t invest an Internet access will not improve. These arguments are also profit-motivated; but that doesn’t necessarily make them wrong from a public interest PoV. The now Republican FCC agrees with the ISPs and is getting ready to reverse the net neutrality regulation.

History tells us that regulation is the enemy of innovation (and usually the friend of monopolists). In the last fifty years of regulated telecommunication, the only innovations we saw were the dial tone and 800 numbers. Just compare the capabilities of your smartphone connected to a largely unregulated data network and your desk phone attached to the regulated phone network which can’t even text.

Internet pioneers lobbied AGAINST attempts to bring the Internet under common carrier regulation; the FCC under Democrats and Republicans agreed; the result was the tidal wave of innovation which brought us to where we are today. Interestingly it was then many of the telcos that wanted to regulate the Internet to prevent it from becoming competition. Good thing they lost or you wouldn’t be Skyping today.

The regulations promulgated last year do exactly what Internet companies, until recently, were against: they impose “common carrier” regulation on ISPs. The common carrier regulations were devised when phone companies were granted monopolies. They gave us some degree of protection (not much) against monopoly pricing and they gave the monopolies protection against competition.

So, if regulation isn’t the answer to potential predatory behavior by ISPs, what is? And what about the danger that ISPs will sell a history of everything we browse which I blogged about last week? Stay tuned.

April 17, 2017

A For-Profit Surgical Center is a Good Idea for Vermont

A group of local investors want to build a $1.8m surgical center in Colchester, VT for surgeons who prefer not to operate in a hospital setting, according to a story in VTDigger last week. Opening such a center, even when no public money is involved, requires a certificate of need from the Green Mountain Care Board. Vermont’s non-profit hospitals (there are currently no “for-profit” hospitals in the state) are urging the Board not to grant the certificate saying that it would result in an increase in health costs.

From the VTDigger article:

“The investors argue such centers save patients and insurance companies money because both Medicare and private insurers pay them less than hospitals for the same procedures. These types of facilities are called ambulatory surgical centers and are both licensed and regulated by the U.S. Centers for Medicare and Medicaid Services

“Christina Oliver, the vice president of clinical services at the University of Vermont Medical Center in Burlington, said the proposed facility is not needed because the hospital’s operating rooms and procedure rooms are working far below capacity. ‘We have open time available every day that is staffed but unused,’ she said.”

I am an admirer of and contributor to UVM Medical Center; but I think that the for-profit surgical center hospital should be allowed to open. The quality of care I've gotten at UVMMC has been excellent; once the hospital saved my life. But that doesn't mean that Vermont won't benefit from competition to keep medical costs down.

We will attract more doctors to the state if they have a choice of being in a wonderful research and teaching hospital like UVMMC or providing care in a smaller, more flexible organization.

There may be plenty of surgical operating rooms in Vermont, as Ms. Oliver said; but I know from experience that does not mean that minor non-emergency operations can be scheduled expeditiously. If a for-profit operation can provide faster care in these cases, that will be a help to many Vermonters.

We are not cost conscious medical consumers in Vermont because we have neither enough choice of providers nor transparent pricing to compare. The proposed center will offer both choice and transparency.

Finally, "for-profit" is not an epithet. A for-profit provider will fold if it does not offer something better than its non-profit competitors. There will be, and should be, quality regulations to assure that efficiencies are not achieved by cutting corners which shouldn't be cut.

It would take a lot to convince me to choose some other provider over UVMMC or Copley; they have set a high bar for quality. Nevertheless, prices are anything but transparent and waits for non-critical care do exist. Competition should be allowed.

The Green Mountain Care Board has a website for public comment. If you have an opinion on this issue – pro or con, please post it at http://gmcboard.vermont.gov/board/comment. Of course your comments are welcome here as well.

April 13, 2017

Do you Want Comcast to Know Your Underwear Size?

Congressman Michael Capuano (D, MA) complained on the House floor that he bought some underwear online and that he thinks that Comcast, his internet service provider (ISP), is selling information about his purchase. He was testifying against Republican legislation which prevents a Federal Communications Commission (FCC) regulation promulgated in the waning days of the Obama administration ostensibly to protect Internet privacy from going into effect. Trouble is the congressman doesn’t understand who is selling his undergarment preferences. It’s highly unlikely that it’s Comcast.

We’ve all had the same experience. You break your ballpeen hammer; you google ballpeen hammers; your search leads you to Amazon where you make a purchase. Immediately your online experience is framed by a flock of ballpeen hammers. You look at weatherunderground: rain tomorrow and ballpeen hammers. Check the local news: headline is arson under a banner ad for ballpeen hammers.

How does that happen, you ask?  Did my ISP spy on my search or my transaction with Amazon and then sell my information to the makers of ballpeen hammers? Is that what happened to the congressman and his underwear order? Nope. It was either Google or Amazon (or both) who “monetized” the information you gave them about your purchase intentions. Here’s how it works:

When you did your search, Google put a “cookie” – a snippet of information only Google and you can read – on your computer. Amazon put an Amazon cookie on as well. The cookies either contain the specifics of what you were searching for or an identifier which lets Google or Amazon retrieve information about searches done from your computer or by you if you happen to be signed on to Google or Amazon at the time.  

Now you go weatherunderground, Google or Amazon or both have bought ad space on the weatherunderground webpage. Their ads run in a “frame” on the webpage which means they have code in them which actually communicates with Google or Amazon and not with weatherunderground. This frame looks to your browser like it is running at Google or Amazon so it has access to the cookies which Google and or Amazon left behind. Aha. As fast as speeding electrons, Google or Amazon “know” that you will be interested in a chance to buy a ballpeen hammer so they give you that chance (I don’t know why Amazon apparently doesn’t know you already bought one). Up pops the hammer. The process is slightly more complex if you are on a different device, but the ballpeen ads can get to your smart phone as well as your computer.

As far as I know Google and Amazon don’t sell the information directly to purveyors of ballpeen hammers; but that’s only because this is not the best way for Google or Amazon to make money from the information. Amazon obviously gains if they can sell you something you want. Google makes most of its money by selling ads. In general they get paid when the ad is clicked on; so they make the most money by serving you an ad you’re likely to respond to. They’ve used the information to make you a source of profit. That’s not a sin, just a fact. You get free searches from Google in return for the information you give them. You pay low prices and get great choices and maybe free shipping at Amazon because they are so good at getting you to buy.

So why does the FCC want to regulate ISPs rather than Google and Amazon? Is that regulation a good idea? How should privacy be protected online? How can you protect yourself? Stay tuned to this blog (it doesn’t put cookies on your computer).

April 10, 2017

Motives Are for Mysteries

Is it more heinous to kill someone for their ethnicity than for their money? Is it worse to beat someone up because of their sexual orientation than because you “just” hate them personally? Yes and yes according to multiple US laws. For example, according to Wikipedia, “The Violent Crime Control and Law Enforcement Act, enacted in 28 U.S.C. § 994 note Sec. 280003, requires the United States Sentencing Commission to increase the penalties for hate crimes committed on the basis of the actual or perceived race, color, religion, national origin, ethnicity, or gender of any person. In 1995, the Sentencing Commission implemented these guidelines, which only apply to federal crimes.” There are numerous other state and federal laws which make the same distinction.

Without making the slightest excuse for crimes motivated by hatred, I think this is absurd. “No, your honor, I didn’t kill him because of his religion; I killed him because he didn’t open the cash register fast enough when I was robbing his store. I should get a lesser sentence.”

Motive is often important in the detective work that leads to an arrest. After arrest and conviction, the punishment should depend on the crime that was committed, not what led the person to commit the crime. A murder should be punished for murder, not for what he said while committing the act.

Over-emphasis on motivation rather than action is not confined to criminal prosecution.

According to NPR, The Hawaii court which issued an injunction against Trump’s second immigration order  "…concluded, based on the historical context of the travel ban and public statements made by the president, that 'a reasonable, objective observer ... would conclude that the Executive Order was issued with a purpose to disfavor a particular religion[.]' " Does that mean that the same executive order would pass legal muster if it were issued by someone else? The order is either constitutional or not; the Supreme Court will decide. It’s either good policy or not; you can decide that on your own and probably have. But whether the court can overturn a law or an order should depend on the language of the law or order, not on the intent of the person who promulgated it. Should we undo the First Amendment if we find out that James Madison was trying to protect himself from a libel suit?

Intelligent friends and relatives have told me that they think our missile attack on the Syrian nerve gas base was a good thing to do and in the interest of both humanity and the United States. “But,” some of them have said, “I don’t trust his motives.” How will we ever know his motives? He probably was aware that sticking a thumb in Putin’s eye would help dispel the allegation that he is Moscow’s man in DC. He probably knew that this action would get the bipartisan support he has not gotten for anything else in his presidency. And no reason to think he wasn’t horrified by the gassing.  You can have more than one motive at a time. But none of that matters. What matters is whether the use of force was right or wrong.

Obama’s extreme detractors say he didn’t act when Assad crossed the chemical red line because he (Obama) wanted to weaken the United States. This is the motive argument backward. If you do something I don’t agree with, you must have a bad motive. In my opinion Obama made a very serious mistake, probably did it with the best of intentions. Doesn’t matter. Actions matter; motives are for mysteries.

April 07, 2017

The World is a Tiny Bit Safer This Morning

The long-overdue attack on Assad’s forces finally came together at unheard of speed – almost faster than leaks about its planning could escape from the Pentagon. That’s only one of the good things about the action President Trump ordered against the Syrian airbase.

Most important, it may deter other horrible chemical attacks against civilians in Syria or elsewhere. It won’t end other atrocities, of course; and it won’t end the complex war in Syria. But it’s still crucial in humanitarian terms that one red line is back.

There was constructive collateral damage to any hopes Russia may have had that Trump would be their man in Washington. According to the NY Times:

Dmitri S. Peskov, a spokesman for President Vladimir V. Putin of Russia, told reporters Friday morning that the strike “deals a significant blow to relations between Russia and America, which are already in a poor state,” …

Although the Pentagon says that it warned Russian forces and tried to avoid killing them at the airbase, we also made clear that we do not regard the Russian presence in Syria as a shield for Assad. That’s important. The Russian troops were inserted after President Obama made the worst mistake of his presidency by setting and then ignoring a red line at the use of chemical weapons against civilians. Putin likes the checkers tactic of occupying vulnerable squares first so that action by the Us and its allies is frozen by fear of Russian casualties and wider consequences (see Ukraine).

President Xi of China is at Mar-a-Lago for his first visit with President Trump. The attack on Syria adds credibility to Trump’s message that China must constrain North Korea or the US will.

Two quibbles:

Before the latest chemical weapons atrocity, the Trump administration did signal that there might be a role for Assad in post-war Syria. We’ll probably never know if that emboldened Assad (if you can use the word “embolden” to describe a cowardly attack). But this signal may have had two fortunate results: 1) the aftermath shows that acts have consequences; 2) there is no appearance that the administration was “out to get Assad”. He was offered an olive branch; he committed a barbarous act; his ability to act was diminished.

My second quibble is that we didn’t do more. “Proportional response” has not proven an effective deterrent. It leaves the enemy contemplating a tit-for-tat and the short patience we Americans have. I think we should have totally destroyed Assad’s air force. I certainly don’t think we should have made the public statement, which we did, that this is all that we’re doing. Too much useful information for the enemy. Why not let them worry?

I’m overjoyed to see that Trump can change his mind as facts evolve. This is a strength and not a weakness. Too often American politicians are trapped by not being able to admit they were wrong.

April 04, 2017

Were You Communists?

Mary and I visited North and South Vietnam on two separate trips in the last couple of years. Couple of weeks as a tourist makes you an expert on exactly nothing but we did learn a lot.

In Hanoi there’s a war museum. The Vietnamese have been in lots of wars. Usually they win; sometimes they lose. When they lose, they keep fighting anyway. That‘s what happened to the French at Dien Bien Phu, a battle they lost after they’d “won” the war in Vietnam a couple of times. That defeat led to the French withdrawal and the partition along the 17th parallel and eventually American involvement.

Ho Chi Minh is the hero of the War Museum. However, there are gaps in the coverage of him. No mention, of course, of his Viet Minh forces cooperating with the French in 1945-46 to massacre other factions from the Vietnamese nationalist movement.  “The American War” is the last war in the long progression. It’s painful for Americans to see the Vietnamese view of it, even with the understanding that there’s no “good” view of what a war does to people. There’s plenty of propaganda and real anger in the exhibit; but no more than there is in the coverage of other former enemies, especially the French and the Japanese.

The North Vietnamese were friendly. They would’ve slightly preferred that we were Brits. But Americans are OK. Lots of countries have lost wars in Vietnam; can’t hate them all. And everyone does have a cousin in the US.

South Vietnam doesn’t talk as much about the “American War”. They still call their old capital by its colonial name, Saigon, and avoid the official name, Ho Chi Minh City. When necessary for administrative reasons, it’s “HCMC”. Many don’t like the North Vietnamese. The only angerI heard towards Americans was bitterness that we abandoned them. Remember the shameful picture of the last American’s leaving Saigon in a helicopter from the roof of a building near the US Embassy? They haven’t forgotten.

We met another American couple (Mary talks to people when we travel). From my PoV the man was stridently liberal and opinionated. But he did respond to (although not agree with) spirited but respectful disagreement. One day they had just come back from talking to some Vietnamese.

“We heard,” said the Vietnamese, “that there were huge protests in your country which led to the US pulling out of Vietnam”

“Yes, our acquaintances told us they said proudly. “We were part of those protests.”

“Were you communists?” the Vietnamese asked.

March 31, 2017

Constructive Compromises for a New Center Coalition

Until recently, a center coalition ruled Washington civilly. Trouble is that the coalition agreed mainly on mutual back scratching and became the creature of lobbyists and interest groups. It tried to appear to do something for everyone but we ended up with crumbling infrastructure, feckless foreign wars, increasingly expensive college tuition and health care costs, bank bailouts, and burgeoning wealthfare and welfare rolls. We elected whomever seemed to offer the most prospective for “change” – without being very fussy about what is going to be changed. Many Americans lost the hope of improvement which has been our distinguishing force. The wrath of both the Tea Parties and The Occupy Movements was kindled.

 Suddenly both parties have become captives of their radical wings, neither of which I think offers much hope. The radical wings can be left flapping in the breeze if there’s a new center coalition and Republicans and Democrats vote for the same bills after some reasonable compromise. Here’s my suggestion for constructive compromises which IMO address the legitimate grievances of voters.

“I’ll vote to end the subsidies and tax loopholes for my contributors (oil and gas drillers , for example) if you’ll vote to end the subsidies and tax loopholes for your contributors (‘renewable energy’, for example).”

Upside: Much less burden to taxpayers. The market rather than government determines business winners and losers.

Downside: Campaign contributors don’t contribute. Congress people have less chance to claim bacon brought back to their districts. The market won’t take into account hidden costs (like pollution) so it is necessary that these are accurately assessed on producers.  

“I’ll vote authorization for US troops in combat if their mission is defined and they are given 150% of what they need to accomplish it in six months.”

Upside: We defend ourselves effectively when we need to; we go less often to places where lives (and money) will be squandered.

Downside: We might be penny-wise and pound foolish and leave ourselves vulnerable. Presidents would need to specify costs and objectives (which we might not want to tell the enemy). Congresspeople would have to take responsibility for the costs of what they approve

“I’ll vote for massive public works if the regulations are changed so all new projects – public or private - must be approved or disapproved within two years, preparing for approval takes no more than six months after design is complete, and those seeking to halt a project after approval need to post a bond for the cost of delay to be refunded only if they prevail in their appeal.” (more here)

Upside: Infrastructure gets built and upgraded as it didn’t under the last stimulus bill. Private dollars pour into projects like pipelines with speedy and firm approval possible. As pipelines are built, gas will displace more coal and oil (lower CO2 AND virtual elimination of SOx and NOx and other bad stuff). Oil will travel by pipeline rather than by train which is not only cheaper but much safer. Better infrastructure helps the regrowth of American manufacturing.

Downside: A project might get built in your backyard and, although you’ll be able to testify against its approval, if it is approved you won’t be able to stop it for 20 years with after- approval litigation. Doesn’t bring back coal miner jobs. Hurts the railroads who lose coal and oil transport business (tough on Warren Buffet).

“I’ll vote for deregulation so banks can lend to new and small business again so long as we also assure that no bank (or other institution) will be bailed out if it fails. This means assuring that no institution can grow to the size that it poses a systemic threat and can blackmail the government for a bailout.” (more here)

Upside: Making loans available to small and new businesses means that the best job-creators are back in business in force. Tired old companies which don’t innovate lose the protection they have now because they get can get credit and nimbler would-be competitors can’t. Local and regional banks grow at the expense of money center banks.

Downside: More banks will fail. Regulating bank size is not easy and could be abused.

“I’ll vote for strict work requirements for all public assistance programs including Medicare if you’ll vote for a higher minimum wage.” (more here)

Upside: It’s bad for both donors and recipients if needed public assistance becomes a disincentive to work. More resources can be focused on those who can’t work if those who can work do and if pay for work covers necessities.

Downside: Determining who can and can’t work and who really needs assistance for how long is difficult and intrusive. Increasing the minimum wage will eliminate some entry level jobs entirely.

“Let’s write legislation which is so clear and concise that regulators don’t make important policy decisions and endless court cases aren’t needed to figure out what we meant.”

Upside: Policy control is in Congress where we can see it rather than in vast bureaucracies where we can’t. We won’t need endless court cases to know what a law means.

Downside: Compromise is more difficult when vague language doesn’t leave it possible for both sides to claim victory. Hard to strike a balance between precision and too much detail in legislation.

March 29, 2017

The Failure of the Center

In The Ship of State is Taking on Water, I warned that increased rocking means we’re in danger of floundering from water coming over both rails as we lunge from side to side. Reader comments have shown both that my metaphor suffers from assuming there’s a strict left-right dichotomy and that failures of the center have much to do with our current instability. Interestingly the two commenters I’ve extracted from below probably don’t agree on much except the failure of the center.

Daniel Berninger wrote (in response to a later post):

The usual left - center - right decomposition misses the more powerful vertical dynamic driving politics across the planet today - elite (up) versus the people (down) aka globalism versus populism/patriotism responsible for a President Trump, Brexit, et al.

The populist energy reflects two things:

  1. Incompetent (actual competently self-serving) stewardship of government by a uni-party power elite. The $48 trillion burned across two R terms and two D terms since 2000 in the US produced a dramatic decay of prospects for the common man (and via similar numbers in the EU) across every category of government activity.
  2. Massive expansion of Internet enabled communication options after 1995 makes it extremely difficult for elites to control the usual narrative - aka everything is fine and we are doing a great job. The government apologist forces control 100% of traditional media channels (and 90% of top 100 news websites), but the existence of direct public to public channels (like this comment) make it impossible (for the moment) to hide reality of utter and complete government failure.

The comprehensive vilification of Trump by punditry can not[sic] dissuade the people of things directly experienced in daily life. The various polls point to pessimism about the prospects for the next generation for the first time.

I defy anyone to name a single aspect of government intervention since 2000 improving daily life. The list of degradations is endless - cost of healthcare & associated insurance, accomplishments of military interventions, median income, labor force participation rate, cost of college and student debt, home ownership and equity, along with an explosion of public and private debt and on and on without end…

John Fairbanks wrote:

…While I would agree - this is the easy part - with the idea we need more thoughtful, evidence-based comity in our public policy discussions, I take exception to other points. While, from your point-of-view, Obama went too far left, he was and is a moderate-to-liberal Dem with a strong sense of social justice. His foreign policy was a mess, but it wasn't coming from the left. The ACA/Obamacare, which you deride as a "Ponzi scheme" (which seems to have become the favored term-of-art on the right for any tax-payer-funded social program), was born at the Heritage Foundation and field-tested by Mitt Romney in Massachusetts. Had Obama been a leftist, he would have pushed for single-payer, if not national health insurance, or at least added the public option to his program. He did none of those things, perhaps out of political utility, but also perhaps because he doesn't see things from the left perspective. (I might add that deriding the ACA as you do, while not snarling and shouting, is neither an example of civil discourse.) Similarly, Obama did not send the Justice Department after the bankers, who not only wrecked the economy and cost millions of Americans, me included, our jobs, savings, and retirements. Anyone from the left would have, at least, done that. The largely-tax-deductible settlements the banks made with the federal government and other plaintiffs scarcely made a dent in the costs of repairing that damage…

Both of their points are well-taken. The anger of both Occupy Wall Street and the Tea Party originated in the massive bank bailout called TARP (see It Was TARP that Boiled the Tea and The Occupiers and Tea Partiers are Both Right). Bernie Sanders got the Occupy votes; Trump got the Tea Party votes (grossly generalizing). Had it not been for the (pretty realistic) public perception that Hillary Clinton represented a continuation of non-partisan wealthfare, she’d probably be President today.

TARP originated in the Bush administration and got even worse under Obama; last outbreak of bipartisanship we’ve had. Not what we want to go back to. The coalition in the middle used to be more civil – but it hasn’t recently been constructive. Compromise has meant I’ll give a handout to your contributors (let’s say oil drillers) if you give one to mine (say “green” energy investors); and let’s both not forget our bankers. Compromise has meant massive funding for public works so tied up in regulation that practically nothing gets built (see We Need Infrastructure, Not Another Stimulus Bill). Compromise has meant fighting undeclared wars while not actually giving our troops the means to win.

My suggestions for a new center are here.

March 23, 2017

The Fantasy Tweet

Trump’s Great Chance.

As of tonight, Republicans in the House of Representatives can’t agree on a healthcare bill that enough of them will vote for given unanimous Democrat opposition to any Republican bill. The President, who really doesn’t belong to either party, could just call a halt to the partisan charade. The tweet would look like this:


The truth is that ObamaCare added coverage for people who weren’t covered before in a way which has resulted in ruinously rising premiums and diminishing choices in coverage for almost everyone, even those not covered by ObamaCare. On the other hand, the bill was addressing a real problem and many people now depend on its provisions. Fixing it is as hard as fixing a bridge which must remain in service during repairs. Thoughtful, constructive legislation needs to be passed.

What we don’t need is a semantic debate over whether we’re repairing or replacing ObamaCare. Who really cares except politicians?

The extreme right wants no government involvement; the extreme left wants no private involvement.  Both are willing to block any compromise by their respective parties if they can’t have all they want. Best way to disempower them is from the middle. If reasonable Dems and Reps vote together for a compromise, the extreme wings of both parties will be flapping in thin air. Great opportunity for a President who is a deal maker and wasn’t the choice of either party.

The Ship of State Hanging by a Thread

We Gotta Talk to Each Other.

Wednesday I blogged The Ship of State is Taking on Water. This morning vtdigger.org was kind enough to run the post. The mainly civil thread of comments it attracted makes me very hopeful that we can steady the ship by talking to rather than past or at each other. Here's the best example:

commenter robby porter wrote:

Yeah, the rocking boat is a nice metaphor, and the story well told, but to imply that Trump's lunatic administration is just the other side of Obama, who ran a scandal-free, competent administration for eight years--eight years of slow but steady growth, declining crime, gradual disentanglement from the wars--is so ridiculous that it pretty much discredits the rest of the essay. Worse, it makes a false comparison between Obama's rational policies which you don't like, and Trump's irrational behavior.

And I replied:


I'm glad you liked the metaphor. It does imply that each rock is worse than the last roll. So the next lurch (presumably to the left) scares me even more than our present unbalance.

Although, as far as I know, no Obama officials were caught with their hands in the cookie jar, there was plenty to react to in his (very rational) administration including:

redlines set and ignored. the world a more dangerous place than it was eight years ago.
entering into significant international agreements without Senate approval (makes them nonbinding which isn't good either)
abuse of executive authority (doesn't matter whether it was in a good cause. precedent now very dangerous)
much more significant hunting down of press leak than his predecessors of either party did
vilifying police while ignoring the terrible violence they are coping with (yes, there are bad cops). BTW, crime now growing again altho I certainly don't blame Obama for the opioid crisis
a health care act whose funding mechanism seemed to have been designed to fail (perhaps to force single-payer)
continued wealth protection, especially for bankers
abuse of the IRS to harass conservative organizations.

This is not to defend the irrational twitter blasts or unforced errors of the Trump administration. It is a partial catalog of what sane but alarmed people reacted to, not just in the election of Trump but in the election of Republicans at the state and congressional level.

My hope is that we can work on the very real problems our state and country have with civility instead of ad hominem attacks (yes, I know who is the ad hominem attacker in chief), without panic, and certainly without dictatorship of the left or right.

To which robby replied:

Thanks for replying, Tom. Look, rational people can disagree about rational choices, but Obama is mostly in the past, so we should let that go. I agree with your sense that the country is lurching and the boat was a good image and I liked the story.

Solutions, as we both know, are much harder than criticism.

It seems to me that the core problem, is that things are getting worse for a majority of people in this country. I think worse is defined by material well-being, not in the narrow sense of a computer that is twice as fast as last year's or a $500 phone in everyone's hand, but in the sense of material and financial security-- whether someone feels that their job is secure, fears that an unexpected illness might bankrupt them, suspects, with statistical justification, that their children's lives will be less secure than their own, and so on.

America, the American Dream, and, frankly, capitalism, is predicated on things gradually improving. Capitalism needs growth, money lent at a rate needs a return, otherwise the system doesn't work. Over the past thirty or so years, most of the value of economic growth in this country has gone, increasingly, to a minority of the people. Naturally the majority, rightly or worngly, feels as though they don't have much to lose, nor do they have much reason to believe in the traditional values of the country, honesty, hard work, democracy, capitalism, and all the rest.

So yes, maybe the next lurch will be hard to the left. I remember a college professor telling us that, in the height of the Great Depression, communism was considered, by many people, be a reasonale alternative to capitalism which didn't seem to be working very well. Personally I consider that an unrealistic and discredited system, but I don't think you can be surprised that people are upset with the status quo.

This increasingly uneven division of the economic pie seems, to me, to be the core problem. You're a smart guy and a guy who has done well in this system, do you agree? If not, what do you think is the core problem? And at any rate, whatever you see as the problem, what do you think is the best way to solve it? That's an essay I'd love to read.

And I had the last word (so far): 

I absolutely agree with you. wish I wrote what you wrote.

my parents were communists during the depression (and their youth). Capitalism - and democracy itself - must deliver at least a chance of improvement - just as you say. If the perception is that the system is rigged, the system will fail.

The "system" is never completely fair, of course; but today it is too close to rigged. I think that is much of the source of anger.

The bipartisan bank-bailout called TARP was the eye-opener for me. It started in the Bush administration and got worse under Obama (as it might have under a Republican). Those who got the big bucks because they took risks got to keep the big bucks even when they failed. On a symbolic level the carried interest tax deduction for hedge fund managers has survived both Republican and Democratic administrations. Hedge fund managers are big campaign contributors.

I do think that repression by political correctness and identity politics with its set asides and quotas also lend to the perception of unfairness.

But it's easier to diagnose the problem than fix it. I do propose improvements from time-to-time. Today I'm encouraged by the tone of the comments on this piece. we can't fix anything if we can't talk to each other.



March 21, 2017

The Ship of State is Taking on Water

A million years ago when I was in college, my friends and I drove to Cornell for a party. Friends there had arranged blind dates and even a boat for an evening on Cayuga Lake. The boat was basically a raft with floatation provided by barrels underneath (I don’t think Styrofoam had been invented yet). There was a cabin on the raft and the flat roof on top of the cabin was the main location for drinking, socializing and attempted seduction. I, unfortunately, was running the outboard and steering us around the lake – my blind date didn’t like me.

For some reason too many people were on one side of the boat. The boat tipped that way. Everyone rushed to the high side. The boat tipped even further in the other direction. The next tip was so extreme that there was water on the low side of the deck. Now the panicking people were reinforcing the rocking motion. The top of the outboard was getting wet and I worried that it would stall and also that the barrels would come loose from under the raft. Drunks would drown and it would be all my fault.

Fortunately, a friend on the boat exercised his voice of authority and got everyone to stop in the middle. The rocking subsided; the drinking, socializing and attempted seduction resumed; and eventually I took us safely back to shore.

I’m afraid that America is currently a rocking boat. We wanted “change”; we elected Obama. From my PoV, the ship of state tipped too far to the left: foreign policy was abysmally weak; more people were covered by health insurance than had been previously covered but the funding mechanism was (is) a Ponzi-scheme; the rich got richer; banks got bailed out; and the poor remained at least as dependent on government largess as they had been. Political correctness reached new lows, especially on campuses.

So we elected Trump. The ship of state rocked far in the other direction.

Xenophobia became policy. Incivility became the norm in political discourse. There are indications that hate crimes are up. The political promises of Republicans are as hard to keep as the promises of the Democrats were. The left is up in arms and would like to lead a “resistance” stampede back to the other side of the boat. After all, water is now coming over the right rail.

History is full of countries which rocked themselves into authoritarian leadership either of the left or the right – frightened people vote for stability. Frightened people vote for authoritarian captains.

Neither Obama or Trump or their “movements” were all right or all wrong. But somehow we have to stand in the middle of the boat and stop the mindless rocking. Then we can get somewhere. Civility and tolerance might be a good start.

March 15, 2017

Free Speech Isn’t Granted by the First Amendment

It’s an “unalienable” right.

Nevertheless it’s a right which is endangered by the intolerance of both the right and the left. Lately and near home some have thought to excuse the disgraceful assault on free speech and free debate, not to mention the physical assault on a professor, at Middlebury College on the grounds that, since the college isn’t the government, free speech (and apparently professors) aren’t protected there.

True enough, the first amendment in The Bill of Rights “only” says: “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press;…”. Congress could only abridge a right if it already existed. This amendment protects the right of free speech; it doesn’t grant it.

The Declaration of Independence makes clear where these rights come from: “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights,…” In other words, no one gets to take rights like free speech away; not government at the federal level; not government at the state level or the local level; and not a mob like the one at Middlebury.

In fact the protections against certain acts of congress in The Constitution have been extended by a series of court decisions to apply to the states and their subdivisions. Congress has extended the obligation to protect these rights to many recipients of federal aid – including colleges. Would those who argue that free speech protection doesn’t apply at Middlebury also argue that Middlebury isn’t obliged to offer equal-opportunity admission or equal funding for men and women’s sports?

Another specious argument used to defend the mob is that Charles Murray had no inherent right to speak at Middlebury. That’s true but irrelevant. It’s not his right that was abridged; it’s the right of the students who invited him and wanted to listen to him or debate with him that was denied by those who wouldn’t let him speak. Free speech means the right to listen to whomever you want as well as the right to say what you want.

Free speech needs lots of defense, partly because it obliges those of who treasure it to protect the rights of those who say obnoxious things – including attacks on free speech itself. We must extend them the right to be heard that they would deny us.

Lately there have been endless parallels proposed between the election of Donald Trump and the rise of Nazis in Germany. We should never forget these lessons. But I’ve just returned from France with its horrible memories of the tyranny of the self-righteous left after the French Revolution. The mob at Middlebury is a reminder that liberty is most at threat from those who are convinced they have a monopoly on truth, whether they are on the left or the right. Our unalienable rights are always endangered and always need defense.

March 13, 2017

Fair Warning in the Desert

A racket overloaded my hearing aids. It sounded mechanical at first but I was in the McDowell Sonoran Preserve reslinging my pack after a snack and getting ready for the last long uphill of the day; nothing mechanical there. Then atavism overcame analysis and instinct recognized the sound. The rattlesnake sunning on the rock next to the one I sat on for lunch was much thicker than I would've expected. Most of it was coiled except for its head and tail. I didn't stop to get my phone out of my pack to take its picture. Later I wrote to my grandson Jack who shares my appreciation of Shel Silverstein and Ogden Nash.

I saw a snake;

The snake saw me.

"Skedaddle," he said with his rattle,

Causing me to flee.


Jack responded with illustrations.

Papersnake Snake

March 08, 2017

Statement of Principles by Middlebury Faculty

So far Bill McKibben has not signed on.

Following the disgraceful events at Middlebury, which included shutting down an invited speaker and assaulting an escorting professor so she had to go to the ER, an impressively large group of Middlebury faculty have written a statement of principles defending free speech and asserting the importance of contrary views. They posted it online along with their names and I’ve quoted it below.

Surprisingly Middlebury professor and environmentalist Bill McKibben is NOT on the list of signers. Since he has made a career of protesting vigorously for his views, I’m sure he understands the importance of free speech and how jealously it must be protected. The list is open until March 11 so perhaps he will still join.

Below is the statement:

On March 2, 2017, roughly 100 of our 2500 students prevented a controversial visiting speaker, Dr. Charles Murray, from communicating with his audience on the campus of Middlebury College.  Afterwards, a group of unidentified assailants mobbed the speaker, and one of our faculty members was seriously injured.  In view of these unacceptable acts, we have produced and affixed our signatures to this document stating core principles that seem to us unassailable in the context of higher education within a free society.

Our statement of principles first appeared in the Wall Street Journal on March 7, 2017.

The principles are as follows:

Genuine higher learning is possible only where free, reasoned, and civil speech and discussion are respected.

Only through the contest of clashing viewpoints do we have any hope of replacing mere opinion with knowledge.

The incivility and coarseness that characterize so much of American politics and culture cannot justify a response of incivility and coarseness on the college campus.

The impossibility of attaining a perfectly egalitarian sphere of free discourse can never justify efforts to silence speech and debate.

Exposure to controversial points of view does not constitute violence.

Students have the right to challenge and to protest non-disruptively the views of their professors and guest speakers.

A protest that prevents campus speakers from communicating with their audience is a coercive act.

No group of professors or students has the right to act as final arbiter of the opinions that students may entertain.

No group of professors or students has the right to determine for the entire community that a question is closed for discussion.

The purpose of college is not to make faculty or students comfortable in their opinions and prejudices.

The purpose of education is not the promotion of any particular political or social agenda.

The primary purpose of higher education is the cultivation of the mind, thus allowing for intelligence to do the hard work of assimilating and sorting information and drawing rational conclusions.

A good education produces modesty with respect to our own intellectual powers and opinions as well as openness to considering contrary views.

All our students possess the strength, in head and in heart, to consider and evaluate challenging opinions from every quarter.

We are steadfast in our purpose to provide all current and future students an education on this model, and we encourage our colleagues at colleges across the country to do the same.

March 06, 2017

Rules for Detecting BS

Borrowed from Astronomer Carl Sagan.

He called them rules for avoiding baloney but he wrote at a politer time. Given the flood of alleged science on the Internet and the impossibility of fact-checking it all, these rules are even more essential than when he wrote them. The list is from his book The Demon-Haunted World: Science as a Candle in the Dark. Highlighting below is mine.

  1. Wherever possible there must be independent confirmation of the “facts.”
  2. Encourage substantive debate on the evidence by knowledgeable proponents of all points of view.
  3. Arguments from authority carry little weight — “authorities” have made mistakes in the past. They will do so again in the future. Perhaps a better way to say it is that in science there are no authorities; at most, there are experts.
  4. Spin more than one hypothesis. If there’s something to be explained, think of all the different ways in which it could be explained. Then think of tests by which you might systematically disprove each of the alternatives. What survives, the hypothesis that resists disproof in this Darwinian selection among “multiple working hypotheses,” has a much better chance of being the right answer than if you had simply run with the first idea that caught your fancy.
  5. Try not to get overly attached to a hypothesis just because it’s yours. It’s only a way station in the pursuit of knowledge. Ask yourself why you like the idea. Compare it fairly with the alternatives. See if you can find reasons for rejecting it. If you don’t, others will.
  6. If whatever it is you’re explaining has some measure, some numerical quantity attached to it, you’ll be much better able to discriminate among competing hypotheses. What is vague and qualitative is open to many explanations. Of course there are truths to be sought in the many qualitative issues we are obliged to confront, but finding them is more challenging.
  7. If there’s a chain of argument, every link in the chain must work (including the premise) — not just most of them.
  8. Occam’s Razor. This convenient rule-of-thumb urges us when faced with two hypotheses that explain the data equally well to choose the simpler.
  9. Always ask whether the hypothesis can be, at least in principle, falsified. Propositions that are untestable, unfalsifiable are not worth much. Consider the grand idea that our Universe and everything in it is just an elementary particle — an electron, say — in a much bigger Cosmos. But if we can never acquire information from outside our Universe, is not the idea incapable of disproof? You must be able to check assertions out. Inveterate skeptics must be given the chance to follow your reasoning, to duplicate your experiments and see if they get the same result.

Yes, I would like to see these rules followed in the debate about climate change which it is essential that we have.

I heard Carl Sagan lecture twice. The first time he was predicting a new ice age, which he called the nuclear winter. He said it would be caused by dust from nuclear testing blocking sunlight from reaching the earth. It’s impossible to know whether he would have been right since above-ground nuclear testing ended. This was the climate worry of its day and was very popular and helped make Sagan a cultural icon. It also helped that he was generally liberal and hated Richard Nixon.

The second lecture was about the likelihood of us ever contacting another intelligent civilization. If I remember right, the odds were 50-50 because he believed that “intelligent” civilizations are likely to destroy themselves in nuclear conflicts around the time they got technically advanced enough for inter-stellar communication. He would be interested to know that his estimate of the frequency of earth-like planets was orders of magnitudes low, partly because he assumed they would have to be circling stars very like our sun. He didn’t have the advantage of recent advances in astronomy. Good scientist that he was he laid out all the steps of his calculation so that it could be updated when astronomy (or history) showed a premise to be incorrect.

Thanks to good friend Eric for pointing me to these rules.

March 03, 2017

The Differences between Camel’s Hump, VT and Camelback, AZ

640px-Camelback_Mountain_2  640px-CamelsHumpVT2012


The most important difference between these two very different mountains is what happens when you stumble and reach out to grab the vertical object you see in your peripheral vision. On Camel’s Hump, the object may be a birch and you may crush a slug in your hand. Disgusting. On Camelback you will grab a cactus and you will wish you had crushed slug in your hand.

It’s true that both mountains have humps on them; actually most mountains which don’t have peaks have humps. Neither of the people who named these mountains had ever seen a live camel (don’t fact check me; I made that up).

Both mountains have scrambles at the top. On Camel’s Hump you scramble the last few hundred feet on solid granite. On Camelback the scramble is the top one third of one approach and most of the other approach, in both cases on not-very-trustworthy sandstone.

Which brings us to hiking sticks. On Camel’s Hump a hiking stick is a great help both for pushing up steep places and not tumbling down them on the way back. On Camelback a hiking stick is something you don’t want to have in your hand because you need to grab the rocks you’re scrambling over with both hands (see scrambling above).

Late news from the hot tub: the trails on Camelback used to be walkable. The recent heavy rains washed out the sand and left the shark-tooth-like jagged stone ridges which require two-handed scrambling.

The view from the top of Camel’s Hump is much prettier. Signs of civilization in Vermont are hidden from view by the geography so the foreground is green forest and the background is other mountains to east and west. Suburban sprawl is very visible on the flat plains between Camelback and the taller mountains on both sides as pictured below.


The view at the top of both mountains is disappointing: too many other people who seem to have easily made the climb you struggled with.

Dogs are only allowed on the Vermont mountain.

For a truly great hike in the Phoenix area, try Tom’s Thumb in Scottsdale’s wonderful McDowall Sonoran Reserve. The trail on hard sandstone has perfect traction; the landscape is a garden of huge rocks and cactus. Dogs are allowed. See author below at the eponymous peak, which is as perfect a pluton as Pinnacle in Stowe, VT.


February 24, 2017

Time to Face the Health Care Facts

Fix or “repeal and replace” is a political issue.

“So you've got this crazy system where all of a sudden 25 million more people have health care and then the people who are out there busting it, sometimes 60 hours a week, wind up with their premiums doubled and their coverage cut in half. It's the craziest thing in the world."

Sounds like something President Trump might’ve tweeted except it’s more than 140 characters. However, this is a quote from President Bill Clinton about the Affordable Care Act (aka ACA aka Obamacare). He walked it back some the next day but he knew what he was talking about.

If Hillary Clinton had been elected President, she’d be dealing with the same real health care cost problems Republicans are struggling with. The main difference would be political: she’d have to be sure that her left wing accepted that changes were only routine maintenance while Republicans have to mollify their right wing by claiming that whatever they come up with is not Obamacare.

There are two separate issues: how do we stop the relentless climb in the cost of health care and who pays the remaining cost. As we’ve seen with ACA, moving the costs from one population, in this case the uninsured and the hospitals who are required to treat them, to another population, “the people who are out there busting it”, doesn’t make the costs go away. This post is about the hard choices we have to make to reduce overall cost. Because all of these choices are politically unpalatable, they are mainly missing from the current healthcare debate. Nor do I have answers for them, but they must be discussed,

The drug epidemic.  An increasing share of hospital budgets goes to treating the same population over and over for drug abuse and its health consequences. Tragically, more and more children of drug abusers need treatment for addiction from the moment of birth and suffer poor health and many other evils from having incompetent parents. Is there a way and is there the will to withdraw treatment from serial abusers who will not (or cannot) be cured of their habit? Is there a way to stop drug abusers form having babies? These are very tough questions.

The obesity epidemic. Obesity is known to cause heart disease and diabetes and multiple other ills, all of which require treatment. We do know that much obesity is caused by bad diet abetted by sedentary ways. We know that children on food stamps are more likely to be obese than those who are not and that childhood obesity is particularly dangerous.  We can and should defy the candy and soda lobbies and make these products ineligible for food stamp purchase just as liquor and cigarettes already are. How much of a nanny state should we be after that? If we’re offering healthcare to everyone, do we have to be a nanny state to keep the cost down?

Geezer care. I benefit from this. But how much treatment should my Medicare pay for? A huge part of the country’s medical budget is spent caring for people in the last year of their lives. Any discussion of this gets shut off politically with talk of “death squads”. But you can’t have free care without rationing it somehow. A dollar spent on me is not available to treat a child with a lifetime ahead of her or him.

If we can bring down the overall budget for healthcare by addressing these issues, then the problem of who pays for it gets simpler to solve. But we can’t bring the cost down while ignoring the elephants in the room.

February 22, 2017

Don’t Panic!

No question these are scary times. The new President, to be charitable, has made a lot of rooky mistakes. His grasp on reality slips in the face of any criticism, and he is faster to go on an ad hominem attack than a pit bull. Things are pretty scary on the other side as well. Most of the press thinks that the most important issue facing the nation is how the President treats them; they confuse criticism with censorship. Most importantly, the country is badly and deeply divided. That’s real. People on both sides of the divide, but particularly on the now-out-of-power left, are reacting with panic.

The best description of panic I ever read is in the novel Norwegian By Night by Derek B. Miller.

“Panic is the enemy,” said Staff Sergeant O’Callahan in 1950. “Panic is not the same as being scared. Everyone gets scared. It is a survival mechanism. It tells you that something is wrong and requires your attention. Panic is when scared takes over your brain, rendering you utterly fucking useless. If you panic in the water, you will drown. If you panic on the battlefield, you will get shot. If you panic as a sniper, you will reveal your position, miss your mark, and fail your mission. Your father will hate you, your mother will ignore you, and women across this planet will be able to smell the stench of failure oozing from your very pores.”

Panic isn’t pretty. It isn’t helpful, either. Dangerous times call for calm and judgment. If we want to stop really bad things, you’ve got to distinguish them from the things we just disagree with. We can’t automatically assume that everything Trump does is wrong – or right, for that matter. We can’t assume every news story we disagree with is false – or assume that it is true just because we agree with it. We can’t imagine ourselves as heroic members of the resistance when we go to a police-protected demonstration; that’s an insult to the people in the Syrian resistance being gassed and barrel-bombed by their government. Equally we are not the “Indians” of the Boston Tea Party because we demonstrate against the bailout of banks (that is the first thing the modern day Tea Party was against).

It’s a scary time; we can’t panic.

There’s another great paragraph in Norwegian By Night. This time Miller is writing about Oslo, where he lives as an American ex-pat. The book was published in 2012 so he wrote this before the last great migration, but he's writing about part of what divides us today.

"Recent immigration from Africa and Eastern Europe— and Muslim countries farther east— created a new social tension in the city that still lacked the political maturity to address it. The liberals expounded limitless tolerance, the conservatives were racist or xenophobic, and everyone debated from philosophical positions but never from ones grounded in evidence, and so no sober consideration was being given to the very real question now haunting all of Western civilization— namely, How tolerant should we be of intolerance?"

February 20, 2017

Is Border-Adjustment the Answer to Broken US Corporate Tax Structure?

The US corporate tax system combined with globalization turns free trade into unfair trade (see last post). Profits domestic companies make overseas are not taxed until they come home; so, naturally, corporations invest these profits abroad and build new factories abroad and favor the output of their foreign factories even if the cost of labor is the same or somewhat better in the US. To add insult to injury, while we are favoring imports with our tax code, most of our trading partners (including all OECD countries except us) favor their exports by rebating value added tax (VAT) when goods leave their country.

If we are going to continue to have the benefits of free trade and globalization, we must make sure free trade is fair to American workers. Sanders and Trump voters are right in saying that these benefits are flowing to the 1% at the expense of American workers. I’m embarrassed not to have thought about this before being hit alongside the head by the strength of these voters’ anger.

One proposal to solve these two problems in the corporate tax code is called a border-adjusted tax. Here’s how The Economist describes it:

“Firms currently pay corporate taxes on their profits. Border-adjustment would change how those profits are calculated. Accountants could no longer deduct imports—say, goods brought in from China—as costs. And their exports would no longer count as revenues. For tax purposes, “profits” would be domestic sales minus domestic costs. Effectively, imports would be taxed, and exports would be subsidized.”

Let’s take a toy which can be purchased by Walmart’s in China for three dollars and which costs twenty cents to bring home. Since the VAT in China is 17%, the refund to Walmart on export to $.51. The net cost is $2.69. Suppose the toy can also be purchased from a factory in the US for three dollars and local transportation is only a nickel. Since there is no refund of corporate taxes in the US like the VAT refund, the cost to Walmart for the US product is $3.05 - $.36 higher than the Chinese toy. Let’s suppose the toy sells for $3.99 at your local Walmart. Under the current system Walmart has a gross taxable profit of $1.30 on the Chinese toy and of $.94 on the US equivalent. Assuming for the sake of example that Walmart pays the effective US corporate tax rate, which is about 26% according to the GAO, the after tax profit on the Chinese product is $.96 and only $.70 on the US product, even though manufacturing costs were the same and transportation from China is more expensive. How do you compete with that?

One answer is border adjustment. Let’s border adjust the example:

This time Walmart is not allowed to deduct the cost of the imported product when calculating its taxable profit, which we’ll assume includes transportation (actually depends on the version of border-adjustment). The full $3.99 sales price is now taxable incremental income to Walmart and the tax due at 26% is $1.03. Walmart will now have an after tax loss of $.07 cents on the Chinese toy as opposed to a gain of $.70 on the US product. Guess who gets the order for the toy – even if the US cost of manufacture is actually somewhat higher.  If, after the tax change, Walmart still wants to make the same after tax profit on the US toy that it used to make on the Chinese toy, it will have to raise the selling price from $3.99 to $4.34. There’s no question that’s an added cost to US consumers (although it might not all be passed through); but all of the cost of the product stays in the US economy.

Walmart is NOT in favor of a border-adjusted tax nor are most other retailers or processors of imported raw materials like refineries. The Koch brothers are against it. See this website for many arguments against.

Suppose the US and China are competing to sell the toy to a third country and transportation is the same and suppose that both factories have a cost of goods and labor of making the product of $2.00. They both sell nominally at $3.00; but the net cost to the buyer of the Chinese toy to the buyer is only $2.49 after the VAT refund. Guess who gets the sale. But, with a border-adjusted tax, the US seller essentially has been forgiven tax on the whole selling price – a savings of $.82 at the effective tax rate of 26%. Now the US manufacturer can afford to drop its price and will win the sale – even if the US price of labor is somewhat higher, the US still gets the sale. The US is more likely to be selling airplanes than toys so add eight zeros to the end of all these numbers.

Boeing is in favor of a border-adjusted tax as are most US manufacturers, drillers, and miners. Farmers are on the fence because of fear of foreign retaliation. This website is sponsored by a who’s who of companies that a border-adjusted tax would benefit.

In a perfect world neither imports or exports would be advantaged. But we don’t live in that world; all of our major trading partners DO advantage their exports. Border-adjustment is one way to enable US workers to compete fairly – even if we pay a little more at Walmart. It’s the best way I’ve seen so far and far better than a set of punitive tariffs – although some countries might challenge it as unfair and we might suffer some retaliation (but they already have VAT refunds). If we had a border-adjusted tax, we could drop a crazy-quilt of tax exemptions whose purpose is to make our products competitive as well as subsidies like the Import-Export Bank.

A border-adjusted corporate tax is part of the tax reform plan Speaker Ryan has been working on for years. It is not clear whether it has enough Republican support to pass nor how much Democrat support to can muster. President Trump is ambiguous on it.

The real shame will be if this important debate gets lost in the noise of hyper-partisanship and the lobbyists keep control of the tax code.

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