Sunday, March 23, 2008

If you're going to bash Free Markets . . .

. . . at least bash an actual free market.

Over on Delawareliberal there is a post entitled See, Free Markets Bring Lower Prices, which lambasts the government auction of cell-phone frequencies in which AT&T and Verizon (the two largest carriers)

won a greater swath of radio spectrum in the government auction that ended this week, heading off new competition that could have led to lower prices for consumers.

Pretty sweet huh? I love our brand of capitalism. Aren’t these the same guys that when asked to break the law, did so?

And shockingly the government had the bidding done in secret. Wonders never cease…

The auction raised $19.12 billion for the Treasury after more than seven weeks of secret bidding.


OK, let's unpack this one with recourse to the original NYT story.

There we find out a couple of important points left out in the post.

First: note that it was the bidding that was secret, not the auction. The fact of the auction was a matter of public record; in fact, the rules and provisions of the auction have been covered by the media for months. The NYT story also notes that Sprint and T-Mobile (the 3rd and 4th largest providers) did not participate, while Google and Dish Network made significant purchases. All of which leads us to. . . .

Second (and most important): there's nothing of the free market really involved when the government dispenses with so-called public assets, and never has been. The original pattern was set by the Northwest Ordnance of 1786 provided for the sale of so-called "public lands" north of the Ohio River. While justly hailed as one of the most important accomplishments under the Articles of Confederation because it allowed for orderly statehood and prohibited slavery, the legislation bore a striking resemblance to modern disposal of the so-called "public airwaves."

For example, the minimum purchase size of land plots was so large that none but the richest of the rich could afford to buy them, guaranteeing that the small farmers would buy their plots at much higher prices in secondary transactions. More critically, the NW Ordinance allowed currency speculators who had bought up the apparently worthless Continental Bonds paid to American soldiers as their discharge bonuses to use those bonds at face value for land purchases, even though for all other purposes they were worthless paper.

How'd that happen? You guessed it. Large land speculators and currency speculators (or their tools) had seats in Congress and looked after their financial interests in drafting the legislation.

Something very similar happened with currency speculators at the Constitutional Convention, not to mention virtually every land sale ordinance ever passed by the US Congress.

With respect to the public airwaves, FCC auctions replaced the older mechanisms of lotteries and comparative hearings in 1994 during the crass Republican presidential administration of Bill Clinton. Both previous methods of dispersing such public assets had their problems. Comparative hearings, according to analyst Jonathan Blake, led to "an absurd preoccupation with licensee performance-counting the seconds of program material devoted to public affairs topics, interviewing leaders in sixteen categories of public life, etc."

As for the lotteries,

because lotteries were every person's chance for a big payoff and winners routinely sold their licenses as soon as possible to real operators, it was soon observed that lotteries led to private auctions. In turn, this led to the question: why shouldn't the government conduct the auctions? Under such a system, the government, not lucky lottery winners, would reap the value of the spectrum on behalf of the public to whom it belonged, and the delays and controversy surrounding lotteries would be avoided.


This is certainly NOT to suggest that government auctions have been any sort of panacea. They are habitually marked by media consolidation as the big players have the weight to outbid the newcomers.

The problem is not that the free market fails to distribute such assets in the public interest, because--again--no free market is involved. Whether it is auctioning off public lands or public airwaves, the Federal government has proven itself time and again (regardless of which party was in power) to be a poor conservator of the public interest, and has repeatedly created processes that had their origination in back-room deals and corrupt bargains.

Perhaps the worst crime committed during this auction process is that the government received only $19.2 Billion--a fraction of the commercial value of these licenses over the long-term.

Moreover, if this is not an example of free markets in action, it is even less and example of free-market capitalism in action. What we've got here is a prime example of the government-managed capitalist or welfare-state capitalist systems that our liberal and progressive brethren and cistern are so fond of. Except, of course, in this case the welfare recipients are gigantic corporations.

The problem is that any system or policy of disbursing so-called "public assets" that depends on legislative or bureaucratic approval is both inherently corrupt and inherently sensitive to changes in the ideological bent of whoever happens to be in control of Congress at key times. You can talk all you want about who controls the appointment of Federal jduges and Supreme Court justices, but the auction of broadcast or cell-phone frequencies probably has a much larger impact on our future than anything Roberts, Alito, or Thomas might give us as a ruling. That's been proven to be the case with government land sales, easements, logging licenses, etc. etc. etc. for the past two centuries.

The problem is that neither mechanism--government (which here means legislative) controlled disbursement or a privatized free market--seems to foster competition (and therefore lower prices to consumers) when the resource at issue is either so large that small operators cannot bid on it (land tracts) or manage it (cell-phone frequencies).

What's the answer? The CATO Institute (an obvious Libertarian think-tank [truth in advertising]) has long suggested that the government should sell not licenses, but ownership in the airwaves, placing the electromagnetic spectrum on the same footing as the real estate market. Once you buy it, it's yours and you can sell it to anyone else for whatever the market will bear. That's the ultimate free-market solution.

But the ideas has problems that its advocates do not acknowledge. For example, what happens when not Newscorp or AT&T but China or Saudi Arabia purchases thousands of frequencies on the open market? That's a chilling prospect that the real-estate analogy suggests is all too probable. You think your news and/or entertainment is biased or incomplete now . . . .

On the other hand (and I'm engaging in some wild-ass speculation here--brainstorming alert), how about the idea of having the Federal Government distribute ownership of the frequencies to the States to control as they please? Chaos? Of course. I like chaos when it supports competition and innovation. Consider: what happens if states decided to lease frequencies for a small down-payment up front and take a yearly cut of, say, 5% of the profits . . . .

Yeah, I know there are all sorts of technical questions to be sorted out, but if you want to talk about the public interest, I always feel safer when the government involved is as close and directly accountable to the citizens as possible, and there are a bewildering variety of policies and procedures being tried around the country, rather than one monolithic, bureaucratic Federal agency involved that has been shown to be inherently susceptible to ideological swings and simple corruption.

I am sure there are other ideas, somewhere outside that authoritarian government vs unfettered free-market box everyone seems insistent upon staying inside.

In the meantime, when you want to bash free markets--as I said at the outset--be sure you understand what they are before you start talking.

3 comments:

Nancy Willing said...

On the other hand (and I'm engaging in some wild-ass speculation here--brainstorming alert), how about the idea of having the Federal Government distribute ownership of the frequencies to the States to control as they please? Chaos? Of course. I like chaos when it supports competition and innovation. Consider: what happens if states decided to lease frequencies for a small down-payment up front and take a yearly cut of, say, 5% of the profits
*
AWESOME prof!
This is a keeper. And I love your line about supporting chaos when it supports competition.
BRILLIANT!

Nancy Willing said...

On the other hand (and I'm engaging in some wild-ass speculation here--brainstorming alert), how about the idea of having the Federal Government distribute ownership of the frequencies to the States to control as they please? Chaos? Of course. I like chaos when it supports competition and innovation. Consider: what happens if states decided to lease frequencies for a small down-payment up front and take a yearly cut of, say, 5% of the profits
*
AWESOME prof!
This is a keeper. And I love your line about supporting chaos when it supports competition.
BRILLIANT!

tom said...

There is an interview in this month's Linux Journal that touches on this issue [http://www.linuxjournal.com/article/10033] but unfortunately you'll need to be a subscriber to see it until July)