December 1, 2014

Steven Pearlstein column on Net Neutrality gets close to real issues in debate.

Steven Pearlstein, a professor at George Mason University, has published a column in the Washington Post Sunday that penetrates the phoney issues in the current debate.  All the noise at present is about neutrality, with claims that Internet Service Providers (ISPs)are discriminating and that they will destroy the Internet as we know it.  Pearlstein's column, entitled " Shades of complexity dominate the debate over "net neutrality", turns the debate to economics. which is where it belongs.

Pearlstein says:

"This is a debate that has come to be dominated by hypocrisy, half-truths and impenetrable complexities.  At one level, net neutrality is a solution to a problem that, for the moment, doesn’t exist.  ... At another level, what the net neutrality debate is really about is deciding who will pay the considerable costs of building out the infrastructure to handle all those bandwidth-hogging videos and games that we’ll be downloading from the Internet. The content providers and start-up app creators, naturally, think they shouldn’t have to pay because that would discourage their economy-disrupting innovation. The ISPs, naturally, think they will only have the money and incentive to expand their network if they can levy an extra charge on the Netflixes and the Googles who have sucked most of the value out of the Internet."

Pearlstein is correct that the fundamental issue is economic.  However, it is not merely related to the cost of building out additional infrastructure.  Rather, it relates to the manner in which the cost of the entire Internet will be recovered.  Like many other networks, the Internet is a joint product in economic terms – it has substantial fixed costs which must be recovered either from suppliers of information, or from consumers.  At present such costs are recovered from consumers.  However, there are proposals to recover some of those costs from suppliers in the form  of higher charges for greater speeds.  These are certainly reasonable proposals, but, obviously, shifting part of the burden to suppliers who had a free ride has generated opposition.  To win the argument, suppliers have camouflaged their economic interest with claims about equity, unfairness to small vendors, etc.  But remember, underneath all the propaganda is the fundamental economic issue of who should pay for the Internet.


25 years ago, I was involved in antitrust litigation with respect to how the cost of airline computerized reservation systems would be recovered.  The CRSs were the essential link between travel agents and the airlines upon which they made reservations.  The vendors, who were all airlines themselves at that time, initially recovered the costs from travel agents, but competition among the airline vendors reduced charges to them.  Therefore, with the help of government regulation requiring nondiscrimination in booking fees, they imposed substantial fees on other airlines.  Outraged, other carriers sued for over $4 billion, claiming that each CRS was a monopoly  After a three-month trial, a jury rejected this claim.

The current debate has many similarities that long-ago controversy.  I will write more about net neutrality and joint products in the future.  I may also devote another post to Pearlstein's bizarre solution to the problem – he  proposes to grant local monopolies to ISPs based upon competitive bidding.  The winning ISPs would then be able to charge monopoly prices.




November 18, 2014

Washington Post Columnists Attack Jonathan Gruber

I don't know if the Washington Post has taken an official position on the veracity of Jonathan Gruber, but its columnists are having a field day attacking President Obama and the entire Obamacare structure,  They rely on Gruber's straightforward, cynical explanations of what the administration was doing to get the bill passed.  Yesterday's newspaper (November 17) contain an interesting column by Marc Theissen, entitled "Thanks to Jonathan Gruber for Revealing Obamacare Deception."   He suggests that "The reason Democrats are running from Gruber is the same reason conservatives should be thanking him: Gruber has exposed what liberals really think of the American people".   Last week, Charles Krauthammer wrote on "The Gruber Confession."  His view was that"Gruber's admission that, in order to get it passed, the bill was made deliberately obscure and deceptive constitutes the ultimate vindication of the charge that Obama care was sold on a pack of lies".

On the other hand, the New York Times in an editorial yesterday entitled "The Impolitic Jonathan Gruber" laments the ammunition he has provided opponents of Obamacare, and claims that he really wasn't that important, and his frank statements are "largely wrong".  Its basic point is don't believe him, even if what he says was correct.  However, it is very difficult for it to show that we shouldn't believe our "lying eyes."

November 17, 2014

The Gift that Keeps on Giving: Gruber tells the truth about the Cadillac Tax

For the last couple of weeks, debate about Obama care has been inflamed by revelations about comments by Professor Jonathan Gruber of MIT, an architect of the Affordable Care Act, who gave several speeches disclosing details about the creation of Obama care.  The latest information that has come out involve the "Cadillac" tax that will start in 2017 upon more expensive healthcare plans. This is well covered in an article today on the opinion pages the Wall Street Journal – Another Obamacare Deception, by Tevi Troy, president of the American Health Policy Institute and a former deputy secretary of Health and Human Services.  I will let you read it, rather than summarize it myself.


November 11, 2014

Obama Proposes Regulation of the Internet to Achieve Net Neutrality

On November 10, President Obama called on the FCC to adopt regulations that would require net neutrality, or non-discrimination, in the operation of the Internet.  The Wall Street Journal today has an interesting column by Andy Kessler suggesting that this proposal would result in full-scale traditional utility-style regulation of the entire Internet.  According to Kessler, the President's call to regulate under Title II of the Federal Communications Act would give the FCC the power to regulate all aspects of Internet service, including prices.

My initial reaction was that this was an exaggeration –  in order to achieve net neutrality, all that is  required are anti-discrimination regulations.  For example, when airlines were deregulated in 1978, the statute eliminated pricing regulation for domestic air transportation, but retained the statute permitting discrimination in air transportation.  I would suggest that this is probably the goal of the administration – not full-scale regulation of the Internet.

However, it seems clear that regulation under Title II would encompass much broader forms of regulation than those required to achieve net neutrality.  This was explained in an excellent brief summary of the issue in Time Magazine.  Mr. Kessler may have a point.

The Blog Resumes

For several reasons, I have done nothing with this blog for almost two years.  I have no great excuses – I just was busy on a lot of other things and it not see much benefit from publishing a blog that had few readers.  However, things have slowed down a bit, which is to be expected at my age, and I have decided to resume publishing.

This time around, I will limit the areas I cover, both to give me a focus, and to perhaps attract readers who are particularly interested in those areas.  For now, those areas will be regulation of the Internet, and the medical regulatory issues enveloped in Obamacare.  President Obama announced yesterday that he fully supports "net neutrality", and this week's news reports that the actual sign-ups for Obamacare are far less than reported.  I am certain there will always be something of interest to post, and I hope readers will find Regulatory Follies a useful resource.

July 24, 2013

Obama's false claims on savings in New York

It's time to start on this blog again. I've just been too busy most of the last year on other projects, including serving as President of a service club, to devote any time to the blog. However, that project is winding down, and the Obama administration provides more and more examples of disastrous regulatory policies.

I will ease into this by simply bringing attention to an excellent Wall Street Journal editorial today about the Obama administration's misleading claim that insurance premiums for New Yorkers will actually be reduced by 50%, compared to last year.  This may be correct, but the reason is that New York insurance rates are so heavily regulated that Obama care will actually deregulate some of the rates.  20 years ago, New York adopted regulations for "community rating" which eliminated the ability of insurance companies to adjust rates on basis of the risk presented by individual insurance candidates. As a result, New York rates are so absurdly high that there is almost no personal insurance market. Under Obamacare, the administration is proposing to transfer much of the New York system to the other 49 states, resulting in increased premiums for individual medical insurance all over the country.

October 6, 2012

Medicare Is Too Good a Deal



I have had two experiences this week that suggest that the government is providing too much subsidy for Medicare. In one case, I received my 2013 plan materials from my Medicare Advantage plan. In the other, I had a medical episode that required extensive testing with high-technology equipment, and consultation with professional medical staff, for which I paid $20.

Under my Medicare Advantage plan, the amounts I pay for various services will actually be reduced. The maximum “out-of-pocket” amount that I will pay for all hospital and doctor services during the year is $3900 – a reduction of $1000 from this year’s $4900. For visits to my primary care physician, I now have a copayment of $5.00. Next year they will be free – no copayment. The cost of visits to specialists will be reduced from $35 to $20, and numerous other medical services will have a similar reduction.

In the other episode, I had to visit a hospital for a barium swallow test after a pill I swallowed went into my lungs rather than my esophagus. The test required a speech therapist to feed me various foods and watch the course of the foods through my throat on a very expensive looking x-ray machine. She will later write a report that will be sent to my specialist doctor. The process took 40 minutes, used expensive equipment, and included a detailed conversation with the speech therapist about what I could do to avoid further episodes. The hospital charge for the test was $180, there was an insurance discount (required by Medicare) of $80, the hospital billed Medicare for $80, and I paid $20.

These prices are ridiculous because I can easily afford to pay more.  It may be reasonable to provide highly discounted prices to low-income persons who really don’t have money to pay for medical care (many of whom would be on Medicaid), but any reasonably affluent person could afford to pay more than I paid above for important medical services. The problem is not just that I am getting away with a cheap price; it is that other people are subsidizing that price through their taxes. With a one trillion dollar annual deficit, in order to save me $1000 in my annual medical costs, the government will be forced to borrow money from China.

Subsidization by the government of such routine medical expenditures as doctor visits or lab tests subverts the purpose of insurance, which should be to protect against the costs of major medical events. Earlier in the year, I had a knee replacement operation, in which I spent three nights in the hospital. The hospital billed the government $108,000; Medicare disallowed $96,000, but paid $12,000 for the services provided to me. The initial bill obviously overstates the hospital’s costs, but the net amount seemed reasonable, if not a little bit less than what I had expected. The savings to me were substantial and an appropriate subject for insurance.

The price reductions imposed by Medicare also have unfortunate economic consequences. The marginal cost of a visit to my primary care physician is now zero. Now, anyone with a sniffle can go to the doctor for free, while previously, the minimal expenditure of five dollars would have dissuaded many people from bothering to go. I suspect there will be a substantial increase of patients in  doctors’ waiting rooms. This, of course, imposes a noneconomic cost in terms of waiting time that is probably the equivalent of the five dollar fee. But the fee is much more efficient as a market clearing mechanism.

There has been political discussion about means testing Medicare, with even President Obama supporting the concept. However, these discussions seem to have focused on increasing premiums for wealthier Americans. I suspect there would be more impact on Medicare expenditures if we means tested payments by the individual for medical services. A more affluent person might not be dissuaded from a doctor visit by a $20 co-pay, but might decide that $100 co-pay makes the visit not worth the expense. Whichever way it goes, there ultimately should be some form of means-testing.