Adam Thierer's Blog, page 97

New Heritage Foundation Study on Internet Tax Policy

Heritage Foundation released a new study this week arguing that "Congress Should Not Authorize States to Expand Collection of Taxes on Internet and Mail Order Sales." It's a good contribution to the ongoing debate over Internet tax policy. In the paper, David S. Addington, the Vice President for Domestic and Economic Policy at Heritage, takes a close look at the constitutional considerations in play in this debate. Specifically, he examines the wisdom of S. 1832, "The Marketplace Fairness Act." Addington argues that, "enactment of S. 1832 would discourage free market competition" and raise a host of other issues:

The Constitution of the United States has set the legal baseline—the level playing field—around which the American free-market economy has built itself. The Constitution, as reflected in the Quill decision, is the source of the present arrangement regarding collection of state sales and use taxes by remote sellers. Ever since the Supreme Court decided Quill in 1992, American businesses have made millions of business decisions in the competitive marketplace based in part on settled expectations regarding state taxation affecting their sales transactions. The states and businesses advocating S. 1832 seek to change the current, constitutionally prescribed playing field. They seek to use governmental power to intervene in the economy to help in-state, store-based businesses by imposing a new tax-collection burden on out-of-state competitors who sell over the Internet, through mail order catalogs, or by telephone. Free-market principles generally discourage such government intervention in the economy to pick winners and losers based on legislative policy preferences.

Veronique de Rugy and I raised similar concerns in both a recent Mercatus white paper ("The Internet, Sales Taxes, and Tax Competition") and an earlier 2003 Cato white paper, ("The Internet Tax Solution: Tax Competition, Not Tax Collusion"). We argued that there are better ways to achieve "tax fairness" without sacrificing tax competition or opening the doors to unjust, unconstitutional, and burdensome state-based taxation of interstate sales. Specifically, we point out that an "origin-based" sourcing rule would be the cleanest, most pro-constitutional, and pro-competitive alternative. I also discussed these issues at a recent Cato event. [Video follows.]

Copyright, Privacy, Property Rights & Information Control: Common Themes, Common Challenges

Andrew Orlowski of The Register (U.K.) recently posted a very interesting essay making the case for treating online copyright and privacy as essentially the same problem in need of the same solution: increased property rights. In his essay ("'Don't break the internet': How an idiot's slogan stole your privacy"), he argues that, "The absence of permissions on our personal data and the absence of permissions on digital copyright objects are two sides of the same coin. Economically and legally they're an absence of property rights – and an insistence on preserving the internet as a childlike, utopian world, where nobody owns anything, or ever turns a request down. But as we've seen, you can build things like libraries with permissions too – and create new markets." He argues that "no matter what law you pass, it won't work unless there's ownership attached to data, and you, as the individual, are the ultimate owner. From the basis of ownership, we can then agree what kind of rights are associated with the data – eg, the right to exclude people from it, the right to sell it or exchange it – and then build a permission-based world on top of that."

And so, he concludes, we should set aside concerns about Internet regulation and information control and get down to the business of engineering solutions that would help us property-tize both intangible creations and intangible facts about ourselves to better shield our intellectual creations and our privacy in the information age. He builds on the thoughts of Mark Bide, a tech consultant:

For Bide, privacy and content markets are just a technical challenges that need to be addressed intelligently."You can take two views," he told me. "One is that every piece of information flowing around a network is a good thing, and we should know everything about everybody, and have no constraints on access to it all." People who believe this, he added, tend to be inflexible – there is no half-way house. "The alternative view is that we can take the technology to make privacy and intellectual property work on the network. The function of copyright is to allow creators and people who invest in creation to define how it can be used. That's the purpose of it. "So which way do we want to do it?" he asks. "Do we want to throw up our hands and do nothing? The workings of a civilised society need both privacy and creator's rights."  But this a new way of thinking about things: it will be met with cognitive dissonance. Copyright activists who fight property rights on the internet and have never seen a copyright law they like, generally do like their privacy. They want to preserve it, and will support laws that do. But to succeed, they'll need to argue for stronger property rights. They have yet to realise that their opponents in the copyright wars have been arguing for those too, for years. Both sides of the copyright "fight" actually need the same thing. This is odd, I said to Bide. How can he account for this irony? "Ah," says Bide. "Privacy and copyright are two things nobody cares about unless it's their own privacy, and their own copyright."

These are important insights that get at a fundamental truth that all too many people ignore today: At root, most information control efforts are related and solutions for one problem can often be used to address others. But there's another insight that Orlowski ignores: Whether we are discussing copyright, privacy, online speech and child safety, or cybersecurity, all these efforts to control the free flow of digitized bits over decentralized global networks will be increasingly complex, costly, and riddled with myriad unintended consequences. Importantly, that is true whether you seek to control information flows through top-down administrative regulation or by assigning and enforcing property rights in intellectual creations or private information.

Let me elaborate a bit (and I apologize for the rambling mess of rant that follows).

Parallels in Debates over Copyright & Privacy Protection

In several essays here over the past few years I have attempted to draw parallels between the battles over protecting digital copyright and online privacy, as well as battle over online safety/speech and cybersecurity. Here are a few of those essays in case you're interested in seeing the evolution of my thinking about this:

When It Comes to Information Control, Everybody Has a Pet Issue & Everyone Will Be Disappointed
And so the IP & Porn Wars Give Way to the Privacy & Cybersecurity Wars
SOPA & Selective Memory about a Technologically Incompetent Congress
Privacy as an Information Control Regime: The Challenges Ahead
Isn't "Do Not Track" Just a "Broadcast Flag" Mandate for Privacy?

In those essays I have argued that a combination of selective morality and wishful thinking are at work in the information policy world these days. In essence, people hate Internet regulation… until they love it! Here's how I summarized that fact during the debate over SOPA:

… conservatives rush out and breathlessly denounce each and every effort to impose Net neutrality regulation because of the danger of empowering an already over-zealous bunch of bumbling bureaucrats at the FCC. (And I agree with them.) Yet, with their next breath many conservatives praise SOPA even though it also empowers government to muck with the inner workings of the Internet. Some of those conservatives are also turning a blind eye to the growing appetite of the defense/security community to meddle with the Net's architecture in the name of avoiding any number of non-catastrophes.

Meanwhile, the liberals decry SOPA and want it stopped at all costs. There's never been a copyright protection measure they liked, of course, but each time one pops up we hear them claim that our analog era Congress is not well-positioned to be designing industrial policy schemes for the Internet. (And I generally agree with them.) But most liberals do a complete 180 whenever online privacy or Net neutrality regulations are the subject of congressional inquiry. Suddenly, the cyber-oafs in Congress are considered veritable technocratic philosopher kings who we should trust to guard our cyber-freedoms to lead us to the digital promised land.

Again, it's both selective morality and wishful thinking. It's selective morality in that some folks think certain values are sacrosanct and deserving of a "by-any-means-necessary" enforcement attitude, yet they are often just as likely to denounce similar information control efforts when it comes to issues or values they don't give a damn about.  And it is wishful thinking in that you can't run around insisting that "information wants to be free" in some contexts but then express outrage when something that you want to bottle up turns out to "just want to be free" as well!

But the important takeaway here is that, consistent with what Orlowski argues, I believe that online copyright and privacy are essentially the same problem: It's an information control problem.

Potential Costs of Control

Once you start thinking about Internet policy debates as a single issue — namely, information control — you can begin to investigate the potential costs of control in a somewhat more objective fashion. Of course, challenging issues remain:

Which method of control should we choose? On one hand, there are many varieties of administrative regulation, technical infrastructure controls, and device mandates. On the other hand, there are property rights and liability / tort schemes. And there are many hybrid enforcement models, such as increasingly popular "co-regulation" models, government standard-setting, and "nudging" of system defaults. Each method will entail different costs and trade-offs.
What metric(s) should we use when attempting to determine whether the benefits of control exceed the costs? Ask any advocate of information control about whether the costs might exceed the benefits of regulation for their pet issue and they will typically suggest that either (a) there are no costs or that (b) the benefits dwarf any costs that may exist. But all too often the benefits they identify are extremely subjective and amorphous in character ("privacy," "safety," and "security" are hard to quantify, after all) while the costs are very real and increasingly substantial.

In my view, these practical questions are increasingly the most interesting issues to explore in the field of cyberlaw and digital economics. We can debate the normative or ethical considerations until we're all blue in the face and ready to rip each other's heads off, but I am less and less interested in such squabbles. Instead, I keep coming back to the question of how we'll go about controlling info flows and how much effort and resources it makes sense to expend in pursuit of each of the values identified above. Some of the specific considerations I find myself asking in every paper I write these days include:

(A) Will the proposed form of information control tie us up in the courts forever, lead to increasingly onerous and unworkable liability norms, and end up yielding outrageous litigation costs?

(B) Will the proposed form of information control require a significant increase in regulatory bureaucracy? How many levels of government will need to be involved in the proposed enforcement scheme? How many new offices and officials will need to be empowered in the hope of achieving some measure of control?

(C) What are the alternatives to the proposed form of information control? Are there less costly or less restrictive means of addressing the concern in question? For example, education and empowerment effort are often an effective way to address many online safety and digital privacy concerns. Can we use those methods in conjunction with social norms, public pressure, self-regulation, informal contracting, and other methods to address these and other concerns?

For me, the costs associated with the A & B are increasing so rapidly that I almost always default to C as the better approach. Importantly, although A & B will be less onerous or costly when the solution is of the increased property-ization variety than of the administrative regulation variety, that does not mean property rights-based solutions for information are costless. Indeed, I increasingly find myself concluding that C solutions are more cost-effective even compared to increased property rights.

Practical Advice Once You Accept the Increasing Costs & Complications of Control

At this point, readers may be thinking: "Wait a minute, this dude is just some kooky libertarian who doesn't want any form of information control, so he's just trying to rationalize anarchy here." No, I'm not. I certainly favor less control across the board than most people, but I also understand that there are times, at the margin, when some forms of "control" are necessary. But my views on the wisdom of control are heavily influenced by the costs of control. The costs of control — broadly defined — are a key factor in every cost-benefit analysis I do related to the wisdom of Net regulation and information control methods — even when one of those methods is increased "property-ization." And because I have come to believe that those costs are going up and that most information control efforts will not work well in practice, I have boiled down my advice on this front to two simple principles:

Choose your info control battles wisely. Figure out where the most serious harms or threats lie and then target the info control solution accordingly and forget about the rest. For example, in child safety debates, that would mean going after child porn rings but leaving run-of-the-mill adult porn alone entirely. In copyright, it would mean nailing the largest commercial mass piracy sites but accepting a certain amount of casual sharing. In the field of personal info, it means singling out health and financial information and data for special protections and likely giving up on most other forms of info control. And so on. In essence, these are where the greatest potential harms lie that most people would consider intolerable. As you move further away from such issues, the case for control becomes harder and harder and the costs will almost certainly exceed the benefits.
Have a good backup plan in mind when those info control plans fail anyway. That backup plan should generally be based on education, empowerment, coping strategies, and resiliency. Again, these are the "C" solutions mentioned above. [I developed this model more robustly in the second half of this recent paper.] This approach won't be perfect but it will likely be what you'll end up relying on anyway, so you better start thinking about plowing more resources into this alternative approach even while you're trying to devise info control mechanisms.

Let me just say a brief word to my market-oriented friends who are dismayed by my inclusion of property rights in the mix of "information control" efforts. I'm a big believer in the importance of property rights in many contexts, but context does matter. More specifically, physicality matters. It is easy to create property rights in tangible goods and almost always right to do so. Property rights in intangible ideas and creations raise special issues, however. Because ideas are non-rivalrous and have public good qualities, it makes property-ization more complicated and less effective. Property rights in facts can also come into conflict with other values and more well-established rights, especially freedom of speech and expression.

On the privacy front, Eugene Volokh made this point in his famous 2000 law review article, "Freedom of Speech, Information Privacy, and the Troubling Implications of a Right to Stop People from Speaking About You," when he noted that, "The difficulty[with] the right to information privacy — the right to control other people's communication of personally identifiable information about you — is a right to have the government stop people from speaking about you. And the First Amendment (which is already our basic code of "fair information practices") generally bars the government from "control[ling the communication] of information," either by direct regulation or through the authorization of private lawsuits." That doesn't mean free speech values should always trump privacy values, but denying this tension is just plain silly. If you want to propertytize all personal information, then you better be prepared to explain how that plays out in practice. How far are you prepared to go to ban the dissemination of facts? Would you place prior restraint on the press to accomplish it? Would you ban a historian from writing a biographies that reveal intimate facts about the subject? Would you shut down all the online sites and services that rely on a certain amount of personal information to fuel their free offerings?

Likewise, copyright law was far more effective in the analog age when we were still pressing music on vinyl and plastic. As soon as digitization become widespread, it was pretty much game over for traditional copyright law and now we are off and running with all sorts of convoluted and increasingly costly regulatory regimes. It's not that I don't want these some of these schemes to work — I've been a long-time copyright defender — but, again, the practicality of control simply must be considered here. I am not will to "pay any price, bear any burden" in defense of protecting intellectual property rights even as I remain outraged by the staggering amount of free-riding at work every single second of the day on the Internet. So, adopting the framework I outlined about, we might try targeted solutions to go after the biggest of those freeloaders — commercial mass piracy hubs — but we should generally avoid the sort of ham-handed technical control methods we saw in SOPA and other fights, like the broadcast flag battle among others. But, generally speaking, property rights just aren't going to work as well in this space going forward. I've come to believe that the best hope lies in massive consolidation of content and conduit. In other words, pipe and device owners need to buy out all the content-creating industries and just embed a small fee in their monthly services to cross-subsidize content. This is essentially a private collective licensing solution and it is not unprecedented. Nor is it perfect. It will be very leaky. Plenty of piracy will still take place. But it will probably offer creators a better chance of finding a sustainable revenue stream than the current system does. The old copyright system that served them and us so well is dying and they had better start thinking of alternatives like this. Of course, antitrust law may never allow it, so I could be wasting my breath here. (Just look at all the grief that antitrust officials both here and abroad are giving Apple and eBook sellers for working together even though that it probably the best scheme devised in recent memory to sustain publishing in an age of mass piracy. Policymakers should be encouraging more of that sort of thing, not punishing it.)

An Uncertain Future

So, to wrap up… I can imagine a future in which both heavy-handed, top-down info control efforts and property / liability solutions are failing almost universally because of the ubiquitous, instantaneous, quicksilver-like flow of information across decentralized digital networks. Some utopians will argue that such a world will be better in every way than the one we live in today. I do not share such hyper-optimism. While I believe that, on balance, the free flow if information generally benefits society, I also understand how it creates enormous angst and intractable challenges for many. It's a world in which copyright is a hollow shell of its former self that offers creators very little protection for their expressive works. And it's a world in which personal privacy is harder to safeguard with each passing day because no matter how hard we try to property-tize facts about ourselves, that enforcement model simply breaks down at some point or becomes socially and economically intolerable. As with copyright, efforts to property-tize personal information will lose the battle against data sharing. As computer scientist Ben Adida argued in his essay, "(Your) Information Wants to be Free," "unfortunately, information replication doesn't discriminate: your personal data, credit cards and medical problems alike, also want to be free. Keeping it secret is really, really hard."

Indeed, and it is growing harder by the day. Contrary to what Orlowski suggests, therefore, this isn't a simple engineering problem. I wish it were as easy as he suggests to build "permissions-based markets" because they could have real benefits for individuals and society. But it is most certainly not that simple. It is far more costly and complicated than ever to devise workable information control schemes on one hand and "permissions-based" property rights schemes on the other. In some cases, I might still be willing to try the latter, but unlike Orlowski, I just don't place much faith in the success of the endeavor.

Cato Institute Job Posting: Data Curator

The Cato Institute's jobs page has a new posting. If you have the right mix of data/technical skillz, public policy knowledge, love of freedom, and vim, this could be your chance to advance the ball on government transparency!

Data Curator, Center on Information Policy Studies



The Cato Institute seeks a data curator to support its government data transparency program. This candidate will perform a variety of functions that translate government documents and activities into semantically rich, machine-readable data. Major duties will include reading legislative documents, marking them up with semantic information, and identifying opportunities for automated identification and extraction of semantic information in documents. The candidate will also oversee the data entry process and train and supervise others to perform data entry. The ideal candidate will have a college degree, preferably in computer science and/or political science, and experience using XML, RDFa, and regular expressions. Attention to detail is a must, with an understanding of U.S federal legislative, spending, and regulatory processes preferred.



Applicants should send their resume, cover letter, and a short writing sample to:



Jim Harper

Director of Information Policy Studies

Cato Institute

1000 Massachusetts Ave. NW

Washington, DC 20001

Fax (202) 842-3490

Email: jharper@cato.org

Here's an exclusive insider tip for TechLiberationFront readers. Don't send your application by fax! That would send the wrong signal…

How & Why the Press Sometimes "Sells Digital Fear"

Yesterday on TechCrunch, Josh Constine posted an interesting essay about how some in the press were "Selling Digital Fear" on the privacy front. His specific target was The Wall Street Journal, which has been running an ongoing investigation of online privacy issues with a particular focus on online apps. Much of the reporting in their "What They Know" series has been valuable in that it has helped shine light on some data collection practices and privacy concerns that deserve more scrutiny. But as Constine notes, sometimes the articles in the WSJ series lack sufficient context, fail to discuss trade-offs, or do not identify any concrete harm or risk to users. In other words, some of it is just simple fear-mongering. Constine argues:

Reality has yet to stop media outlets from yelling about privacy, and because the WSJ writers were on assignment, they wrote the "Selling You On Facebook" hit piece despite thin findings. These kind of articles can make mainstream users so worried about the worst-case scenario of what could happen to their data, they don't see the value they get in exchange for it. "Selling You On Facebook" does bring up the important topic of how apps can utilize personal data granted to them by their users, but it overstates the risks. Yes, the business models of Facebook and the apps on its platform depend on your personal information, but so do the services they provide. That means each user needs to decide what information to grant to who, and Facebook has spent years making the terms of this value exchange as clear as possible.

"While sensationalizing the dangers of online privacy sure drives page views and ad revenue," Constine also noted, "it also impedes innovation and harms the business of honest software developers." These trade-offs are important because, to the extent policymakers get more interested in pursing privacy regulations based on these fears, they could force higher prices or less innovation upon us with very little benefit in exchange.

Of course, the press generating hypothetical fears or greatly inflating dangers is nothing new. We have seen it happen many times in the past and it can be seen at work in many other fields today (online child safety is a good example). In my recent 80-page paper on "Technopanics, Threat Inflation, and the Danger of an Information Technology Precautionary Principle," I discussed how and why the press and other players inflate threats and sell fear. Here's a passage from my paper:

"The most obvious reason that doomsday fears get disproportionate public attention is that bad news is newsworthy, and frightening forecasts cause people to sit up and take notice," Julian Simon astutely observed in 1996.[1] That is equally true today.[2] Many media outlets and sensationalist authors sometimes use fear-based rhetorical devices to gain influence or sell books. "Opportunists will take advantage of this fear for personal and institutional gain," notes University of Colorado Law School professor Paul Ohm.[3]

Fear mongering and prophecies of doom have always been with us, since they represent easy ways to attract attention and get heard. "Pessimism has always been big box office," notes [Matt] Ridley.[4] This is even more true in the midst of the modern information age cacophony. Breaking through all the noise is hard when competition for our eyes and ears is so intense. It should not be surprising, therefore, that sensationalism and alarmism are used as media differentiation tactics. This is particularly true as it relates to kids and online safety.[5] "Unbalanced headlines and confusion have contributed to the climate of anxiety that surrounds public discourse on children's use of new technology," argues Professor Sonia Livingstone of the London School Economics. "Panic and fear often drown out evidence."[6]

Sadly, most of us are eager listeners and lap up bad news, even when it is overhyped, exaggerated, or misreported. [Michael] Shermer notes that psychologists have identified this phenomenon as "negativity bias," or "the tendency to pay closer attention and give more weight to negative events, beliefs, and information than to positive."[7] Negativity bias, which is closely related to the phenomenon of "pessimistic bias" …  is frequently on display in debates over online child safety, digital privacy, and cybersecurity.

And that's why we shouldn't expect these fear tactics and threat inflation to dissipate any time soon. Although education and fact-based awareness efforts can help alleviate some of these problems, the reality is that Chicken Little tactics will always trump dispassionate, level-headed analysis. Prophets of doom will always have a congregation. Plenty of politicians and policy pundits have long known this. Sadly, not even the press is immune from wanting to play this game.

[1]     Julian Simon, The Ultimate Resource 2 (Princeton, NJ: Princeton University Press, 1996), 539–40. Simon adds, "It is easier to get people's attention (and television time and printer's ink) with frightening forecasts than soothing forecasts." Ibid., 583.




[2]     "Many perceived 'epidemics' are in reality no such thing, but instead the product of media coverage of gripping, unrepresentative incidents." Cass Sunstein, Laws of Fear: Beyond the Precautionary Principle (Cambridge: Cambridge University Press, 2005), 102.




[3]     Paul Ohm, "The Myth of the Superuser: Fear, Risk, and Harm Online," UC Davis Law Review 41, no. 4 (2008), 1401.




[4]     Ridley, The Rational Optimist, 294.




[5]      "On a very basic level, the news media also benefit by telling us emotional stories about the trouble that kids may find themselves in . . . Bad news about kids encapsulates our fears for the future, gives them a face and a presence, and seems to suggest a solution." Karen Sternheimer, Kids These Days: Facts and Fictions about Today's Youth (Lanham, MD: Rowman & Littlefield Publishers, Inc., 2006), 152.




[6]     Michael Burns, "UK a 'High Use, Some Risk' Country for Kids on the Web," Computerworld, October 18, 2011, http://news.idg.no/cw/art.cfm?id=F325....




[7]     Shermer, The Believing Brain, 275.

 

 

The Kochs, Cato, and Miscalculation—Part II

Last week, I posted about the conflict between the Koch brothers and the Cato Institute, threatening to make that post first in a series. Never let it be said that I don't follow through on my threats, sometimes.

Recapping: I believe the Koch brothers want what's best for liberty, but the actions of the "Koch side"—an array of actors with differing motivations and strategies—may not be serving that goal. This seems due to miscalculation: the Koch side seems not to recognize how much of the Cato Institute's value is in its reputational capital, capital which would be despoiled by a Koch takeover. I basically fleshed out an early point of Jonathan Adler's on the Volokh Conspiracy.

But why is it the Koch side that gets the attention and not the Cato side? That deserves some explanation.

I'm a Cato partisan, but I don't think it's just my partisanship that puts the Koch side's goals and strategies in play. So let me explain why I think the Koch side should get most of the examination—and why that's a product of Koch-side miscalculation.

I believe the Koch side is fairly regarded as the moving party in the dispute. I'm still not 100% certain, but when the Kochs filed suit—and remember that link: to a Politico story that went up the next morning—I believe they stood to lose nothing from waiting. A Cato board meeting had been called at which Bill Niskanen's shares might be transferred to his widow, leaving Koch ownership at 50% contrary to their desires. But the Kochs could have objected and given up no legal rights to contest at a later time what they would argue to be an invalid transfer.

If there's a corporate lawyer who can clear it up for me in the comments, please do, but I believe the Kochs' rights under the articles of incorporation or shareholders agreement would not have lapsed upon a transfer of shares to which they objected. If the Kochs had to install new board members, ejecting the old, in order to preserve their rights, tell me what operative document or law required it.

If I'm not wrong, the Kochs are the moving party. The Kochs went to court to require a change from the status quo in terms of ownership (Niskanen's shares not having been transferred). The Kochs changed the status quo in terms of membership on the Cato board. (Cato had independence from the Kochs as a long-term goal, but preferred the short-term status quo.)

Was the timing of the meeting precipitous? Bob Levy has stated that Cato's bylaws require a meeting on the first day of December, and that the 2011 meeting had already been postponed 90 days.

Maybe some on the Koch side feel they were goaded into action. One could craft a narrative that the Cato side was ingeniously laying trip-wires for the Kochs and scheduled that meeting as a final provocation. But the truth is probably somewhere closer to "sick of this $&*#—schedule the meeting."

Life isn't fair, and having been goaded does not diminish the fact of having acted. Read your Sun-Tzu. Suing made the Kochs the moving party.

As the moving party, the Kochs put their own motivations and actions in issue. But the Koch side had taken no steps ahead of time (none I can discern, anyway) to make Cato's management or leadership the issue in public debate. Doing so would at least have softened the argument that a Koch takeover would be bad for Cato.

But remember that link I pointed out above? I've seen it suggested on the Cato side that the Koch side dished an exclusive to Politico. I don't know the truth of it, but the story was posted before 10:00 a.m. the day after the Kochs went to court. That's awfully quick Politico sleuthing, to get the court documents out of Kansas and the story up before the morning coffee break. I don't know when or how Cato people were served the legal papers, but I doubt they got clean PDFs. I could easily be wrong, but the evidence and inferences I've accessed point to someone on the Koch side pushing the lawsuit story.

In terms of communications and public relations, this is kind of jaw-dropping stuff. It looks as though the Koch side laid little or no groundwork for public discussion of their move to take control of Cato. They didn't register a public complaint about the direction of Cato's research. They didn't enlist a single ally or proxy into raising questions about Cato's management. It's as if they were unaware they might meet with resistance, though they have apparently met with downright obstinance from Ed Crane, Cato's president, for some number of years. Then, when they sued, they may even have pushed that story.

Only recently, and very late, have a statement from David Koch and a write-up on Breitbart.com attempted to tar Ed Crane for his management style and his evil-geniosity in the present dispute. We'll see how that works.

Ed may have miscalculated some and played into the Koch side of the story by talking to Dave Weigel at Slate about some things he has done wrong. He pretty much admitted to rudeness, and he said he gave on off-the-record quote to Jane Mayer, the terms of which she did not respect in her hit-piece on the Kochs. I get what he seems to have been saying—"Nobody will tell the Kochs that 'market-based management' isn't the best thing since sliced bread"—but it's a whole hell of a mess whether Ed had a good point or not. A sharp quote he got in—"Who the hell is going to take a think tank seriously if it's controlled by billionaire oil guys?"—barely saves it and makes it a wash in my opinion. (Update: A new Breitbart piece exploits the Weigel interview.)

Except for fringies who will back the Kochs because they are reviled on the left and Cato is not, the story remains fairly well set: The Koch brothers are trying to take over the well-respected Cato Institute and convert it to their own purposes. Unfair? Well, the Koch side impetuously put itself at the center of the story by filing the lawsuit without preparing for public discussion of it. The outcome was fairly well dictated by that framing. This seems like miscalculation of a high order and communications malpractice.

We in Washington, D.C. pay attention to how issues are framed and communicated. It looks like someone on the Koch side didn't think this thing through and didn't have a communications plan, so the opening salvo in the Koch/Cato dispute was a Koch-side backfire.

The Risks of Misapplied Privacy Regulation

Reason.org has just posted my commentary on the five reasons why Federal Trade Commission's proposals to regulate the collection and use of consumer information on the Web will do more harm than good.

As I note, the digital economy runs on information. Any regulations that impede the collection and processing of any information will affect its efficiency. Given the overall success of the Web and the popularity of search and social media, there's every reason to believe that consumers have been able to balance their demand for content, entertainment and information services with the privacy policies these services have.

But there's more to it than that. Technology simply doesn't lend itself to the top-down mandates. Notions of privacy are highly subjective. Online, there is an adaptive dynamic constantly at work. Certainly web sites have pushed the boundaries of privacy sometimes. But only when the boundaries are tested do we find out where the consensus lies.

Legislative and regulatory directives pre-empt experimentation. Consumer needs are best addressed when best practices are allowed to bubble up through trial-and-error. When the economic and functional development of European Web media, which labors under the sweeping top-down European Union Privacy Directive, is contrasted with the dynamism of the U.S. Web media sector which has been relatively free of privacy regulation – the difference is profound.

An analysis of the web advertising market undertaken by researchers at the University of Toronto found that after the Privacy Directive was passed, online advertising effectiveness decreased on average by around 65 percent in Europe relative to the rest of the world. Even when the researchers controlled for possible differences in ad responsiveness and between Europeans and Americans, this disparity manifested itself. The authors go on to conclude that these findings will have a "striking impact" on the $8 billion spent each year on digital advertising: namely that European sites will see far less ad revenue than counterparts outside Europe.

Other points I explore in the commentary are:

How free services go away and paywalls go up
How consumers push back when they perceive that their privacy is being violated
How Web advertising lives or dies by the willingness of consumers to participate
How greater information availability is a social good

The full commentary can be found here.

 

Christina Mulligan on patent scalability

On the podcast this week, Christina Mulligan, Visiting Fellow at the Information Society Project at Yale Law School, discusses Her new paper, co-authored with Tim Lee, entitled, Scaling the Patent System. Mulligan begins by describing the policy behind patents: to give temporary exclusive rights to inventors so they can benefit monetarily for their inventions. She then explains the thesis of the paper, which argues that the patent system is failing because it is too large to scale. Mulligan claims that some industries are ignoring patents when they develop new products because it is nearly impossible to discover whether a new product will infringe on an existing patent. She then highlights industries where patents are effective, like the pharmaceutical and chemical industries. According to Mulligan, these industries rarely infringe on patents because existing patents are "indexable," meaning they are easy to look up. The discussion concludes with Mulligan offering solutions for the current problem, which includes restricting the subject matter of patents to indexable matters.

Related Links

Scaling the Patent System , by Mulligan & Lee"Questions About 'Scaling the Patent System' Answered", Forbes.comWhen Patents Attack, NPR.org

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The Kochs, Cato, and Miscalculation

It's well known now that a long-simmering contest for control of the Cato Institute has bubbled over. On the last day of February, Charles and David Koch filed a lawsuit against the widow of former Cato chairman Bill Niskanen, Cato president Ed Crane, and Cato itself seeking to have Niskanen's shares returned to Cato or granted to the remaining shareholders under the terms of a shareholder agreement. This would give the Kochs (one of whom participated in the founding of Cato) majority ownership, allowing them to elect a majority of Cato's board. It would also position them to extinguish Crane's shares so as to gain 100% control.

Cato disputes the Kochs legal positions, and it believes that their success "would swiftly and irrevocably damage the Cato Institute's credibility as a non-partisan, independent advocate for free markets, individual liberty, and peace."

The quote just above is from Cato's "Save Cato" web page, but the more interesting commentary has been scattered by Cato staff and leadership across various blogs and outlets (e.g., Jerry Taylor, Gene Healy, Jason Kuznicki, Julian Sanchez, Jonathan Blanks, Justin Logan, Trevor Burris, Michael Cannon). There has been lots of commentary from many quarters, of course, led by Jonathan Adler at the Volokh Conspiracy. Really, there's too much commentary to list.

A Facebook page dedicated to "saving" Cato has zoomed past 5,000 supporters.

Now it's my turn. Putting my thoughts here on TLF is a stretch because I won't be talking about tech. Think of this as the "liberation" part of Tech Liberation Front. The reason many of my colleagues and I do what we do here is because of both Ed Crane and the Kochs, and the institutions they have built and nurtured. Now these giants in the modern liberty movement are fighting.

That's a shame for a lot of reasons. There is the overall cause of freedom, of course, our part of which is side-tracked and sullied by the dispute. We Catoites love what we do, fighting for freedom backed by thousands of highly engaged supporters. But don't go all analytical and forget the hundred-plus Cato staff whose livelihoods and careers are under a cloud. That's concerning and frustrating, especially for the people with children. Once or twice, I've let my colleagues know when I found their arguments overwrought. That personal dimension might be why.

Yes, Cato people are people. And so are Koch people. This is important to surface as part of the theme I want to focus on: miscalculation.

Perhaps because we're intellectuals, maybe out of courtesy, or in pursuit of simplicity, much commentary has forgotten that all the actors in this drama are people. And people make mistakes. Lots of 'em.

People on the Cato side have treated the Koch side as monolithic and acting in unison. From inside Cato, it's rather obviously not, but the Koch side likely perceives the Cato side as monolithic and similarly orchestrated. But when I talk here about "the Kochs" or the "Koch side," I do not mean the brothers as a unit, or either of them individually. I rather doubt that these successful businessmen devote a huge percentage of their time to their ideological work (and hope they don't, for their sake!).

The "Koch side" is actually a variety of different actors, including each of the Koch brothers themselves and any number of advisors and allies. The things any one person has said, the suit the Kochs' attorneys filed in their names, and the press releases put out for them are the products of different actors within the "Koch side," each of which may have different motivations and strategies.

Examining the Koch side's actions, I have a suspicion that it is not acting in a highly coordinated and planned fashion, and that it is not actually pursuing the interests of the Koch brothers all that well. That's saying a lot, and it's a little presumptuous. I hope to bring the evidence forth in a series of posts.

My work at Cato on counterterrorism, including the production of the book Terrorizing Ourselves, is something no politically active group would do because it doesn't help one party or the other. Same goes for my anti-national-ID work. Growing the government is a bipartisan project. But I think of the counterterrorism work in particular because it exposed me to national security and foreign policy concepts that pertain well here.

In national security and foreign policy, no theme is stronger than the problem of miscalculation. So often, international powers misunderstand one another and misinterpret each others' actions. They develop theories of each others' behavior (treating each other as monoliths), then act and react based on those theories until conflagration ensues. The victor writes history.

As we libertarians all know, war kills people and saps the world of wealth. Now "war" among libertarian powers causes libertarians to suffer, and it saps strength from the libertarian movement. So we really, really ought to avoid miscalculation, oughtn't we?

It seems to me that a central miscalculation on the Koch side is to misapprehend what the Cato Institute is and what gives it value.

Before I get to that, let me start with a premise: I believe the Kochs want what's best for liberty. The Kochs' work to advance liberty over many decades is very strong evidence that they want to see its advance continue. The statements put out in their names are creditable evidence of the same. This doesn't exclude other goals within the Koch "side" or secondary goals on the part of the Koch brothers themselves, but consistency on liberty over decades suggests that the Kochs themselves want Cato to remain an organization that advocates liberty well.

Now, what makes Cato a valuable part of the libertarian movement? Here, the Koch side is not calculating well.

Cato is not a profit-making enterprise, but concepts from that world apply fairly well to its examination. Take "going-concern value." That's the value of an enterprise as an ongoing entity, over and above the value of its assets if liquidated. Going-concern value includes liquidation value plus the value of intangible assets such as goodwill.

Goodwill. That's the positive reputation of an enterprise, the "something" that enables it to do more with a given set of intellectual and physical assets than another enterprise could with the same assets. Reputation (as you can learn starting on page four of my recent Cato policy analysis) is the set of conclusions one makes by combining identity and biography.

Cato has a clear identity—a brand—and it has a thirty-five-year history/biography of being a reasonable, consistent, and honest intellectual advocate for libertarian and free-market policies. This has caused a number of non-libertarians to come to Cato's defense in the current dispute.

The simpleton might use this against Cato—"Aha! They're admired on the left!"—but people who care about persuasion know that gains come from bringing fence-sitters to the side of liberty. Gains come from convincing opponents of liberty to moderate their positions. Real persuasion happens in small increments over a long time, and it comes from engaging with the other side.

There are lots of inputs into reputation, and one of them for advocacy groups is most definitely funding and control. One need only look at SourceWatch to see that ownership and control is an important input into reputation. (Again, because of the propensity for cheap argument in some quarters: Citing to SourceWatch is not endorsement. I am pointing out a reality of participation in public debate.)

The properties of reputation are somewhat like the properties of physical assets. A machine that is not maintained will start to work less well over time or suffer catastrophic failure at some point. A reputation that is not maintained will slide or even collapse. Cato has ideological opponents who are constantly and often unfairly trying to tear down the organization's repuation, mostly using proxies for substance such as funding and control. (It's the easy way. Debating us on the merits is hard.)

It is not to endorse that I state the following: The Koch Brothers do not have the same reputation as Cato. The Center for American Progress puts out reports that call the Kochs "financiers of the radical right" while it joins with Cato and Cato scholars on issues like immigration, gay marriage, national security, and transparency. For whatever reason, while Cato has successfully cultivated the currency of legitimacy in Washington, D.C., the Kochs unfortunately have not. I believe they have tried, and the Kochs' reputation in the public policy arena is undeserved in my opinion, but it is a reality. (Speaking of cheap argumentation, some have argued that the Cato side is buying into or fostering "lefty" arguments about the Kochs. There is very little evidence of this, and the proponents of that idea should put themselves to proof.)

A Koch takeover would affect the reputation of Cato. Such a thing generally wouldn't happen with an industrial firm, but a change in corporate control of an advocacy group most definitely would affect its operations. A Koch takeover would degrade Cato's reputation, its goodwill, and its value as a going concern. Cato would lose some measure of its ability to persuade. I don't believe the Koch side fully considered this effect when it embarked on its current course of action.

This miscalculation permeates the Koch/Cato dispute. Jonathan Adler recognized it insightfully in the early going:

Even if one assumes that the Kochs have better ideas for how Cato should direct its resources, know more about how to advance individual liberty, and are correct that the Institute is too " subject to the personal preferences of individual officers or directors," any benefit from whatever changes they could make will be outweighed to the permanent damage to Cato's reputation caused by turning it into a de facto Koch subsidiary.

I hear a counter-claim to this argument: Unfairness! Ed Crane pushed this idea! He pushed the idea of a 'takeover'!

Maybe. Ed's an interesting one. And if I'm not fired for something in this post (!), I'll say more later about him. But "unfairness" is not an answer to the underlying point.

Think of that industrial machine. Without proper maintenance, it either degrades over time or seizes up. In the end, it doesn't matter which. The enterprise can no longer produce what it did. I have a hard time blaming the person who built an enterprise over thirty-five years for hastening the discussion about whether his machine will run better in the next thirty-five years, or whether it will cough and sputter, potentially to grind to a halt.

I've focused on miscalculation on the Koch side rather than the Cato side. The cause of this is not simply Cato partisanship (which I fully admit to). I will explain the reason for focus on the Kochs in a future post—and why I think it is a product of more Koch-side miscalculation.

Continuing Confusion in the Debate over Retrans & Video Marketplace Deregulation

Imagine the following scenario. The government passes a law that includes regulations governing "transactional consent" for retail commerce. These regulations stipulate how buyers and sellers of various goods shall do business. Some of the rules give the sellers special rights to demand that the stores carry some of their goods as well as rules stipulating that stores not carry the goods of competing sellers from other markets. On the flip side, other preexisting rules give buyers the right to demand that certain sellers deal their goods to them at regulated rates.

Now, it's true that a contractual negotiation takes place in this "marketplace" governed by "transactional consent" regulations, but does this sound like a truly free market to you? Most of us would say No.

Regrettably, that's the essential error that the American Conservative Union (ACU) makes in a letter they sent to members of Congress this week in which they made the case against H.R. 3675 and S. 2008, "The Next Generation Television Marketplace Act." That bill, which is sponsored by Senator Jim DeMint (R-SC) and Rep. Steve Scalise (R-LA), represents a comprehensive attempt to deregulate America's heavily regulated video marketplace. In a recent Forbes oped, I argued that the DeMint-Scalise effort would take us "Toward a True Free Market in Television Programming" by eliminating a litany of archaic media regulations that should have never been on the books to begin with. The measure would:

eliminate: "retransmission consent" regulations (rules governing contractual negotiations for content);
end "must carry" mandates (the requirement that video distributors carry broadcast signals even if they don't want to);
repeal "network non-duplication" and "syndicated exclusivity" regulations (rules that prohibit distributors from striking deals with broadcasters outside their local communities);
end various media ownership regulations; and
end the compulsory licensing requirements of the Copyright Act of 1976, which essentially forced a "duty to deal" upon content owners to the benefit of video distributors.

Despite these clearly deregulatory provisions, in its letter to Capitol Hill, the ACU argues that the DeMint-Scalise bill would somehow interfere with what they regard as a free market in video programming. The ACU writes:

one of the major outcomes of the bill would be to strip away the negotiation process known as "retransmission consent."  This process created a marketplace to ensure that broadcasters were compensated by pay-tv providers for the use of their signal and content. In 1992 Congress set up "retransmission consent" — a process by which broadcasters and the pay-tv industry would have to negotiate with each other for the use of the broadcast signal.  This prevented the pay-tv industry's previous practice of using the signal for free and then profiting from its retransmission by selling the broadcasters' content as part of their basic service. The programming that is most viewed today is still produced by broadcasting companies.  Broadcasters take risks by investing significant amounts of money into content production and marketing, and should have the right of determining its distribution.

It continues on:

The reality is that today we have a functioning market in which opposing parties are able to bring value to the negotiating table.  By stripping away the right to compensation for the use of the signal the government would be tipping the scales heavily to the side of the pay-tv companies.  It would distort the marketplace and allow an uncompensated use of broadcast signals and content and is certainly not "deregulation."  So we urge you to oppose the retransmission consent provisions contained in HR 3675 and S 2008.

ACU has mistakenly equated the retransmission consent regulatory process with an actual free market contracting process. The two are not synonymous. Again, their are many layers of red tape that continue to encumber this marketplace and it would be incorrect to claim that the contracting process for video signals today represents a truly free and unfettered marketplace. The government has its thumb on one side of the scales with the retrans, must carry, and out-of-market signal regulations, but government simultaneously has its other thumb on the other side of the scale with the compulsory licensing requirements. And plenty of other regs litter the video landscape.  Thus, contrary to what the ACU claims, (1) a truly free video marketplace does not exist today because, by definition, a truly free marketplace would not be cluttered with so many federal regulations; and (2) the DeMint-Scalise bill absolutely does represent genuine deregulation of this marketplace since it would remove those unnecessary regulations. These are indisputable facts. No contortion of the English language can render them otherwise.

Unsurprisingly, because the ACU has made the mistake of assuming we currently live in a free market nirvana, it makes another error commonly heard in this debate. The ACU claims that an elimination of retransmission consent rules represents the end of free market contracting for video services. Indeed, the ACU's claim that the DeMint-Scalise bill "would distort the marketplace and allow an uncompensated use of broadcast signals and content" gets it exactly backward. In reality, the DeMint-Scalise bill would end the regulatory policies that actually do currently "distort the marketplace" and then allow a truly free marketplace in video contracting to develop without any regulatory thumb on the scale in either direction.

Most importantly, nothing in this bill forces content creators or broadcasters to deal their content to other distributors. And nothing in the bill gives those other video distributors the right to freely distribute content without the permission of its owners. In sum, the bill does not repeal copyright law — it only repeals the compulsory licensing rules that force content owners to deal their programming against their consent on government regulated terms.  That means copyright is actually strengthened under this bill and that content owners have more bargaining power than they do today. Thus, the ACU is horribly mistaken in asserting that the DeMint-Scalise bill would "allow an uncompensated use of broadcast signals and content." The exact opposite is the case.

If the ACU wants to make a case against this measure, I would respectfully suggest that they first get their terminology and facts right. And then we can have an honest debate about true video marketplace deregulation–which is exactly what the DeMint-Scalise bill represents.

Blocking Verizon/SpectrumCo Deal Would Harm, not Help, Consumers

Yesterday, the International Center for Law and Economics and TechFreedom jointly filed comments [pdf] with the FCC on the Verizon SpectrumCo deal.  In the comments, ICLE Executive Director Geoffrey Manne and TechFreedom President Berin Szoka counter the primary arguments against the deal:

Critics lament the concentration of spectrum in the hands of one of the industry's biggest players, but the assumption that concentration will harm to consumers is unsupported and misplaced.  Concentration of spectrum has not slowed the growth of the market; rather, the problem is that growth in demand has dramatically outpaced capacity.  What's more: prices have plummeted even as the industry has become more concentrated.

While the FCC undeniably has authority to review the license transfers, the argument that the separate but related commercial agreements would reduce competition is properly the province of the Department of Justice.  That argument is best measured under the antitrust laws, not by the FCC under its vague "public interest" standard.  Indeed, if the FCC can assert jurisdiction over the commercial agreements as part of its public interest review, its authority over license transfers will become a license to regulate all aspects of business.  This is a recipe for certain mischief.

The need for all competitors, including Verizon, to obtain sufficient spectrum to meet increasing demand demonstrates that the deal is in the public interest and should be approved.