Statement on “Restoring Internet Freedom”

Lots of people are asking what I think about today’s FCC vote to roll back the 2015 Title telephone regulations for the Internet, and restore the Internet as an “information service.” So here’s a summary of my view:

Restoring Internet Freedom - statement - Swanson - 12.14.17

“Net Neutrality and Antitrust,” a House committee hearing

On Wednesday, a House Judiciary subcommittee heard testimony on the potential for existing general-purpose antitrust, competition, and consumer protection laws to police the Internet. Until the Federal Communications Commission (FCC) issued its 2015 Title II Order, the Federal Trade Commission (FTC) oversaw these functions. The 2015 rule upended decades worth of successful policy, but now that the new FCC is likely to return the Internet to its original status as a Title I information service, Title II advocates are warning that general purpose law and the FTC are not equipped to deal with the Internet. They’re also hoping that individual states enter the Internet regulation game. I think they are wrong on both counts.

In fact, it’s more important than ever that we govern the sprawling Internet with general purpose laws and economic principles, not the outdated, narrow, vertical silos of a 1934 monopoly telephone law. And certainly not a patchwork of conflicting state laws. The Internet is not just “modernized telephone wires.” It is a broad and deep ecosystem of communications and computing infrastructure; vast, nested layers of software, applications, and content; and increasingly varied services connecting increasingly diverse end-points and industries. General purpose rules are far better suited to this environment than the 80-year old law written to govern one network, built and operated by one company, to deliver one service.

Over the previous two decades of successful operation under Title I, telecom, cable, and mobile firms in the U.S. invested a total of $1.5 trillion in wired and wireless broadband networks. But over the last two years, since the Title II Order, the rate of investment has slowed. In 2014, the year before the Title II Order, U.S. broadband investment was $78.4 billion, but in 2016 that number had dropped by around 3%, to $76 billion. In the past, annual broadband investment had only dropped during recessions.

This is a concern because massive new investments are needed to fuel the next waves of Internet innovation. If we want to quickly and fully deploy new 5G wireless networks over the coming 15 years, for example, we need to extend fiber optic networks deeper into neighborhoods and more broadly across the nation in order to connect millions of new “small cells” that will not only deliver ever more video to our smartphones but also enable autonomous vehicles and the Internet of Things. It’s a project that may cost $250-300 billion, but it would happen far more slowly under Title II, and many marginal investments in marginal geographies might never happen at all.

At the hearing, FTC Commissioner Terrell McSweeny defended the 2015 Title II order, which poached many oversight functions from her own agency. Her reasoning was odd, however. She said that we needed to radically change policy in order to preserve the healthy results of previously successful policy. She said the Internet’s success depended on its openness, and we could sustain that openness only by applying the old telephone regulations, for the first time, to the Internet.

This gets things backwards. In our system, we usually intervene in markets and industries only if we demonstrate both serious and widespread market failures and if we think a policy can deliver clear improvements compared to its possible downside. In other words, the burden is on the government to prove harm and that it can better manage an industry. The demonstrable success of the Internet made this a tough task for the FCC. In the end, the FCC didn’t perform a market analysis, didn’t show market failures or consumer harm, didn’t show market power, and didn’t perform a cost-benefit analysis of its aggressive new policy. It simply asserted that it knew better how to manage the technology and business of the Internet, compared to engineers and entrepreneurs who had already created one of history’s biggest economic and technical successes.

Commissioner McSweeny also disavowed what had been one of the FTC’s most important new-economy functions and one in which it had developed a good bit of expertise – digital privacy. Under the Title II Order, the FCC snatched from the FTC the power to regulate Internet service providers (ISPs) on matters of digital privacy. Now that the FCC looks to be returning that power to the FTC, however, some states are attempting to regulate Internet privacy themselves. This summer, for example, California legislators tried to impose the Title II Order’s privacy rules on ISPs. Although that bill didn’t pass, you can bet California and other states will be back.

It’s important, therefore, that the FCC reaffirm longstanding U.S. policy – that the Internet is the ultimate form of interstate commerce. Here’s the way we put it in a recent post:

The internet blew apart the old ways of doing things. Internet access and applications are inherently nonlocal services. In this sense, the “cloud” analogy is useful. Telephones used to be registered to a physical street address. Today’s mobile devices go everywhere. Data, services, and apps are hosted in the cloud at multiple locations and serve end users who could be anywhere — likewise for peer-to-peer applications, which connect individual users who are mobile. Along most parameters, it makes no sense to govern the internet locally. Can you imagine 50 different laws governing digital privacy or net neutrality? It would be confusing at best, but more likely debilitating.

The Democratic FCC Chairman Bill Kennard weighed in on this matter in the late 1990s. He was in the middle of the original debate over broadband and argued firmly that high-speed cable modems were subject to a national policy of “unregulation” and should not be swept into the morass of legacy regulation.

In a 1999 speech, he admonished those who would seek to regulate broadband at the local or state level:

“Unfortunately, a number of local franchising authorities have decided not to follow this de-regulatory, pro-competitive approach. Instead, they have begun imposing their own local open access provisions. As I’ve said before, it is in the national interest that we have a national broadband policy. The FCC has the authority to set one, and we have. We have taken a de-regulatory approach, an approach that will let this nascent industry flourish. Disturbed by the effect that the actions of local franchising authorities could have on this policy and on the deployment of broadband, I have asked our general counsel to prepare a brief to be filed in the pending Ninth Circuit case so we can explain to the court why it’s important that we have a national policy.”

In the coming months, the FCC will likely reclassify the internet as a Title I information service. In addition to freeing broadband and mobile from the regulatory straitjacket of the 2015 Title II Order, this will also return oversight responsibility for digital privacy to the Federal Trade Commission (FTC), its natural home. The FTC has spent the last decade developing rules governing this important and growing arena and has enforced those rules to protect consumers. States’ efforts to impose their own layer of possibly contradictory rules would only confuse consumers and discourage upstart innovators.

As the internet becomes an ever more important component of all that we do, as its complexity spreads, and as it touches more parts of the economy, this principle will only become more important. Yes, there will be legitimate debates over just where to draw the boundaries. As the internet seeps further into every economic and social act, this does not mean that states will lose all power to govern. But to the extent that Congress, the FCC, and the FTC have the authority to protect the free flow of internet activity against state-based obstacles and fragmentation, they should do so. In its coming order, the FCC should reaffirm the interstate nature of these services.

A return to the Internet’s original status as a Title I information service, protected from state-based fragmentation, merely extends and strengthens the foundation upon which the U.S. invented and built the modern information economy.

The $12-million iPhone

Several years ago, I had a bit of fun estimating how much an iPhone would have cost to make in the 1990s. The impetus was a story making the rounds on the web. A journalist had found a full-page newspaper ad from RadioShack dating back to 1991. He was rightly amazed that all 13 of the advertised electronic gadgets — computer, camcorder, answering machine, cordless phone, etc. — were now integrated into a single iPhone. The cost of those 13 gadgets, moreover, summed to more than $3,000. Wow, he enthused, most of us now hold $3,000 worth of electronics in the palm of our hand.

I saluted the writer’s general thrust but noted that he had wildly underestimated the true worth of our modern handheld computers. In fact, the computing power, data storage capacity, and communications bandwidth of an iPhone in 2014 would have cost at least $3 million back in 1991. He had underestimated the pace of advance by three orders of magnitude (or a factor of 1,000).

Well, in a recent podcast, our old friend Richard Bennett of High Tech Forum brought up the $3 million iPhone 5 from 2014, so I decided to update the estimate. For the new analysis, I applied the same method to my own iPhone 7, purchased in the fall of 2016 — 25 years after the 1991 RadioShack ad. continue reading . . .

Why productivity slowed . . . and why it’s about to soar.

I enjoyed discussing technology’s impact on growth and employment with David Beckworth and Michael Mandel on David’s Macro Musings podcast.

Full speed ahead on the internet

Here’s a brief statement on today’s action at the Federal Communications Commission, where the agency will begin a rule-making to reverse Title II regulation of the Internet and ask how best to protect its freedom and openness.

The Internet has always been open and free, and the successful results were clear for all to see. The imposition of Title II regulation on the Internet in 2015 was unnecessary, illegal, and foolish. Title II was a speed bump that, if allowed to remain, could have grown into a giant road-block to Internet innovation. Fortunately, Chairman Ajit Pai and the FCC today begin the process of returning to the simple rules that for decades fostered Internet investment and entrepreneurship and led to the historically successful digital economy.

The next waves of Internet innovation will bring the amazing power of the digital economy to the physical economy, promising widespread economic benefits. If we want to take the next step, to encourage infrastructure investment and innovation for decades to come, Congress could codify a pro-innovation, pro-consumer approach that would keep the Internet free and open without harmful bureaucratic control.

– Bret Swanson

Robots on TV

See brief interview on Fox Business this morning discussing our “Robots Will Save the Economy” op-ed from The Wall Street Journal.

Robots (and all kinds of info-tech) Will Save the Economy

Screen Shot 2017-05-15 at 9.57.05 AM

See our commentary, with Michael Mandel, in today’s Wall Street Journal: Robots Will Save the Economy.

Ajit Pai’s Welcome Return to Internet Innovation

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FCC Chairman Ajit Pai gives speech announcing new approach to Internet regulation, in Washington, D.C., April 26, 2017.

Here’s our latest in Forbes . . . Ajit Pai’s Welcome Return to Internet Innovation:

“Yesterday, Ajit Pai, the new Chairman of the Federal Communications Commission, announced a roll back of the Obama administration’s aggressive regulatory approach to the Internet, adopted in early 2015. This afternoon, Pai will release the text of the proposed rule-making, which will launch several months of public comment.

“In yesterday’s speech, Pai emphasized the Internet’s historic success, based on a bipartisan approach adopted in the Clinton administration, which elevated innovation over regulation by consciously rejecting the old telephone rules for the emerging digital economy:

Under this framework, a free and open Internet flourished. Under this framework, America’s Internet economy produced the world’s most successful online companies: Google, Facebook, and Netflix, just to name a few. Under this framework, the private sector invested about $1.5 trillion to build the networks that gave people high-speed access to the Internet. And under this framework, consumers benefited from unparalleled innovation. But two years ago, the federal government’s approach suddenly changed.

continue reading . . .

Dawn? Or doom? I vote dawn.

Here is video of a presentation from last October’s Dawn or Doom technology conference at Purdue University, where I previewed the Coming Productivity Boom research.

The Coming Productivity Boom: Transforming the Physical Economy with Information

We’re excited to share this new research, conducted with Michael Mandel, and commissioned by the Technology CEO Council. Here’s the Executive Summary:

Executive Summary

The Information Age is not over. It has barely begun.

●  The diffusion of information technology into the physical industries is poised to revive the economy, create jobs, and boost incomes. Far from nearing its end, the Information Age may give us its most powerful and widespread economic benefits in the years ahead. Aided by improved public policy focused on innovation, we project a significant acceleration of productivity across a wide array of industries, leading to more broad-based economic growth.

●  The 10-year productivity drought is almost over. The next waves of the information revolution—where we connect the physical world and infuse it with intelligence—are beginning to emerge. Increased use of mobile technologies, cloud services, artificial intelligence, big data, inexpensive and ubiquitous sensors, computer vision, virtual reality, robotics, 3D additive manufacturing, and a new generation of 5G wireless are on the verge of transforming the traditional physical industries—healthcare, transportation, energy, education, manufacturing, agriculture, retail, and urban travel services.

●  At 2.7%, productivity growth in the digital industries over the last 15 years has been strong.

●  On the other hand, productivity in the physical industries grew just 0.7% annually, leading to anemic economic growth over the last decade.

●  The digital industries, which account for around 25% of U S private-sector employment and 30% of private-sector GDP, make 70% of all private-sector investments in information technology. The physical industries, which are 75% of private-sector employment and 70% of private-sector GDP, make just 30% of the investments in information technology.

● This “information gap” is a key source of recent economic stagnation and the productivity paradox, where many workers seem not to have benefited from apparent rapid technological advances. Three-quarters of the private sector—the physical economy—is operating well below its potential, dragging down growth and capping living standards.

● In particular, the crucial manufacturing sector, outside the computer and electronics industry, has barely boosted its capital stock of IT equipment and software over the past 15 years. Not surprisingly, productivity growth in manufacturing has slowed to a crawl in recent years.

● Information technologies make existing processes more efficient. More importantly, however, creative deployment of IT empowers entirely new business models and processes, new products, services, and platforms. It promotes more competitive differentiation. The digital industries have embraced and benefited from scalable platforms, such as the Web and the smartphone, which sparked additional entrepreneurial explosions of variety and experimentation. The physical industries, by and large, have not. They have deployed comparatively little IT, and where they have done so, it has been focused on efficiency, not innovation and new scalable platforms. That’s about to change.

● Healthcare, energy, and transportation, for example, are evolving into information industries Smartphones and wearable devices will make healthcare delivery and data collection more effective and personal, while computational bioscience and customized molecular medicine will radically improve drug discovery and effectiveness. Artificial intelligence will assist doctors, and robots will increasingly be used for surgery and eldercare. The boom in American shale petroleum is largely an information technology phenomenon, and it’s just the beginning. Autonomous vehicles and smart traffic systems, meanwhile, will radically improve personal, public, and freight transportation in terms of both efficiency and safety, but they also will create new platforms upon which entirely new economic goods can be created.

● Manufacturing may be on the cusp of transformation—not just by robotics and 3D printing, but by the emergence of smart manufacturing more broadly: a fundamental rethinking of the production and design processes that substantially boost productivity and demand. That, in turn, could create a new set of manufacturing-related jobs and allow American factories to compete more effectively against low-wage rivals.

●  Far from a jobless future, a more productive physical economy will make American workers more valuable and employable. It also will free up resources to spend on new types of goods and services. Artificial intelligence and robots will not only perform many unpleasant and super-human tasks but also will complement our most human capabilities and make workers more productive than ever. Humans equipped with boundless information, machine intelligence, and robot strength will create many new types of jobs.

●  Employment growth in the digital sector has modestly outpaced employment growth in the physical sector, despite the big edge in productivity growth for digital industries. This suggests that we can both achieve higher living standards and create good new jobs. The notion that automation is the key enemy of jobs is wrong. Over the medium and long terms, productivity is good for employment.

●  How much could these IT-related investments add to economic growth? Our assessment, based on an analysis of recent history, suggests this transformation could boost annual economic growth by 0.7 percentage points over the next 15 years. That may not sound like much, but it would add $2.7 trillion to annual U.S. economic output by 2031, in 2016 dollars. Wages and salary payments to workers would increase by a cumulative $8.6 trillion over the next 15 years. Federal revenues over the period would grow by a cumulative $3.9 trillion, helping to pay for Social Security and Medicare. State and local revenues would rise by a cumulative $1.9 trillion, all without increasing the tax share of GDP.

● Expanding the information revolution to the physical industries will require an entrepreneurial mindset—in industry and in government—to deploy information technology in new ways and reorganize firms and sectors to exploit the power of IT. Some of these technological transformations are already underway. Public policy, however, will either retard or accelerate the diffusion of information into the physical industries. Better or worse policy will, in significant part, determine the rate at which more people enjoy the miraculous benefits of rapid innovation, both as workers and consumers.

● Better tax policy, for example, can encourage domestic investment and the allocation of capital into more cutting-edge projects and firms. Closing the information gap also will demand the ability of regulators in the physical industries—from the Food and Drug Administration to the Department of Transportation, and every agency in between—to embrace innovation and technological change. Mobilizing information to dramatically improve education and training is imperative if we want our citizens to fully leverage and benefit from these emerging opportunities. Encouraging investment in communications networks, which are the foundation of most of these new capabilities, is also a crucial priority. The free flow of capital, goods, services, and data around the world is as essential as ever to innovation and productivity.

● Launching this new productivity boom thus demands a new, pro-innovation focus of public policy.

Read the entire report.

Samsung seeks another patent victory at Supreme Court vs. Apple

After several decades when patents were handed out like candy, leading to a litigious free-for-all, the courts and Congress over the past few years have begun tightening the reins. This is important if we want intellectual property to promote real technological  innovation, rather than frivolous legal entrepreneurship.

Among the signs of progress, the Supreme Court in December 2016 ruled 8-0 for Samsung, reversing a large $300 million award to Apple. In my view, the Court made the right call that the 19th century law governing design patents, which concern the look and feel of products, was being misapplied in a modern smartphone world.

On the heels of its victory, Samsung is now asking the Supreme Court to look at another patent squabble with Apple. This case concerns substantive questions of patent validity and infringement and also an unusual procedural question – both of which could have important implications for IP law.

In this case, Apple initially prevailed 2-1 in its charge that Samsung infringed three patents, which we’ll call:

  1. a 1996 “quick links” patent with “analyzer server” (‘647);
  2. a “slide to unlock” patent (‘721); and
  3. an “autocorrect” patent (‘172)

Upon appeal, however, the Federal Circuit ruled 3-0 for Samsung – finding that patent 1. was not in fact infringed and that patents 2. and 3. are invalid because they are obvious.

Apple requested en banc review by the entire court, but the parties did not hear from the court for six months. Until, suddenly, an en banc order was issued overturning the 3-0 ruling, without any hearing, briefs, or notice. Normally, a court will first announce it has taken a case en banc (or not), and later issue an opinion. In patent cases especially, there is usually further briefing and often a hearing. Court watchers were thus surprised by the unusual procedure (or lack thereof). All three judges from the 3-0 decision dissented with gusto, questioning the en banc review’s substance and procedural irregularities.

Samsung is thus returning to the Supreme Court, petitioning for cert on March 10. Getting the High Court to hear your case is always hard. They only take a small minority of those who ask. And the Court just decided a case with the same two litigants in December. On the other hand, the Court has been keen to reform patent law over the past few years, and its 8-0 decision in December reveals a likeness of mind to further the “patent reformation,” as I’ve called it.  The High Court may want to clarify some of these utility patent questions like it did for design patents in the last case, as well as resolve the highly unusual en banc behavior, lest that court make it a habit. The strength of the three dissents by the 3-0 panel also makes it somewhat more likely they’ll take it.

In fact, FOSS Patents argues that

What’s ambitious about Samsung’s petition is that it raises three questions for review, covering the big three patent litigation questions:

·         validity (here, obviousness),

·         remedies (here, injunctive relief, which is always a more important issue than damages unless damages would really be devastating), and

·         infringement (here, whether all elements of the relevant “quick links” claim were infringed).

If the Supreme Court granted all three, it would be the most comprehensive patent case ever before the top U.S. court, and the implications of a decision could, collectively, go beyond Alice.

Thus, if the High Court really wants to extend its recent efforts to improve patent law, this might be the case to do it.

Can Indiana lead in the 5G economy?

5G integrated network, many applications and services“A revival of economic growth in the U.S. and around the world will, to a not insignificant degree, depend on the successful deployment of the next generation of wireless technology.

“The Internet’s first few chapters transformed entertainment, news, telephony, and finance — in other words, the existing electronic industries. Going forward, however, the wireless Internet will increasingly reach out to the rest of the economy and transform every industry, from transportation to education to health care.

“To drive and accommodate this cascading wireless boom, we will need wireless connections that are faster, greater in number, and more robust, widespread, diverse, and flexible. We will need a new fifth generation, or 5G, wireless infrastructure. 5G will be the foundation of not just the digital economy but increasingly of the physical economy as well.”

That’s how I began a recent column summarizing my research on the potential for technology to drive economic growth. 5G networks will not only provide an additional residential broadband option. 5G will also be the basis for the Internet of Things (IoT), connected cars and trucks, mobile and personalized digital health care, and next generation educational content and tools. The good news is that Indiana is already poised to lead in 5G. AT&T, for example, has announced that Indianapolis is one of two sites nationwide that will get a major 5G trial. And Verizon is already deploying “small cells” – a key component of 5G networks – across the metro area, including in my hometown of Zionsville (see photo).

Zville small cell 1

Small cell lamppost in Zionsville, Indiana.

If Indiana is to truly lead in 5G, and all the next generation services, however, it will need to take the next step. That means modest legislation that makes it as easy as possible to deploy these networks. Streamlining the permitting process for small cells will not only encourage investment and construction jobs as we string fiber optics and erect small cells. It will also mean Indiana will be among the first to enjoy the fast and ubiquitous connectivity that will be the foundation of nearly every industry going forward. In many ways, 5G is the economic development opportunity of the next decade.

There is legislation currently moving in the Indiana General Assembly that could propel Indiana along its already favorable 5G path. Sponsored by Sen. Brandt Hershman, SB 213 is a common sense and simple way to encourage investment in these networks, and the multitude of services that will follow.

The great news is that 5G is one of the few economic and Internet policy issues that enjoys widespread bipartisan support. The current FCC chairman Ajit Pai supports these streamlining polices, but so did the former Democratic chairman Tom Wheeler:

The nature of 5G technology doesn’t just mean more antenna sites, it also means that without such sites the benefits of 5G may be sharply diminished. In the pre-5G world, fending off sites from the immediate neighborhood didn’t necessarily mean sacrificing the advantages of obtaining service from a distant cell site. With the anticipated 5G architecture, that would appear to be less feasible, perhaps much less feasible.

I have no doubt other states will copy Indiana, once they see what we’ve done – or leap ahead of us, if we don’t embrace this opportunity.

Here are a few of our reports, articles, and podcasts on 5G:

Imagining the 5G Wireless Future: Apps, Devices, Networks, Spectrum – Entropy Economics report, November 2016

5G Wireless Is a Platform for Economic Revival – summary of report in The Hill, November 2016

5G and the Internet of Everything – podcast with TechFreedom, December 2016

Opening the 5G Wireless Frontier – article in Computerworld, July 2016

– Bret Swanson

 

How the Internet Will Become the ‘Exanet’

See our latest at Forbes: How the Internet Will Become the ‘Exanet’

Today’s Internet has transformed media and delivered prodigious value to consumers, in entertainment, ecommerce, and personal productivity.

Yet the next waves of the Internet will extend to new industries in the physical world, delivering a far greater variety of services and requiring connectivity that is even faster, more ubiquitous, and more robust than today. To drive and accommodate this information embrace by the real economy, we’ll need something bigger and better than the Internet. We’ll need the “exanet.”

In 2016, global Internet traffic likely topped 1,000 exabytes. A thousand exabytes equals one zettabyte (ZB), or a billion trillion (1021) bytes, which is roughly 114 million years of high-definition video. Over the last 20 years, since the dawn of the dot-com era in 1996, monthly Internet traffic has grown around 90 million-fold. continue reading . . .

A decade of subpar growth

Here’s a supplement to our previous post on economic growth scenarios, another way to look at the past decade.

A Decade of Subpar Growth 2006-16

Busting out of the 1.9% economy

The Congressional Budget Office yesterday published its annual 10-year economic outlook. It says, essentially, the economy will continue expanding for the coming decade at the tepid pace of the last decade. It predicts a slow-growth “new normal” of 1.9% annual expansion extending through 2027. If nothing changed, CBO might very well be correct. Yet it’s possible, even likely, that economic policy will change more in the next few years than any time since the early 1980s, maybe even since the 1930s.

CBO projects growth of 2.3% this year, then 2.0% in 2018, 1.7% in 2019, 1.5% in 2020, 1.8% in 2021, and 1.9% from 2022-2027. It’s a tragic outcome if it comes to pass. We see below what a 1.9% economy got us over the last decade: a gigantic growth gap of around $2.8 trillion in lost output, compared to what we might have expected.

Growth Scenarios 2027 - chart 2.0

A continuation of the new normal would only compound this shortfall, compared to our economy’s likely potential. In fact, CBO also includes in its latest report an appendix showing the potential effects of productivity growth *even slower* than its central estimate. To be fair, CBO is not predicting slower productivity, just offering useful heuristics to estimate the economic and budgetary effects of slower productivity growth. I think, however, that variance from the baseline scenario will be just the opposite — that productivity growth will surprise to the *upside* over the next 10 years.

The chart above illustrates these scenarios over the coming decade. The gray line is actual real GDP. The light blue dotted line is what the economy would have looked like had the U.S. continued growing at its historical rate after 2007. The growth gap today, at the start of 2017, stands at something like $2.8 trillion (the difference between the gray line and the blue dotted line). Others, using more conservative assumptions, find a gap of around $2 trillion, still a huge shortfall.

The dark blue line is roughly CBO’s projection for the next 10 years — around 2.0% annual growth — which is a continuation of the roughly 2% we’ve experienced in the current expansion. If CBO is correct, the U.S. economy will be something like $6.2 trillion smaller in 2027 compared to what we might have expected in 2007.

The green line shows 2.5% growth, and yellow shows 3.0%, which was about the U.S. average between 1965 and 2007.

The red line shows 3.5%, which many analysts believe is too ambitious a scenario. They think, with some reason, the U.S. economy is maturing and is on a permanently lower growth path than before. Perhaps in the very long term 3.5% is too optimistic. Who knows? But I think the U.S. can grow at 4% or more for the next few years before returning to the longterm average of 3%, which could sum to around 3.5% over the next decade. I say this for three reasons:

(1) The U.S. economy never really recovered from the financial panic and Great Recession. Investment has been weak, job growth was steady but very slow, and entrepreneurship has been wanting. The overall policy environment — on taxes, regulation, and monetary management — has discouraged growth. There’s lots of room to make up.

(2) The policy environment could improve dramatically over the coming years. Big reforms of the tax code and regulatory approaches across dozens of agencies could unleash investment and innovation that’s been pent up for years. Such huge potential policy changes will not only allow us to “catch up” some lost growth from the last decade but can also boost our top-line frontier of innovation and thus growth potential. (There are also of course policy risks, such as rising protectionism, and global risks, such as China’s fragile economy. Yet I think the balance tilts toward growth.)

(3) The productivity plunge of the last decade is nearly over. I believe, based on what I’m seeing across the technology landscape, we are the cusp of a productivity boom. I will have much more to say about this in a forthcoming paper. But if it happens, the productivity increases I’m estimating could lift annual economic growth by nearly a percentage point over the coming decade.

Combining these three factors, I think the red 3.5% growth scenario through 2027 is possible. It would represent a $3.6 trillion GDP improvement over CBO’s estimate for the 2027 economy.

— Bret Swanson

 

Happy 250th birthday, Jean-Baptiste Say

JB Say

JB Say, 1767-1832

Jean-Baptiste Say was born 250 years ago, on January 5, 1767.

Say translated Adam Smith into French, wrote his own *Treatise on Political Economy* in 1803, and coined the term entrepreneur. He worked at a life insurance company in England and established his own cotton spinning mill in France, employing as many as 5,000. His “Law of Markets” – later known as Say’s Law – was a foundation of classical and neoclassical economics, a contravention of Malthusian pessimism, and later a chief target of Keynesian antagonists.

Peter Drucker began the first chapter of his book *Innovation and Entrepreneurship* by quoting Say.

“The entrepreneur,” said the French economist J.B. Say around 1800, “shifts economic resources out of an area of lower and into an area of higher productivity and greater yield.”

Drucker later continued:

“Joseph Schumpeter was the first major economist to go back to Say. In his classic *The Theory of Economic Dynamics,* published in 1911, Schumpeter broke with traditional economics – far more radically than John Maynard Keynes was to do twenty years later. He postulated the dynamic disequilibrium brought on by the innovating entrepreneur, rather than equilibrium and optimization, is the ‘norm’ of a healthy economy and the central reality for economic theory and economic practice.”

Here’s is Thomas Sowell’s book *Say’s Law.*

Here is Steven Kates’s book *Say’s Law and the Keynesian Revolution,* and a video of a Kates lecture on the topic.

Here’s John Maynard Keynes’s book *The General Theory,* which was in significant part an attempt to refute his own clever misstatement of Say’s Law.

Here is Mark Skousen: “Say’s Law is Back.”

And here is the @JBSay twitter account (me).

— Bret Swanson

Reasons for optimism in 2017?

A new policy direction in 2017 could substantially boost the economy. Last week I commented on the 15-year IPO winter and the possibilities for a revival of public equity financing of growing firms.

ipos-in-us-1980-2016

More broadly, my research for the last 10 years at the U.S. Chamber Foundation has focused on the collapse of economic growth, summarized in the chart below. (See also, for example, The Growth Imperative, Beyond the New Normal, The Growth Agenda, etc.)

growth-gap-3q16-revised-a

This $2.8-trillion “miss” translates into millions of lost job-years and stagnant incomes for most occupations in much of the country.

I’ll have lots more to say about the sources of — and potential solutions to — this growth gap in the coming weeks and months. For now, we highlight these severe shortfalls to reinforce just how crucial a new growth agenda is.

The Internet media free-for-all

Tomorrow, a host of Silicon Valley firms will visit Trump Tower for a meeting with the President-elect. Last week, AT&T and Time Warner visited Capitol Hill to testify about their proposed merger. These diverse companies build lots of things, from software to networks to original content, but they also have one thing in common. Increasingly they are all vying for bigger chunks of the video market, and in the process they are creating an entirely new media universe.

Too often when policymakers look at these companies, individually or in small sets, they see only what it right in front of them, rigidly defined and static, or even stereotypes of what these companies were a generation ago. But these companies — and the markets in which they play — are changing every day.

Several years ago, in a report called “Life After Television,” we noted that the YouTube and Netflix phenomena were only just the most obvious and earliest manifestations of the Web video revolution. We noted that, yes, the more abundant bandwidth of cable TV and then satellite had been improving the video market for years, but that even bigger changes were coming. This process, we said, would be intense, and messy, and often exhilarating.

Broadband and the Web have now super-charged all these phenomena. We enjoy far more choice and diversity, and the spectrum of quality is broader still. The producers, delivery channels, and business models for video are also multiplying (and in some cases recombining and overlapping in surprising ways). We are only in the middle of the beginning of what will be a decade-long process of sorting out the video content, creation, distribution, aggregation, user-interface, viewing, advertising, and subscription markets.

Here is the graphic we used to describe, in simplified form, the overlapping activities of firms competing in the video market, often approaching from very different angles and starting points.

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Graphic describing simplified video value chain, circa 2014, in Life After Television.

The firms pictured are still at the center of the new media tussle. But others have joined the fray, and the battlefield is constantly shifting. Facebook, for example, was not even on our 2014 graphic, but in the subsequent two years it has become a giant player in the Web video (and thus advertising) market. At the time of our report, only Comcast covered the full spectrum, from connectivity to content. But in the meantime Verizon added content via its purchases of AOL and Yahoo, and AT&T is adding content with its Time Warner acquisition. Netflix and Amazon have only expanded as award-winning  production houses of original content. Google and Apple, of course, continue to approach video with distinct business models — Google via advertising and the Web, Apple via a la carte and apps — but each remains a powerful player. And we are still only, perhaps, at the end of the beginning of this media reshuffling.

This new media world is emblematic of an even larger phenomenon of dynamic competition across the technology landscape. I described this even wider playing field in another report called “Digital Dynamism: Competition in the Internet Ecosystem,” which illustrated the multidimensionality of the market. This new market was characterized by intensive innovation, product differentiation, and cascades of competitive and complementary products and services.

The dynamism of the Internet ecosystem is its chief virtue. Infrastructure, services, and content are produced by an ever wider array of firms and platforms in overlapping and constantly shifting markets.

The simple, integrated telephone network, segregated entertainment networks, and early tiered Internet still exist, but have now been eclipsed by a far larger, more powerful phenomenon. A new, horizontal, hyperconnected ecosystem has emerged. It is characterized by large investments, rapid innovation, and extreme product differentiation.

There is both more competition, and more complementarity, than ever before. Which is why policymakers or pundits who are quick to shout “monopoly” in any of these contexts is almost surely wrong. Yes, some of these firms have large market shares in small portions of this overall digital world, but these share are often gained through real innovation, and even then they are often fleeting. These markets are way too fluid to assume anyone has a lock on any part of it, let alone a dominant position overall. So a merger of, say, AT&T and Time Warner, might to some look like “consolidation,” when in fact it potentially provides highly innovative and beneficial new competition in the online advertising business, where at the moment Google and Facebook are the biggest players.

It’s way too early to predict where all this will end up, let alone to dictate and end game.

Zero-sum thinking on zero-rating threatens 5G success

On Wednesday, the Senate Antitrust Subcommittee will take up AT&T’s pending acquisition of Time Warner (the owner of HBO and TBS, not the cable company). Congress has no direct role in merger approval, but the hearing will no doubt highlight the arguments for and against the merger that the Department of Justice, and possibly the Federal Communications Commission (FCC), will hear next year.

As odd as it may sound, I think the AT&T-TWX alliance is chiefly a 5G wireless infrastructure story. Time Warner, combined with DirecTV, will provide a huge amount of popular video content to act as a killer app for a new nationwide wireless infrastructure, not only delivering video to proliferating mobile devices but also competing with cable for residential TV and broadband subscribers.

While video may be the killer app, this 5G wireless network will also serve as the strategic platform for most of the rest of the economy, from connected and autonomous cars to health care to the retail and industrial Internet of Things (IoT). For an incoming administration focused on infrastructure and reviving the lagging sectors of our economy, 5G is attractive. It offers not only tens of billions of dollars of direct infrastructure investment and jobs (at no cost to taxpayers) but also a means to boost productivity and incomes in industries that so far have been left out of the information revolution.

Much of the opposition to the deal takes the vague and familiar form of big-is-bad. Among specific critiques of the deal, however, the most prominent is opposition to “zero rating.” Zero rating, or free data, is the practice of content firms paying for the data consumption of their viewers or listeners. Free data comes in different forms — some are like 1-800 toll-free numbers, other exempt sponsored content from data limits.

Critics worry that AT&T, like Comcast before it, will use zero rating to favor some content over other content, and the outgoing FCC is trying to pick a fight. Last week, AT&T launched its new DirecTV Now service, which delivers bundles of cable-like video channels over the internet and which won’t count against users’ AT&T data limits. You’d think the FCC would be thrilled with this new, attractively-priced, competitive offering. Yet the FCC promptly hit AT&T (and Verizon, which has a similar service) with letters skeptical of their free data programs.

The FCC’s attack on free data is probably legally indefensible, but it is also economically unsound. Opposition to zero rating is based on zero-sum fallacies, where one party’s gain necessarily means another party’s loss. If HBO or ESPN or Netflix or NBC or Spotify subsidize your consumption of their content, then you or other content firms must somehow lose, or so the theory goes.

But the opposite is true. What if most everyone can get more of what they want? This is the way innovation works. In competitive markets like mobile broadband and digital content, free data is additive. It’s positive-sum. By allowing content firms to contribute to the economic equation where they see a benefit, it promotes the consumption of more total data by consumers, their ability to access more third-party non-zero-rated content, and the ability to build faster networks. It’s a win-win-win for consumers, ISPs, and content providers.

Free data is likely to be a widely used business model for connected cars, health care and educational apps, and the Internet of Things. And so proscribing the use of this commonplace business model would not only hurt digital content but also the emerging apps and services we are planning to build using 5G networks.

There’s lots more to say on these topics, but opposing a merger based on refusing free data for consumers is unlikely to be a winning argument.

Google Fiber pull-back shows broadband is difficult. But 5G will make it much easier.

USA Today reports that:

Google Fiber is halting its rollout in 10 cities and laying off staff as its chief executive Craig Barratt steps down, dealing a major setback to the Internet giant’s ambitions of blanketing the nation in super-speedy Internet.

Several years ago, Google Fiber was the darling of both Silicon Valley and most of Washington’s tech policy wonks. It was supposed to bring “gigabit speeds” to supposedly woefully underserved American consumers. The facts were more complicated. It turned out existing broadband firms were already investing hundreds of billions of dollars in wired and wireless broadband, and the U.S. topped the world rankings in the most important measures of Internet performance. Google Fiber’s demise, or pause, or whatever it turns out to be, shows that large scale infrastructure projects are hard. And expensive. And competitive. Especially when deploying fast-changing technologies. And especially when the costs of regulation are rising.

Which points to an ironic facet of this news. At the Wall Street Journal‘s annual WSJ.D conference yesterday, AT&T CEO Randall Stephenson plainly acknowledged Google’s victory in the biggest tech policy debate of the last 15 years: “On neutrality. You guys from Google, you won. It’s done.” Yet the sad irony is that Google’s “win” on policy — the imposition in 2015 of old and voluminous monopoly telephone rules onto modern broadband — made Google’s own broadband deployment efforts even more difficult. We long said that Title II regulation would make broadband less competitive, and Google’s exit of the business is evidence of this effect.

What regulation taketh in terms of innovation and investment, however, technology can in some significant portion often give back. Enter 5G wireless.

Fifth generation wireless, or 5G, is a suite of technologies that will be the foundation of the Internet, and of most of the economy, for the next 20 years. It includes more advanced air interface protocols, new “software defined” network architectures, use of huge new swaths of high-frequency spectrum, and deployment of millions of small cells, all of which will dramatically expand coverage and capacity. But not just for mobile. 5G will also power connected cars and the Internet of Things. It could even become a real competitive offering for fixed residential broadband, delivering both interactive Web video and TV-like high-definition video the way only cable and fiber-to-the-home do today.

It is this facet of 5G that AT&T and Time Warner have emphasized over the last few days since announcing the $85-billion merger of the two firms. Verizon and AT&T over the last decade have built fiber networks into neighborhoods where it made financial sense. But as Google learned the hard way, the business case for fiber is tough even in densely populated urban or suburban areas, let alone exurbs or rural communities. (Google does deserve credit for the progress it made in prying open the local regulatory bottlenecks that too often discourage broadband deployment — things like burdensome infrastructure permitting and local cable franchise rules. Larger broadband firms are now taking advantage of these beneficial bottleneck openings to lay more fiber deeper into communities and neighborhoods across the country.)

A key component of 5G is the opening up of huge amounts of spectrum, at far higher frequencies than are used today for mobile wireless. Today’s mobile devices send and receive signals mostly in the 1-2 gigahertz range. Most Wi-Fi signals are in the 2.4 and 5 GHz bands. But 5G will make use of bands in the 20, 30, and even 70 GHz range. These higher frequencies contain large blocks of mostly unused bandwidth that can transmit more data far faster than today’s mobile cell networks. In a neighborhood setting, fiber-connected small cells could blanket not only hundreds of home receivers but also thousands of mobile devices. But bringing fiber to the neighborhood is far more cost-effective than taking it all the way into the home.

5G could be powerful enough to deliver a video service on par with cable TV/broadband. Satellite will still have an important role for high definition TV, but 5G can overcome satellite’s limited capacity for interactivity (given the latency incurred over the 46,000-mile round trip to space and back).

This new competitive broadband service might be enough to push the AT&T-TW partnership over the line with regulators. And it should also serve as a warning to future market meddlers at the FCC: technology is almost always far more powerful, and pro-consumer, than clever attempts to shape yesterday’s markets.

 

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