“It is the single worst telecom bill that I have ever seen.”

— Reed Hundt, Jan. 31, 2012

Isn’t this rich?

One of the most zealous regulators America has known says Congress is overstepping its bounds because it wants to unleash lots of new wireless spectrum but also wants to erect a few guardrails so that FCC regulators don’t run roughshod over the booming mobile broadband market.

At a New America Foundation event yesterday, former FCC chairman Reed Hundt said Congress shouldn’t micromanage the FCC’s ability to micromanage the wireless industry. Mr. Congressman, you don’t know anything about how the FCC should regulate the Internet. But the FCC does know how to build networks, run mobile Internet businesses, and perfectly structure a wildly tumultuous economic sector. It’s just the latest remarkable example of the growing hubris of the regulatory state.

In his book, You Say You Want a Revolution, Hundt famously recounted his staff’s interpretation and implementation of the 1996 Telecom Act.

The passage of the new law placed me on a far more public stage. But I felt Congress — in the constitutional sense — had asked me to exercise the full power of all ideas I could summon. And I believed that I and my team had learned, through many failures, how to succeed. Later, I realized that we knew almost nothing of the complexity and importance of the tasks in front of the FCC.

…

Meeting in several overlapping groups of about a dozen people each . . . we dedicated almost three weeks to studying the possible readings of each word in the 150-page statute. The conference committee compromises had produced a mountain of ambiguity that was generally tilted toward the local phone companies’ advantage. But under the principles of statutory interpretation, we had broad authority to exercise our discretion in writing the implementing regulations. Indeed, like the modern engineers trying to straighten the Leaning Tower of Pisa, we could aspire to provide the new entrants to the local telephone markets a fairer chance to compete than they might find in any explicit provision of the law. In addition, the law gave almost no guidance about how to treat the Internet, data networks, . . . and many other critical issues. (Three years later, Justice Antonin Scalia agreed, on behalf of the Supreme Court, that the law was profoundly ambiguous.)

…

The more my team studied the law, the more we realized our decisions could determine the winners and losers of the new economy. We did not want to confer advantage on particular companies; that seemed inequitable. But inevitably

wink, wink,

a decision that promoted entry into the local market would benefit a company that followed such a strategy.

There are so many angles here.

(1) Hundt says he and his team basically stretched the statute to mean whatever they wanted. The law may have been ambiguous — and it was, I’m not going to defend the ‘96 Act — yet the Supreme Court still found in a series of early-2000s cases that Hundt’s FCC had wildly overstepped even these flimsy bounds. That’s how aggressive and unconstrained Hundt was.

(2) Hundt’s rules helped crash the tech and telecom sectors in 2000-2002. His rules were so complex and intrusive that, whatever your views about the CLEC wars, the PCS C block spectrum debacle, and other battles, it’s hard to deny that the paralysis caused by the rules hurt broadband and the nascent Net.

(3) Is it surprising that, given the FCC’s poor record of reaching way past its granted powers, some in Congress want to circumscribe FCC regulators by giving them less-than-omnipotent authority? Is the new view of elite regulators that Congress should pass laws, the full text of which might read: “§1. Congress grants to the Internet Agency the authority to regulate the Internet. Go forth and regulate.”

(4) On the other hand, it’s not clear why Hundt would care particularly what Congress says in any new spectrum statute. He didn’t care much for the words or intent of the ‘96 Act, and he thinks regulators should “aspire” to grand self-appointed projects. Who knows, maybe all those Supreme Court smack downs in the early 2000s made an impression.

(5) Hundt says he and his team later realized, in effect, how naive they were about “the complexity and importance of the tasks in front of the FCC.” So he’s acknowledging after things didn’t go so well that his FCC underestimated the complexity and thus overestimated their own expertise . . . yet he says today’s FCC deserves comprehensive power to structure the mobile Internet as it sees fit?

(6) Hundt admitted his FCC relished its capacity to pick winners and losers. Not particular companies, mind you — that would be improper — merely the types of companies who win and lose. A distinction without very much of a difference.

(7) We don’t argue that Congress, instead of the FCC, should impose intrusive regulation through statute. We don’t advocate long and complex laws. That’s not the point. Laws should be clear and simple, but stating the boundaries of a regulator’s authority is not a controversial act. No one should be imposing intrusive regulation or overdetermining the structure of an industry. And that’s what Congress — perhaps in a rare case! — is protecting against here.

The U.S. wireless sector has been only mildly regulated over the last decade. We’d argue this is a key reason for its success. But this presumption of mostly unfettered experimentation and dynamism may be changing.

Consider Sprint’s apparent decision to use “roaming” in Oklahoma and Kansas instead of building its own network. Now, roaming is a standard feature of mobile networks worldwide. Company A might not have as much capacity as it would like in some geography, so it pays company B, who does have capacity there, for access. Company A’s customers therefore get wider coverage, and Company B is paid for use of its network.

The problem comes with the FCC’s 2011 “digital roaming” order. Last spring three FCC commissioners decided that private mobile services — which the Communications Act says “shall not . . . be treated as a common carrier” — are a common carrier. Only D.C. lawyers smarter than you and me can figure out how to transfigure “shall not” into “may.” Anyway, the possible effect is to subject mobile data — one of the fastest growing sectors anywhere on earth — to all sorts of forced access mandates and price controls.

We warned here and here that turning competitive broadband infrastructure into a “common carrier” could discourage all players in the market from building more capacity and covering wider geographies. If company A can piggyback on company B’s network at below market rates, why would it build its own expensive network? And if company B’s network capacity is going to company A’s customers, instead of its own customers, do we think company B is likely to build yet more cell sites and purchase more spectrum?

With 37 million iPhones and 15million iPads sold last quarter, we need more spectrum, more cell towers, more capacity. This isn’t the way to get it. And what we are seeing with Sprint’s decision to roam instead of build in Oklahoma and Kansas may be the tip of this anti-investment iceberg.

Last spring when the data roaming order came down we began wondering about a possible “slow walk to a reregulated communications market.” Among other items, we cited net neutrality, possible new price controls for Special Access links to cell sites, and a host of proposed regulations affecting things like behavioral advertising and intellectual property (see, PIPA/SOPA). Since then we’ve seen the government block the AT&T-T-Mobile merger. And the FCC is now holding up its own important push for more wireless spectrum because it wants the right to micromanage who gets what spectrum and how mobile carriers can use it.

Many of these items can be thoughtfully debated. But the number of new encroachments onto the communications sector threatens to slow its growth. Many of these encroachments, moreover, are taking place outside any basic legislative authority. In the digital roaming and net neutrality cases, for example, the FCC appeared clearly to grant itself extra- if not il-legal authority. These new regulations are now being challenged in court.

We need some restraint across the board on these matters. The Internet is too important. We can’t allow a quiet, gradual reregulation of the sector to slow down our chief engine of economic growth.

— Bret Swanson

“One solution is giving back to bank creditors the job of policing bank risk-taking. Roll back deposit insurance, for instance. We may not be able to see the future, but we can incentivize caution as a general matter. And we can improve the odds that, when banks make mistakes, they won’t all make the same mistake at the same time.”

— Holman Jenkins, The Wall Street Journal, January 18, 2011

“If the Greeks had skimped on the olive oil in a liter bottle, that wouldn’t threaten the metric system.”

— John Cochrane, Bloomberg View, December 21, 2011

More bad news for U.S. economic growth. In the face of multiplying obstacles deployed by Washington regulators, AT&T today abandoned its pursuit of T-Mobile. The most important outcome of the merger would have been a quicker and broader roll-out of 4G mobile broadband services. Now AT&T will have to find other paths to the wireless radio spectrum (and cell towers) it needs to meet growing demand and build tomorrow’s networks. T-Mobile is left in purgatory, short of the spectrum and long-term financial wherewithal to effectively compete.

Some say, don’t worry, assuming that another U.S. mobile provider will pick up T-Mobile. Not so fast. If Washington disallowed AT&T, it would do the same for Verizon. Sprint was pursuing T-Mobile before AT&T swooped in, but a Sprint-TMo combo makes much less sense. The spectrum-technology-tower infrastructure positions of AT&T and TMo were almost perfectly complementary. Not so for Sprint, who uses mostly higher frequencies, has always been a CDMA company (as opposed to WCDMA), and is already finding it challenging to raise the funds to build its own LTE network, given rocky times with partner Clearwire.

The U.S. mobile industry has been a shining star in an otherwise dark U.S. economy. But with Washington nixing the AT&T- T-Mobile merger, and given recent struggles at Clearwire and engineering disputes with upstart LightSquared, it’s not clear mobile will continue on its steep ascent. The FCC “staff report” opposing the AT&T-TMo deal didn’t even address the elephant in the room – spectrum. It’s odd. The FCC declared a spectrum crisis two years ago and repeatedly emphasized the urgent need for broadband expansion. Then, poof, not hardly a mention of either in its report. Not a good sign when the expert agency has taken its eye off the ball.

The industry is still full of potential, but there will be near-term disruptions as companies sort out new spectrum, business, and technology strategies. And as millions of un- and underemployed Americans know, time is money. Regulatory impediments and foot-dragging are especially harmful – and even infuriating – for an industry that desperately wants to grow. For an industry that is in many ways the bedrock of the 21st century American knowledge economy.

Beyond the disquieting roller-coaster in the mobile industry, one wonders more broadly about the American economy. Just what kind of business are we allowed to conduct? What investments are preferred – by whom? How far will the tilt of decision-making from private entities to public bureaucracies go?

— Bret Swanson

See our new report “Into the Exacloud” . . . including analysis of:

> Why cloud computing requires a major expansion of wireless spectrum and investment

> An exaflood update: what Mobile, Video, Big Data, and Cloud mean for network traffic

> Plus, a new paradigm for online games, Web video, and cloud software

A paper out today challenges the assertion that the AT&T-T-Mobile merger will create jobs. AT&T has said it would invest an additional $8 billion in wireless network infrastructure, above and beyond its usual $8-10 billion per year, and the Economic Policy Institute estimated this would result in between 55,000 and 96,000 job-years. The Communication Workers of America has cited the EPI study as one reason it supports the mobile union.

In a study prepared for Sprint, however, professor David Neumark says the EPI estimate fails to account for the fact that T-Mobile will no longer be investing its normal couple billion dollars per year after it is subsumed by AT&T. He says EPI is only looking at AT&T’s gross increase, not the net industry effect. He thinks the net effect will be negative and will thus cost jobs.

This is a fair point. We should analyze these things in as dynamic and realistic a way as possible. But the Sprint study appears to be relying on its own static, simplistic view of the world. Namely, it assumes an independent T-Mobile would keep investing billions a year on network infrastructure. Even though T-Mobile says it has neither the spectrum nor the financial resources from its parent Deutche Telekom to continue as an effective competitor in the highly dynamic mobile market where companies must constantly upgrade their networks to exploit all the good stuff offered by Moore’s law. In other words, it’s unlikely T-Mobile will continue investing several billion per year as a stand-alone company.

Another point that needs clarification: Some smart people think the AT&T estimate of $8 billion in additional capex is specific to the merger — connecting the two networks, expanding LTE beyond its previous plans, etc. But if these people are right, it’s still the case that AT&T will have to adopt at least some portion of network upgrades and maintenance that T-Mobile does every day on its own network. So AT&T’s capex spend is likely to go up beyond this additional $8 billion. In a merger scenario, therefore, not all, perhaps not even most, of the existing T-Mobile network investment “goes away.”

Another scenario in which a non-AT&T carrier acquired T-Mobile would result in whatever similar loss of T-Mobile specific investment that Sprint claims under the AT&T-T-Mobile scenario. But it doesn’t account for this possibility either.

So it seems the new Neumark-Sprint analysis also is not really a net estimate, just another form of gross estimate.

Ultimately, no one knows exactly what will happen in an ever-changing economy in our ever-changing world. But it is pretty safe to say that a healthy, growing, vibrant mobile industry will support more sustainable jobs than an unhealthy industry. The Sprint paper correctly acknowledges that efficiencies from mergers can result in all sorts of economic welfare gains, both for consumers and for workers who move into higher-value jobs.

A stand-alone T-Mobile is not a healthy company, and without T-Mobile, AT&T, although healthy, doesn’t have the spectrum or cell towers it needs to match current growth and fuel new growth. The proposed merger would result in a major supplier of next gen 4G broadband mobile services across most of the U.S. The benefits of this go far beyond the capex it takes to build the network (though very important) and extend to every citizen and industry that will enjoy ubiquitous go-anywhere broadband. These jobs created across the economy are incalculable but are likely to be substantial.

Where to begin. The economy is still in the doldrums some three years after an historic crash, the Administration is having a tough time boosting output and job growth, and so its Justice Department thinks it would be a good idea to discourage one of the nation’s biggest investors and employers from building yet more high-tech infrastructure in a sector of the economy that is manifestly healthy and which serves as a productivity platform for the rest of the economy.

It’s hard to believe, but that’s exactly what’s happening with the DoJ’s attempt to block AT&T’s merger with T-Mobile.

AT&T wants T-Mobile’s wireless spectrum and compatible cell-tower infrastructure so it can more quickly roll out next generation 4G mobile broadband services. It can’t wait for much needed spectrum auctions that will hopefully occur over the next several years. Meanwhile, T-Mobile doesn’t have the spectrum or financial wherewithal (through its parent Deutche Telekom) to build its own 4G network. Perfect fit, right? Join forces to rapidly deploy new network capacity and coverage for the next iteration of iPads, Androids, Thunderbolts, Galaxy Tabs, and broadband everywhere.

The Communication Workers of America union thinks the union is a good idea, estimating the merger will create 96,000 jobs. AT&T even this morning sweetened the pot by announcing – before DoJ’s surprise announcement – that on completion of the merger it would bring back 5,000 call center jobs from overseas and guarantee no job cuts for T-Mobile call center employees.

DoJ says a combination will hurt competition, but T-Mobile itself says it can’t really compete in the next generation of 4G. And DoJ ignores the fact, reported by the FCC, that 90% of the U.S. population has five or more mobile service provider choices, with brand new entrants like Clearwire, LightSquared, and Dish Network coming online and expanding every day. DoJ relies on indirect evidence of current market share to infer that bad things might happen in the future even as it ignores direct evidence of low prices, wild innovation, and widespread consumer choice in networks and devices.

This July 11 paper from economists Gerald Faulhaber, Robert Hahn, and Hal Singer really says it all.

With the economy in crisis, you’d think someone with a bit of business sense would be seeking every way to expand investment and employment, not find creative ways to quash it. Antitrust lawyers imagine themselves guardians of the public good, but there’s a big problem: they usually see the world through a rear-view mirror, wearing blinders, while experiencing tunnel vision.

Was it antitrust that saved the world from big, bad Microsoft. No, the Internet, Google, and Apple, among hundreds of other innovators, diluted Microsoft’s very temporary dominance. Did the AOL-TimeWarner merger kill competition in the online content or broadband markets? No. To remember the alarmism over that merger is to laugh. DoJ did block WorldCom’s bid for Sprint, and of course WorldCom went bankrupt. Did Verizon’s acquisition of Alltel kill innovation in the mobile market? What? Who’s Alltel?

There’s just no way a few attorneys in Washington can decree the proper organization of an industry that is so exceedingly dynamic. Meanwhile, the economy shuffles along slowly, very slowly.

— Bret Swanson

See our new column in Forbes:

As we entered August, a time of family vacations and corporate retreats, a CEO friend, who is a director of several companies, made a darkly humorous observation. “I’m impressed,” he said. “At our upcoming retreat, the CEO is dedicating an entire day to talk about . . . the business.”

This was a break from the new normal, where management is consumed with compliance, legality, accounting, risk mitigation, and political prognostication and manipulation. Carving time out of a business retreat to talk strategy, execution, product, and sales was a welcome novelty. It also revealed a chief challenge of our times – the obsession with and aversion to risk.

Update: Steve Lohr, the excellent New York Times technology reporter, offers his own take on risk-taking through the lens of Steve Jobs. Lohr and I picked the same great quote from Jobs’ Stanford commencement address.

A host of telecom and cable companies today announced a new plan to reform the Universal Service Fund and extend broadband further into rural America. I’ve spent years only partially understanding how USF works. Or how it doesn’t work, as seems the case. I think even in the old days, when it may have made some kind of sense, USF probably retarded investment and new technology in the areas it aimed to support. Unsubsidized potential entrants sporting new technologies couldn’t hope to compete with heavily subsidized incumbents. Even incumbents effectively couldn’t deploy newer, more efficient unsubsidized technologies. The result was probably some extension of phone service in the early days but lots of stagnation for decades after that. In today’s communications market, however, where many companies and many technologies supply many wholesale, commercial, and consumer services — and where broadband, Internet cloud, and wireless complement, compete, and overlap — USF has really broken down. Reform is long overdue, and this consensus industry plan should finally help move USF into the Internet age.

The new proposal — called America’s Broadband Connectivity Plan — also reforms the antiquated and broken Inter Carrier Compensation system, which sets the terms for traffic exchange among communications companies. In a broadband-mobile-Internet world, ICC, like USF, no longer works and is often exploited with arbitrage schemes that add no value but shuffle money via clever manipulation of the rules.

For too long wrangling and indecision between industry and government — and among industry players themselves — has delayed action. We now have a good consensus leap on the road to modernization.

I’m no in-the-weeds budget expert — not even close — but it seemed to me that among all the important debates over deficits, entitlements, and debt ceilings, the biggest factor of all is being mostly ignored. That factor is the compound rate of economic growth, and I made the case for “The Growth Imperative” at a Tuesday meeting of the National Chamber Foundation Fellows. Here’s my column at Forbes. See the slides below:

“Over the 10-year budget window, the president plans for Washington to extract $39 trillion in taxes and spend $46 trillion. The debt limit, currently $14.3 trillion, would have to grow to over $26 trillion.

“Making matters worse, these horrendous spending, taxing and debt numbers would be even grimmer if not for the budget’s rosy assumptions. The budget assumes that real growth will climb from an already wishful 4% in 2012 to 4.5% in 2013 and 4.2% in 2014 — despite plans for sweeping tax increases. The assumed GDP growth is well over any growth rate achieved in the Bush expansion. The budget also reflects the unrealistic assumption that the Federal Reserve will be able to keep interest rates very low and generate $476 billion in profits through highly leveraged financial speculation.”

— David Malpass, The Wall Street Journal, February 16, 2011

Tyler Cowen talks to Matt Yglesias about The Great Stagnation . . . . Here was my book review – “Tyler Cowen’s Techno Slump.”

If it’s true, as Nick Schulz notes, that FCC Commissioner Copps and others really think Chairman Genachowski’s proposal today “is the beginning . . . not the end,” then all bets are off. The whole point is to relieve the overhanging regulatory threat so we can all move forward. More — much more, I suspect — to come . . . .

Adam Thierer nicely dissects a bunch of really sloppy arguments by Tim Wu, author of a new book on information industries called The Master Switch. (Scroll down to the comments section.)

Libertarians do NOT believe everything will be all sunshine and roses in a truly free marketplace. There will indeed be short term spells of what many of us would regard as excessive market power. The difference between us comes down to the amount of faith we would place in government actors versus market forces / evolution to better solve that problem. Libertarians would obviously have a lot more patience with markets and technological change, and would be willing to wait and see how things work out. We believe, as I have noted in my previous responses, that it’s often during what critics regard as a market’s darkest hour that innovation is producing some of the most exciting technologies with the greatest potential to disrupt the incumbents whose “master switch” you fear. Again, we are simply more bullish on what I have called experimental, evolutionary dynamism. Innovators and entrepreneurs don’t sit still; they respond to incentives, and for them, short-term spells of “market power” are golden opportunities. Ultimately, that organic, bottom-up approach to addressing “market power” or “market failure” simply makes a lot more sense to us – especially because it lacks the coercive element that your approach would bring to bear preemptively to solve such problems.

For Adam’s comprehensive six-part review of the book, go here.

In what may be the final round of comments in the Federal Communications Commission’s Net Neutrality inquiry, I offered some closing thoughts, including:

• Does the U.S. really rank 15th — or even 26th — in the world in broadband? No.
• The U.S. generates and consumes substantially more IP traffic per Internet user and per capita than any other region of the world.
• Among individual nations, only South Korea generates significantly more IP traffic than the U.S. (Canada and the U.S. are equal.)
• U.S. wired and wireless broadband networks are among the world’s most advanced, and the U.S. Internet ecosystem is healthy and vibrant.
• Latency is increasingly important, as demonstrated by a young company called Spread Networks, which built a new optical fiber route from Chicago to New York to shave mere milliseconds off the existing fastest network offerings. This example shows the importance — and legitimacy — of “paid prioritization.”
• As we wrote: “One way to achieve better service is to deploy more capacity on certain links. But capacity is not always the problem. As Spread shows, another way to achieve better service is to build an entirely new 750-mile fiber route through mountains to minimize laser light delay. Or we might deploy a network of server caches that store non-realtime data closer to the end points of networks, as many Content Delivery Networks (CDNs) have done. But when we can’t build a new fiber route or store data — say, when we need to get real-time packets from point to pointover the existing network — yet another option might be to route packets more efficiently with sophisticated QoS technologies.”
• Exempting “wireless” from any Net Neutrality rules is necessary but not sufficient to protect robust service and innovation in the wireless arena.
• “The number of Wi-Fi and femtocell nodes will only continue to grow. It is important that they do, so that we might offload a substantial portion of traffic from our mobile cell sites and thus improve service for users in mobile environments. We will expect our wireless devices to achieve nearly the robustness and capacity of our wired devices. But for this to happen, our wireless and wired networks will often have to be integrated and optimized. Wireline backhaul — whether from the cell site or via a residential or office broadband connection — may require special prioritization to offset the inherent deficiencies of wireless. Already, wireline broadband companies are prioritizing femtocell traffic, and such practices will only grow. If such wireline prioritization is restricted, crucial new wireless connectivity and services could falter or slow.”
• The same goes for “specialized services,” which some suggest be exempted from new Net Neutrality regulations. Again, necessary but not sufficient.
• “Regulating the ‘basic’ Internet but not ’specialized’ services will surely push most of the network and application innovation and investment into the unregulated sphere. A ’specialized’ exemption, although far preferable to a Net Neutrality world without such an exemption, would tend to incentivize both CAS providers and ISPs service providers to target the ’specialized’ category and thus shrink the scope of the ‘open Internet.’ In fact, although specialized services should and will exist, they often will interact with or be based on the ‘basic’ Internet. Finding demarcation lines will be difficult if not impossible. In a world of vast overlap, convergence, integration, and modularity, attempting to decide what is and is not ‘the Internet’ is probably futile and counterproductive. The very genius of the Internet is its ability to connect to, absorb, accommodate, and spawn new networks, applications and services. In a great compliment to its virtues, the definition of the Internet is constantly changing.”

Scott Grannis on the “bond bubble” conundrum.

Thomas Cooley and Lee Ohanian on “Lessons from the Depression.”

Tim Carney on the real Republican divide.

A good conversation between Harry McCracken of Technologizer and Bob Wright of bloggingheads.tv. Topics include Apple’s ascent (and world domination?); iPhone vs. Android; whither Microsoft; Facebook’s privacy flub; etc.

“My guess is that the euro will survive, but no one will trust it like they used to. At the end of the day, it’s an entitlement problem. In Greece, the public sector makes up 40% or more of the work force, with short weeks, lots of vacation and lavish retirement benefits. All of that needs to be paid for with real income, not debt, and the markets are anticipating the day of reckoning. One can only hope European policy makers listen to the market. I wonder if California and Medicare are taking notes.”

— Andy Kessler, May 8, 2010

See our new CircleID commentary on the China-Google dustup and its implications for an open Internet:

China is nowhere near closing for business as it did five centuries ago. One doubts, however, that the Ming emperor knew he was dooming his people for the next couple hundred years, depriving them of the goods and ideas of the coming Industrial Revolution. China’s present day leaders know this history. They know technology. They know turning away from global trade and communication would doom them far more surely than would an open Internet.

Akamai announced a record peak in traffic volume on its content delivery network on April 9.

In addition to reaching a milestone for peak traffic served this past Friday, the Akamai network also hit a new peak during the same day for video streaming, as well as a near high for total requests served.

• With online interest in major sporting events – including professional golf and baseball – helping to drive the surge in demand, Akamai delivered its largest ever traffic for high definition video streaming.
• Over the course of the day, Akamai logged over 500 billion requests for content, a sum equal to serving content to every human once every 20 minutes
• At peak, Akamai supported over 12 million requests per second – a rate roughly equivalent to serving content to the entire population of the United States every 30 seconds.

If you really want to understand the climate debate, you simply must read this book, by A.W. Montford, about a Canadian scientific detective named Steve McIntyre, who humbly but doggedly pursued the truth about the 1,000-year temperature reconstructions that generated the famed “hockey stick.”

The November 2009 email “hack” of Britain’s Climatic Research Unit that has generated so much recent news is only a brief epilogue. The real story happened day by day over the last decade as McIntyre, a retired mining engineer, and a his fellow Canadian Ross McKitrick, an economist, searched for, and then through, shabbily constructed data sets and magical algorithms, with surprising finds on almost every page.

As my friend George Gilder wrote:

The reader should know that the supposed email “scandal,” as described in the book, is in fact a rather trivial and even defensible part of the story. Few people are at their best in emails. What is shocking — and I use the word advisedly as a confirmed sceptic not easily shocked — is the so called science. I never imagined that it was quite this bad. It is shoddy beyond easy belief.

The hockey stick chart mostly reflects a defective algorithm that extends and inflates a few deceptive signals from as few as 20 cherry-picked trees in Colorado and Russia into a hockey stick chart that is replicated repeatedly through reshuffles of the same or similar defective and factitious data to capture and define two thousand years of climate history. These people simply had no plausible case and were pressed by their political sponsors to contrive a series of Potemkin charts.

Almost, but not quite, as surprising, was Montford’s narrative itself. Somehow he turned an esoteric battle over statistical methodology into a captivating “what happens next” mystery. British science writer Matt Ridley agreed:

Montford’s book is written with grace and flair. Like all the best science writers, he knows that the secret is not to leave out the details (because this just results in platitudes and leaps of faith), but rather to make the details delicious, even to the most unmathematical reader. I never thought I would find myself unable to put a book down because — sad, but true — I wanted to know what happened next in an r-squared calculation. This book deserves to win prizes.

Engrossing. Astonishing. Devastating.

The Yo-Yos versus the Distavores. The HurriKeynes versus the Invisible Hands. And the team with more Monetary Madness appearances than any other — Stuff Happens. This was the scientific bracketology that determined the real cause of the Great Panic at the American Economic Association’s recent meetings:

(hat tip: David Warsh)

“…commercial real estate loans should not be marked down because the collateral value has declined.  It depends on the income from the property, not the collateral value.”

— Ben Bernanke, Feb. 24, 2009, finally, if tamely, acknowledging the crucial role of mark-to-market accounting in the financial death spiral.

(via Brian Wesbury)

That’s the question I ask in this Huffington Post article today.

Among all the books, articles, and academic papers analyzing the financial meltdown, very few have pinpointed and exposed what I think was the accelerant that turned a problem into an all-out panic: namely, the zealous application of mark-to-market accounting beginning in the autumn of 2007. In this video, two of these very few — Brian Wesbury and Steve Forbes — discuss the meltdown, mark-to-market’s crucial role, and the stock market’s short and mid-term prospects. Wesbury and Forbes have also written two great books explaining the Great Panic, why it’s not as bad as you think, and how capitalism will save us.

Holman Jenkins today also picks up the theme of mark-to-market’s central role in the panic.

Wyoming wireless operator Brett Glass has 20 questions for the FCC on Net Neutrality. Some examples:

1. I operate a public Internet kiosk which, to protect its security and integrity, has no way for the user to insert or connect storage devices. The FCC’s policy statement says that a provider of Internet service must allow users to run applications of their choice, which presumably includes uploading and downloading. Will I be penalized if I do not allow file uploads and downloads on that machine?

4. I operate a wireless hotspot in my coffeehouse. I block P2P traffic to prevent one user from ruining the experience for my other customers. Do the FCC rules say that I must stop doing this?

6. I am a cellular carrier who offers Internet services to users of cell phones. Due to spectrum limitations, multimedia streaming by more than a few users would consume all of the bandwidth we have available not only for data but also for voice calls. May we restrict these protocols to avoid running out of bandwidth and to avoid disruption to telephone calls (some of which may be E911 calls or other urgent traffic)?

7. I am a wireless ISP operating on unlicensed spectrum. Because the bands are crowded and spectrum is scarce, I must limit each user’s bandwidth and duty cycle. Rather than imposing hard limits or overage charges, I would like to set an implicit limit by prohibiting P2P, with full disclosure that I am doing so. Is this permitted under the FCC’s rules?

14. I am an ISP that accelerates users’ Web browsing by rerouting requests for Web pages to a Web cache (a device which speeds up Web browsing, conceived by the same people who developed the World Wide Web) and then to special Internet connections which are asymmetrical (that is, they have more downstream bandwidth than upstream bandwidth). The result is faster and more economical Web browsing for our users. Will the FCC say that our network “discriminates” by handling Web traffic in this special way to improve users’ experience?

15. We are an ISP that improves the quality of VoIP by prioritizing VoIP packets and sending them through a different Internet connection than other traffic. This technique prevents users from experiencing problems with their telephone conversations and ensures that emergency calls will get through. Is this a violation of the FCC’s rules?

18. We’re an ISP that serves several large law offices as well as other customers. We are thinking of renting a direct  “fast pipe” to a legal research database to shorten the attorneys’ response times when they search the database. Would accelerating just this traffic for the benefit of these customers be considered “discrimination?”

19. We’re a wireless ISP. Most of our customers are connected to us using “point-to-multipoint” radios; that is, the customers’ connection share a single antenna at our end. However, some high volume customers ask to buy dedicated point-to-point connections to get better performance. Do these connections, which are engineered by virtually all wireless ISPs for high bandwidth customers, run afoul of the FCC’s rules against “discrimination?”

See our new commentary at CircleID:

The Internet has two billion global users, and the developing world is just hitting its growth phase. Mobile data traffic is doubling every year, and soon all four billion mobile phones will access the Net. In 2008, according to a new UC-San Diego study, Americans consumed over 3,600 exabytes of information, or an average of 34 gigabytes per person per day. Microsoft researchers argue in a new book, “The Fourth Paradigm,” that an “exaflood” of real-world and experimental data is changing the very nature of science itself. We need completely new strategies, they write, to “capture, curate, and analyze” these unimaginably large waves of information.

As the Internet expands, deepens, and thrives—growing in complexity and importance—managing this dynamic arena becomes an ever bigger challenge. Iran severs access to Twitter and Gmail. China dramatically restricts individual access to new domain names. The U.S. considers new Net Neutrality regulation. Global bureaucrats seek new power to allocate the Internet address space. All the while, dangerous “botnets” roam the Web’s wild west. Before we grab, restrict, and possibly fragment a unified Web, however, we should stop and think. About the Internet’s pace of growth. About our mostly successful existing model. And about the security and stability of this supreme global resource.

Excellent analysis of Google’s plan to build a few experimental fiber networks from my former colleague Barbara Esbin:

NetworkWorld reports that by constructing its own fiber network, Google “is trying to push its vision for how the Internet as a whole should operate.” I wish the company all the success in the world with GoogleNet. Business model experimentation and new entry to the broadband Internet service provider market like this should be encouraged. If this “open access” common carrier network proves to be a viable business model that attracts both customers and followers, it will be a fabulous addition to the domestic Internet ecosystem. But this vision should not be turned into unnecessary government mandates for other Internet network operators who are similarly trying to experiment with their business models in this brave new digital world.

Surprisingly, I also agree with Harold Feld’s analysis:

the telecom world is all abuzz over the news that Google will build a bunch of Gigabit test-beds. I am perfectly happy to see Google want to drop big bucks into fiber test beds. I expect this will have impact on the broadband market in lots of ways, and Google will learn a lot of cool things that will help it make lots of money at its core business — organizing information and selling that service in lots of different ways to people who value it for different reasons. But Google no more wants to be a wireline network operator than it wanted to be a wireless network operator back when it was willing to bid on C Block in the 700 MHz Auction.

So what does Google want? As I noted then: “Google does not want to be a network operator, but it wants to be a network architect.” Oh, it may end up running networks. Google has a history of stepping up to do things that further its core business when no one else wants to step up, as witnessed most recently by their submitting a bid to serve as the database manager for the broadcast white spaces devices. But what it actually wants to do is modify the behavior of the platforms on which it rides to better suit its needs. Happily, since those needs coincide with my needs, I don’t mind a bit.

I do mind.

See our new analysis of Net Neutrality regulation’s possible impact on the U.S. job market.

“My attitude is this: if you are getting attacked by Krugman, you must be doing something right.”

— Eugene Fama, University of Chicago professor, in The New Yorker

For those of you not wishing to sift through 15,000 comments submitted to the FCC for its Net Neutrality proposed rule making, let me recommend what — so far — is the best technical filing I’ve read. It comes from Richard Bennett and Rob Atkinson of the Information Technology Innovation Foundation.

Also very useful is a new post by George Ou on content delivery and paid peering, with important policy implications.

These are among the least discussed — but most important — items in the whole Net Neutrality debate.

Separately, from the FCC’s “Open Internet” meeting at MIT last week, see summaries of each panelist’s remarks: Opening Presentations, Panel 1, Panel 2.

“Here’s one problem with digital collectivism: We shouldn’t want the whole world to take on the quality of having been designed by a committee. When you have everyone collaborate on everything, you generate a dull, average outcome in all things. You don’t get innovation.

“If you want to foster creativity and excellence, you have to introduce some boundaries. Teams need some privacy from one another to develop unique approaches to any kind of competition. Scientists need some time in private before publication to get their results in order. Making everything open all the time creates what I call a global mush.

“There’s a dominant dogma in the online culture of the moment that collectives make the best stuff, but it hasn’t proven to be true. The most sophisticated, influential and lucrative examples of computer code — like the page-rank algorithms in the top search engines or Adobe’s Flash — always turn out to be the results of proprietary development. Indeed, the adored iPhone came out of what many regard as the most closed, tyrannically managed software-development shop on Earth.”

— Jaron Lanier, author of the new book You Are Not a Gadget.

A bunch of good metrics on the decade that was from Oliver Chiang. Here are a few:

–Number of e-mails sent per day in 2000: 12 billion

–Number of e-mails sent per day in 2009: 247 billion

–Revenues from mobile data services in the first half of 2000: $105 million

–Revenues from mobile data services in the first half of 2009: $19.5 billion

–Number of text messages sent in the U.S. per day in June 2000: 400,000

–Number of text messages sent in the U.S. per day in June 2009: 4.5 billion

–Number of pages indexed by Google in 2000: 1 billion

–Number of pages indexed by Google in 2008: 1 trillion

–Amount of hard-disk space $300 could buy in 2000: 20 to 30 gigabytes

–Amount of hard-disk space $300 could buy in 2009: 2,000 gigabytes (2 terabytes)

Completely missing from the health care debate is a conversation about health care innovation and productivity. But not only are these legitimate factors — they are the most important factors.

Look around the world, however, and see the crucial advances being made.

“Japanese companies reinvented the process of making cars. That’s what we’re doing in health care,” Dr. Shetty says. “What health care needs is process innovation, not product innovation.”

At his flagship, 1,000-bed Narayana Hrudayalaya Hospital, surgeons operate at a capacity virtually unheard of in the U.S., where the average hospital has 160 beds, according to the American Hospital Association.

Narayana’s 42 cardiac surgeons performed 3,174 cardiac bypass surgeries in 2008, more than double the 1,367 the Cleveland Clinic, a U.S. leader, did in the same year. His surgeons operated on 2,777 pediatric patients, more than double the 1,026 surgeries performed at Children’s Hospital Boston.

Before we turn the whole U.S. system into a larger, more rigid and stagnant, less entrepreneurial, more costly version of Medicare, one that “bends the cost curve” up instead of down, shouldn’t we give at least a few minutes consideration to the real solution to our health care problem: technological, process, and business model innovation?

We Hoosiers are lucky:

Perhaps most appreciated was the governor’s overhaul of the Bureau of Motor Vehicles. It’s gone from one of the worst in the country—a place, he says, “where people would take a copy of ‘Crime and Punishment’”—to one of the best, with an “average visit time of seven minutes and 36 seconds.”

I had my own experience about four years ago, before the BMV was overhauled, where I made some seven trips to the license branch and various other government offices over a period of weeks just to renew my driver’s license.

But as Kim Strassel tells us in her interview with Mitch Daniels, this is only the very tip of the iceberg. In a state challenged by our reliance on the automobile industry in particular and manufacturing in general, instead of imploding like Michigan or profligate California, we had a governor whose common sense, hard work, business savvy, and courageous budgeting has left Indiana in a much better spot than many other states. Especially given our special old-economy obstacles.

This is the ironic but very legitimate question AT&T is asking.

As Adam Thierer writes,

Whatever you think about this messy dispute between AT&T and Google about how to classify web-based telephony apps for regulatory purposes — in this case, Google Voice — the key issue not to lose site of here is that we are inching ever closer to FCC regulation of web-based apps!  Again, this is the point we have stressed here again and again and again and again when opposing Net neutrality mandates: If you open the door to regulation on one layer of the Net, you open up the door to the eventual regulation of all layers of the Net.

George Gilder and I made this point in Senate testimony five and a half years ago. Advocates of big new regulations on the Internet should be careful for what they wish.

The Technology Liberation Front is five today. Go check out these courageous defenders of Internet freedom, of which I am a too-infrequent yet proud comrade-in-arms.

Watch Tyler Cowen talk about his new book to Will Wilkinson. The book’s title, Create Your Own Economy, sounds like just another self-help business pamphlet. But you’ll see Cowen isn’t talking about business or money at all — at least not directly. His subjects are autism, “neurodiversity,” Adam Smith’s division of labor, and the Internet’s ability to match more people with their highly specific talents and passions. Far from the latest trope that “Google [or the Web] is making us stupid,” Cowen argues the the Web helps a vast variety of previously undiscovered intelligences, or “neuro profiles,” flourish.

Tough stuff from the always-insightful David Malpass, who warns that slow growth from a lower economic base could yield an historic downgrade of the U.S. experiment:

With the crisis taking a deep toll on our economy, the expectation is for a “new norm” once recovery kicks in. It’s a dismal prospect: slower growth from a lower base, with higher unemployment and bigger government.

Rather than a healthy frugality, the new norm implies an outright decline in median living standards, a disaster for both prosperity and fairness. For President Obama such economic mediocrity spells extended deficits, a “jobless” recovery and, at best, a stiff reelection fight instead of the cakewalk that his perfect timing–inaugurated at the exact bottom of the crisis–deserves.

The U.S. decline isn’t inevitable. Game changers exist. The Fed could improve dollar policy to make the tens of trillions of dollars in new U.S. Treasury debt more salable. It should stop buying Treasurys to make it utterly clear that it will not monetize debt. Buying Treasurys is the monetary equivalent of government workers digging a hole, filling it back up and calling it GDP.

To underscore the new commitment to price stability and creditors the Fed has to stop using core inflation for its report card. It’s a loud signal to the world, proclaiming: “The Fed is not serious. Money should flow to Asia. Sell the dollar.”

In the wake of EC antitrust chief Neelie Kroes’s charge that Intel’s microchips are too tiny, too fast, and too inexpensive, the company has quickly unveiled a new line of huge, power-hungry, slow, overpriced, out-dated products.

Intel unveils new huge, expensive, power-hungry, slow "EuroChip"

Of the Treasury’s long-awaited non-plan bank plan, Andy Kessler writes, “Mr. Geithner should instead use his ’stress test’ and nationalize the dead banks via the FDIC — but only for a day or so.”

Then,

strip out all the toxic assets and put them into a holding tank inside the Treasury. . . .  inject $300 billion in fresh equity for both Citi and Bank of America. Create 10 billion new shares of each of the companies to replace the old ones. The book value of each share could be $30. Very quickly, a new board of directors should be created and a new management team hired. Here’s the tricky part: Who owns the shares? Politics will kill a nationalized bank. So spin them out immediately.

Some $6 trillion in income taxes were paid by individuals in 2006, 2007 and 2008. On a pro-forma basis, send out those 10 billion shares of each bank to taxpayers. They paid for the recapitalization.

Each taxpayer would get about $100 worth of stock for each $1,000 of taxes paid. Of course, each taxpayer has the ability to sell these shares on the open market, maybe at $40, maybe $20, maybe $80. It depends on management, their vision, how much additional capital they are willing to raise, the dividend they declare, etc. Meanwhile, the toxic assets sitting inside the Treasury will have residual value and the proceeds from their eventual sale, I believe, will more than offset the capital injected. That would benefit all citizens, not the managements and shareholders who blew up the banking system in the first place.

Is Kessler crazy? Well, maybe. In his own creative and boisterous way. But not nearly so crazy as Washington’s fumble-bumble these last few months. I’d much prefer Kessler’s out-of-the-box plan to D.C.’s muddle.

What becomes clearer every day is that all the government’s efforts, from the AIG “bailout” to TARP 1.0 and TARP 2.0 onward, have essentially been efforts to get around the terribly destructive interaction of “mark-to-market” accounting and regulatory capital requirements. A few keen observers — David Malpass (I), Brian Wesbury (I, II, III, IV), Steve Forbes (I, II) – have made this point from the start. But the government and most economists clung stubbornly to “fair value” in an apparent attempt not to “let the banks off the hook.” 

But what a time for an attack of conscience, a principled stand for supposed accounting purity! We’ll spend trillions and totally alter the nation’s financial landscape, but a minor (though powerful and free!) accounting change — relaxing mark-to-market — is a bridge too far? Explain that one. (more…)

Dateline, Illinois. Tim Carney exposes history’s largest earmark.

Futurist and The Singularity Is Near author Ray Kurzweil and the very impressive X-Prize Foundation chief Peter Diamandis launch Singularity University with the goal of “preparing humanity for accelerating technological change.”

Susan Lee on the post-crash, post-Madoff universe.

May your 2009 be less “interesting” than 2008.

‘Twas the night before Christmas
And all through the house
Not a thing was dry
Not even my spouse

The icy rain fell
The water pipe froze
Slipping and sliding
There was no time to doze

We vacuumed and pumped
The whole night through
Yet when we awoke
Santa’s dream had come true 

Merry Christmas. 

Thank goodness Nancy Pelosi and Harry Reid are reviewing the Big Three’s business plans before “investing” a couple hundred bil’ of taxpayer money. I’m so relieved. Silicon Valley could learn a few things from these bleeding edge venture capitalists…and the CEOs groveling for our money.

Or opportunity of a lifetime? That’s the question economist Scott Grannis asks as he surveys the sickly prices of stocks and corporate bonds.

Any way you look at it, the pricing on corporate bonds and stocks today implies that the next several years will be the most disastrous in the history of the U.S.

In order to fully appreciate why that prediction is unlikely to prove correct, consider that not one of the key ingredients that precipitated the depression exists today.

(Hat tip: Real Clear Markets)

“The point is not to deflate asset bubbles, but to avoid them in the first place.”
– Gerald P. O’Driscoll, Jr., November 17, 2008

After an exhausting political season, Rich Karlgaard relaunches his great Digital Rules blog to focus on innovation, mavericks, and entrepreneurs.

Eliot Spitzer reemerges to claim vindication. Shameless does not begin to describe…

“Hyperbole is not harmless; careless language bewitches the speaker’s intelligence. And falsely shouting ’socialism!’ in a crowded theater such as Washington causes an epidemic of yawning.” 

– George Will, November 15, 2008, wondering what to call existing bail-outs galore and almost $4 trillion of annual Federal spending.

Is Paul Ryan the future?

After two straight electoral defeats, it is time for a substantial party shake-up. We don’t need a feather duster; we need a fire hose.

We need to be honest about the root causes of our current financial crisis: loose money, crony capitalism and a lack of market transparency and information.

The credit crisis almost deep-sixes the company that makes the commemorative M&A toys for Wall Street execs.

This spring came what Kern called “the tiny-globe craze.” Sokoler rolled his eyes. “Oh, don’t start with that,” he said. “You know those things you see in Sharper Image, where there’s a base and a little globe just floats over it?” (They work by means of magnets.) Somebody at Merrill decided to order a hundred of them to celebrate an M. & A. deal, and all of a sudden everybody had to have one. “It was a real pain in the ass,” Sokoler said. “People were calling my cell phone in the middle of the night, saying, ‘It’s not floating!’ And you’d have to, like, walk them through it. You’d say, ‘Yes, it is floating—you just have to hold it in the right place.’”

“Let us bend over and kiss our ass goodbye. Our 28-year conservative opportunity to fix the moral and practical boundaries of government is gone — gone with the bear market and the Bear Stearns and the bear that’s headed off to do you-know-what in the woods on our philosophy.”

– P.J. O’Rourke, November 10, 2008, repeating George Will’s sentiment, but from a . . . shall we say . . . different angle.

(via Don Luskin)

Advancing faster than Moore’s Law, hard disk digital storage technologies are are the unsung heroes of the tech revolution. The beat goes on, and a large number of new technologies, from hybrid drives to phase-change ovonics to racetrack memory, promise to match the capacity of digital storage and/or DRAM with the speed of SRAM and other solid state memories. See a big special report from MIT’s Technology Review on all these ”next memory” candidates, and more.

Janet Novack writing in Forbes details the long-term U.S. budget and tax realities that will lead to “The Coming Shakedown.” Big taxes and skimpy benefits, she writes, are baked in the cake:

Here’s what sober budget analysts (from both parties) see when they focus on 2020 and beyond: The well-off will pay higher federal taxes, for sure. But ordinary folks will pay more, too. They will pay as tax burdens diffuse into the costs of things they buy. They will likely pay more for fuel and electricity, as the costs of carbon permits and renewable-fuels mandates get built in. They may be asked to pay a European-style value-added tax. And they will pay on the other side of the ledger: Their retirement benefits will get clipped.

The federal government will get bigger, but not big enough to keep all the promises Washington has made. So the normal age to receive Social Security retirement benefits, already rising in steps to 67 for those born in 1960 or later, will increase further, perhaps to 69. High earners will pay more in and get less back in retirement. Call it a “tax” or call it “means testing”—it’s government, and it will make you poorer.

Economists of all stripes think we absolutely need a new value added (or a kind of sales) tax.

“A VAT has got to happen. We’re at a point where the traditional money-raising options are not going to work,” says Yale law professor Michael J. Graetz, who was a Treasury official during the Administration of President George H.W. Bush and has been pushing a plan to use proceeds from a VAT to reduce corporate income taxes and exempt families earning less than $100,000 from the income tax. A VAT encourages personal savings, which the U.S. needs more of. Plus, it forces retirees to help pay for their government benefits. Says Graetz: “You tax the elderly and you tax the coupon clippers. But no politician is going to say that out loud.”

To be sure, a VAT faces tremendous hurdles. Two decades ago economist Lawrence H. Summers, who later became President Clinton’s Treasury Secretary and is now an Obama adviser, famously observed that the U.S. hadn’t adopted a VAT because “liberals think it’s regressive and conservatives think it’s a money machine.” The country might get a VAT, he went on, when liberals realized it was a money machine and conservatives figured out it was regressive.

Larry Summers is a smart liberal, one of my favorites, and he’s probably right. But let’s get something straight: layering a VAT on top of our current tax system would be catastrophic. Some have suggested trading a VAT for a reduction in the corporate income tax. But that too is a dangerous game. One option I’d consider, versions of which have been suggested by both Art Laffer and Sen. Jim Demint, is a low-rate flat income tax with a low-rate VAT — say 8% each. That would be a hugely efficient and growth-fueling fundamental tax reform.

But it wouldn’t be the increase in government that the normal VAT backers have in mind. The way to “solve” the Medicare problem is not to gouge American producers in an inevitably futile effort to close the $43 trillion dollar unfunded budget gap. We shouldn’t wrack our brains trying to pay for the current bloated system. Much better to transcend the issue altogether by transforming health care with new medical technology and a newly dynamic, entrepreneurial, and consumer-driven market.