Articles by Jerry Ellig

Jerry Ellig is a senior research fellow at the Mercatus Center at George Mason University. He has also served as deputy director of the Office of Policy Planning at the Federal Trade Commission and as a senior economist at the Joint Economic Committee of the US Congress.


A Modest Proposal to Improve the State of the Union Speech

by on January 27, 2010 · 2 comments

Just finished watching President Barack Obama’s State of the Union speech and Virginia Governor Bob McDonnell’s response.

For some reason, this reminds me of the annual honors ceremony at my daughter’s school.  Why?  Because at my daughter’s school, when they award a plethora of awards to students in each grade, they ask the audience to hold our applause to the end.  Why? Because  applause prolongs the ceremony interminably.

Sound familiar? Members of Congress imitate Jack-in-the-Boxes springing up and down at appropriate applause lines. Democrats sprang up at appropriate applause lines relevant to the president’s agenda. Republicans sprang up too, when the president praised small business or said said he wanted more nuclear power plants.  President Obama expected applause from Republicans when he listed his tax cuts, but he was disappointed and then joked about it. If you watched the speech on TV, some members of Congress seemed to be applauding with a look on their faces that said they didn’t quite know why they were applauding. The Joint Chiefs of Staff finally stood up and applauded when Obama praised veterans. Vice President Joe Biden has perfected the “sage” look, though sometimes he looked grumpy enough to be mistaken for a Republican!  

Republicans have finally cottoned to this phenomenon. Instead of presenting a solo speaker in a sterile environment, they presented Virginia Governor Bob McDonnell with an audience in the Virginia State Capitol. Like the president, the governor was interrupted by applause from legislators and others in the audence. Rhetorically, I thought it added an extra “oopmh” to the governor’s speech — both because it showed he has folks who agree with him and because he highlighted the state perspective. Given the rules of the political game, it was a smart choice. 

But that doesn’t mean a change in the rules wouldn’t make everyone better off. It’s friggin’ 11:50 at night, and I’m wiped out from a day of simultaneously working at home to get something written and running multiple scans on the home computer to get rid of the friggin’ Security 2010 virus, or Trojan, or whatever that thing  is.  I would have appreciated shorter speeches that simply told me what each party wanted to accomplish.

So here’s my suggestion. For the State of the Union Speech and the opposition party’s response, they should make the same request made at my daughter’s school awards ceremony: “Please hold your applause until the end.”

Now … anybody got any interesting technological solutions that would accomplish this goal?

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Regulatory Whack-A-Mole, Part II

by on January 21, 2010 · 0 comments

Congress and the Federal Communications Commission periodically get upset over wireless phone early termination fees. The latest uproar has occurred during the past couple months in response to Verizon’s doubling of the early termination fee on “smart” devices. The fee falls by $10 per month, leaving s $120 early termination fee in the last month of a two-year contract.

Policymakers still have not gotten the message that they cannot really do much about this “problem” unless they comprehensively regulate wireless rates and terms of service. (I would not recommend this, since a competitive wireless market has brought us rate reductions that even perfectly-functioning regulation would be unlikely to achieve. ) Attempts to poke and prod early termination fees are like the carnival game “whack-a-mole.”  As soon as you whack one mole with a stick, another one pops up out of another hole.

Sen. Amy Klobuchar (D-MN) is taking another whack.  In 2007, she introduced legislation requiring wireless companies to prorate early termination fees “in a manner that reasonably links the fee to recovery of the cost of the device or other legitimate business expenses.”  Coincidentally, the major carriers promised to prorate their fees at about the same time her bill got a hearing.  Then last November, up popped a mole from Verizon’s hole. Early termination fees for smart devices are prorated, but doubled. Now the good senator is whacking away at that mole with legislation that requires wireless companies to prorate early termination fees AND mandates that the early termination fee cannot exceed the size of the subsidy the carrier is giving the consumer on the phone.

Smart whack, huh?  Doesn’t cost-based regulation of early termination fees eliminate the loophole (oops, mole-hole)?

Not necessarily. In the first place, the legislation could create an accounting nightmare with plenty of opportunities for companies to game the system, especially if they offer different subsidies on different phones. Recall that the original impetus for breaking up the old AT&T landline monopoly was that AT&T was gouging consumers by charging them inflated prices to lease equipment manufactured by its subsidiary, Western Electric. With the AT&T breakup, the government essentially gave up on managing that problem and completely prohibited the monopoly local phone companies from manufacuring equipment. I think George Santayana just left me a voice mail. Even if the game board is restricted to early termination fees, we’ll soon see uglier, nastier moles emerge from uglier, nastier holes.

But the wireless phone contract is about more than early termination fees. Even if policymakers succeed in imposing effective,  cost-based regualtion on early termination fees, wireless companies can still change other terms of the contract to compensate for any revenue losses. The law must have a truly long arm to reach the diverse array of rodents that will scurry forth from diverse orifices.

Stay tuned for the next whack.

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There's no accounting for job creation

by on January 13, 2010 · 3 comments

An Associated Press story posted at 9:31 pm last night by Brett J. Blackledge notes that the Obama adminsitration “has abandoned its controversial method of counting jobs under President Barack Obama‘s economic stimulus, making it impossible to track the number of jobs saved or created with the $787 billion in recovery money.” Recipients of federal money were originally supposed to report how many jobs they had “saved or created.” Now, they’re just supposed to report how many people got paid with the money. 

The “saved or created” approach was an attempt to estimate how the Recovery Act spending affected employment. Unfortunately, it was impossible for this approach to deliver what it promised, as I pointed out in testimony to Congress last May. To know how many jobs the Recovery Act spending saved or created, we need to control for other factors that affect employment. We also need to control for the employment effects of the borrowing (and future taxing) that pays for the spending.

This is what good “macroeconomic” analysis does. It is not what employers do when they put people on the payroll.  Asking employers who received federal money to tell us how many jobs were created or saved is asking them to give us information that they do not have and cannot acquire.

Under the new approach, employers will report quarterly how many people they are paying with the federal money. Since the reports will be quarterly, some jobs may be counted more than once — I guess as much as four times a year. According to the AP story, some Republicans are complaining that the new approach will lead to even larger and more misleading job numbers.

The numbers will likely be higher. But they will not necessarily be misleading, as long as recovery.gov makes clear that these are simply reports on the number of people paid with the federal money, not an attempt to measure the number of jobs created.

Estimating jobs created is work for serious macroeconomists who try to control for other factors affecting the results. There’s of course plenty of room for disagreement over how to do this, as this commentary by my Mercatus Center colleagues Garrett Jones and Veronique de Rugy demonstrates.

The administration’s decision demonstrates once again the old adage that data is not knowledge.

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Mississippi leads the nation …

by on January 6, 2010 · 2 comments

… in receiving support from the Federal Communications Commission’s Universal Service Fund.

In case you missed it, on December 31 the Federal-State Joint Board on Universal Service issued its 2009 Universal Service Monitoring Report. This 568 page report compiles a massive number of statistics on the Federal Communications Commission’s $7.6 billion Universal Service Fund.  This fund subsidizes phone service in high-cost areas, phone subscriptions for low-income households, Internet service for schools and libraries, and Internet connections for rural health care facilities. About 60 percent of the money — $4.4 billion — goes to “high cost” (usually rural) phone companies.

U Service fun facts 2009

The money comes from the universal service charge on your wired, wireline, or VOIP phone bill. (That’s why the phone companies put the FCC’s phone number on the bill, so you can call the FCC if you have questions about this charge. Isn’t that thoughtful!)

Virtually every table in the Monitoring Report is fascinating. But check out some of the statistics to the right, which came from Table 1.12.  After substracting the universal service charges paid by its citizens, Mississippi received the highest net amount from the Universal Service Fund — $258 million. Alaska, Puerto Rico, Kansas, and Oklahoma round out the top five net recipients.

Some states are net payers. Florida paid $304 million more into the Universal Service Fund than its phone companies, low-income consumers, schools, libraries, and rural health facilities received back. Not surprisingly, other big, high-income states with large urban areas are also big net payers.

Some states receive close to what they pay in. Although Texas is a big Universal Service Fund recipient ($511 million in 2008), Texas telephone customers also pay a lot into the fund ($508 million in 2008). Thus, Texas received a net $3 million from the Universal Service Fund. Other states close to breakeven are Arizona, Missouri, Oregon, and South Carolina.

For 2008, I counted 22 states that are net recipients of $15 million or more, and 23 states that are net payers of $23 million or more.

And you thought you had fun on New Year’s Eve!

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Some good ideas in the FCC's National Broadband Plan

by on December 17, 2009 · 2 comments

Good ideas, supported by evidence, eventually matter.

That’s the conclusion I reached after reviewing the outline the FCC’s broadband task force presented to the commission yesterday. Here are some ideas perceptive scholars have been discussing for a long time that are apparently going to be part of the National Broadband Plan:

  • “Private sector investment is essential; new funding is limited.” So I guess the Interstate Highway System won’t be the funding model for universal broadband. Whew!
  • “Policy changes require the consideration of unintended consequences.”
  • “Competition drives innovation and better choices for consumers.”
  • Wireless broadband needs a big new chunk of spectrum, and policymakers need to consider reallocating broadcast TV spectrum and spectrum reserved for use by the federal government.
  • “Market forces should be applied to all [spectrum] bands, though other policy objectives should play a role in allocation decisions.”
  • Fundamental reform of the Universal Service Fund, which subsidizes phone service very inefficiently, should actually be done, not just talked about.
  • Universal service reform should include reform of “intercarrier compensation,” the charges phone companies pay each other when they hand off traffic.
  • “USF policies should be designed to achieve measurable outcomes with transparency, oversight, and accountability.”

Most of these ideas were considered wacky, ideological, politically unrealistic, or just not relevant a few decades (or even a few years) ago.  Now they are the mainstream.

That doesn’t mean everything is wonderful with the National Broadband Plan. The FCC is supposed to plan how broadband will be used to promote consumer welfare, civic participation, public safety, education, health care, energy independence, community development, worker training, and a host of other legislative goals. In many cases there may be a fundamental tension between consumer welfare — a term of art in economics that means resources are allocated so that consumers get the selection of goods and services they are most willing to pay for, with the quality attributes they most prefer, at the best possible prices — and the other goals, which often involve planners deciding what consumers should want. Similarly, FCC Chairman Genachowski’s comments illustrate some decisionmakers’ disturbing tendency to conflate access (the service is available to those who want it) with adoption (everybody actually chooses to use it). Technophiles sometimes have an annoying habit of assuming that those of us who fail to adopt the latest info tech gadget or service must be ignorant rubes who don’t understand the glories of being hooked up to a fat information pipe 24/7 — rather than careful shoppers who have better things to do with our time than read Yahoo OMG! while driving. For this reason I fully expect to be annoyed by the National Broadband Plan, as well as gratified to see that some good ideas have finally made it from the Ivory Tower to real-world policy application.

But there’s enough good stuff in there to stick with “gratified” for at least one day.

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Argument for an e-mail and twitter tax?

by on December 16, 2009 · 0 comments

A new study in the December 2009 Archives of Ophthalmology reports the beginnings of a new public health epidemic: a dramatic increase in nearsightedness (myopia).  The authors compared the prevalence of myopia in Americans aged 12-54  in 1971-72 and 1999-2004. Prevalence of myopia increased from 25 percent of the population in 1971-72 to 41.6 percent in 1999-2004 — a 66.4 percent increase!  Myopia increased for both blacks and whites (the only two racial categories investigated in the study) and for both men and women (the only two gender categories investigated in the study).

According to the article, genetics and environment both play a role in myopia. It cites several previous studies showing that people with more education are at greater risk, presumably because they’re more likely to spend a lot of time doing “up-close” work like reading and using computers. The authors note that although it’s easy to treat myopia with contact lenses or eyeglasses, the costs of having 25 percent of the population with myopia are about $2 billion per year. 

So stop reading this, get outside, and throw that football around! 

More seriously, I am counting the days until some advocate gloms onto this study to justify a tax on e-mails and social networking, the same way advocates have cited the costs of obesity, alcoholism, and smoking to justify higher taxes on “sins” like soda pop, alcohol, and cigarettes. (Yes, a soda pop tax was under discussion to fund this year’s health care bill!) In fairness to the study’s authors, I should note that they suggest no such thing.

Education is a risk factor for myopia, but I doubt anyone would propose a tax on education as a cure. Education, after all, is generally regarded as a good thing that generates significant private and social benefits. E-mails, Facebook, and Twitter, on the other hand, have a “fun” aspect that makes it much easier to classify them as sins in the same category as getting drunk, smoking, and sipping Coca-Cola. They may also be addictive; anybody heard the term “crackberry”?

There are, of course, some counter-arguments:

  • The biggest costs of myopia are borne privately; they are not “externalities” imposed on unwilling recipients. I always wear glasses because I simply hate having blurred vision. My daughter asked for eyeglasses because she couldn’t read the blackboard from the back of the classroom. Bumping into and tripping over things are also costs of myopia that are borne almost completely by the person who has myopia. Those are pretty strong incentives to get it corrected or change behavior to reduce the risk of becoming myopic. Therefore, an e-mail or social networking tax would not likely have a marginal effect on myopia.
  • Social costs of myopia can be corrected with targeted, less restrictive alternatives. My state driver’s license has a restriction saying I have to wear glasses or contacts to drive. This controls the aspect of my myopia that poses the biggest risk of harm to other people.
  • To the extent that treating myopia is costly, we can find ways to reduce the cost. For example, James C. Cooper’s research has found that online vendors and warehouse clubs sell contact lenses for 20 percent less than other brick-and-mortar sellers. State laws or regulations that prevent online sales, or prevent warehouse clubs from selling contacts, increase the cost of treating myopia substantially. 
  • A majority of the population does not have myopia! For them, an e-mail tax would merely siphon money from their electronic wallets or induce them to cut back e-mail use with no effect on the social ills the tax is supposed to cure.  These folks are like the responsible majority who drink rum, cola, or both in moderation and just keep paying the taxes.

That last analogy reminds me —  those counter-arguments might apply to a lot of existing sin taxes too!

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Online wine sales: Retailers matter

by on December 9, 2009 · 0 comments

Wine lovers in 37 states can now order wine online from out-of-state sellers and have it shipped to their homes. But if you’re thinking of laying in a nice California red to celebrate the holidays, you could have to pay more if your state law only allows you to order online from wineries.

This topic came up yesterday while I was testifying before the Tennessee General Assembly’s Joint Study Committee on Wine in Grocery Stores. Rick Jelvosek, a Tennessee wine consumer who testified on behalf of Tennessee Consumers for Fair Wine Laws, asked lawmakers to allow out-of-state retailers to ship to Tennessee consumers, so consumers could have access to a greater variety of wines than they can get from the 160 wineries currently licensed to ship wine to consumers. (Video of the hearing is available here.)

Letting retailers ship directly to consumers also lets consumers save money. In 2002 and 2004, Alan Wiseman (now at Ohio State University) and I gathered data on the prices and availability of a sample of popular wines from online sellers and in Nothern Virginia retail stores.   For most bottles, the lowest online price was offered not by the winery, but by a retailer. Usually a California retailer offered the lowest price, but for a few bottles the low-price retailer was in Illinois, New York, Washington DC, Missouri, or Texas.  We suspect the reason is that California allows wineries to bypass wine wholesalers and sell directly to retailers if they choose. The tabulations are in this article.

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Is the FCC jumping the gun on broadband and the universal service fund?

by on December 2, 2009 · 0 comments

In a speech yesterday, FCC Chairman Julius Genachowski pledged to revisit the Federal Communications Commission’s universal service programs for telecommunications as part of the National Broadband Plan: 

 The key points for today are these: USF is a multi-billion dollar annual fund that continues to support yesterday’s communications infrastructure. The goal of universality is as important as ever — and to meet our country’s innovation goals, we need to reorient the fund to support broadband communications. This is a thorny issue, with no shortage of practical and statutory challenges. We need to wring savings out of the system, protect consumers, avoid flashcuts, while ultimately moving USF in the direction it needs to go to support our 21st century platform for innovation. 

The USF program spends approximately $7 billion annually. Most of the money goes to subsidize phone service in “high cost” areas. Eeuww – phone service.  So twentieth century! All of us who have not yet shifted 100% of our personal communications to Facebook and Twitter pay for the universal service fund via surcharges of about 12 percent on our wireless and  wireline phone bills, including VOIP. (Dirty little secret: you also pay for universal telephone service if you use a wireless broadband card, because each card is assigned a phone number.) 

Genachowski’s comment follows some rather interestingly-timed announcements from the FCC’s broadband task force. On November 13, the task force asked for public comment on the role the universal service fund and “intercarrier compensation” (another, more opaque set of transfers from consumers in general to rural phone companies) should play in the national broadband plan. Comments are due December 7. Five days after soliciting comments, on November 18, the FCC announced that the structure of the universal service fund is one of the “critical gaps” in the path to universal broadband.

I doubt the FCC has telepathically determined what the parties will say in the comments they file on December 7, but there’s no need to. The FCC has ground through so many rounds of comments on universal service reform that the problems and potential solutions are well-known. At a conference on universal service about five years ago, I recall one speaker commented, “Everything that can be said about universal service has already been said, but not everyone’s had a chance to say it, so that’s why we still have conferences on it.” About a year ago, the FCC almost used a court-imposed deadline as an opportunity to actually reform universal service and intercarrier compensation, but the commissioners failed to reach consensus.

Here are some major problems with the universal service fund, in no particular order:

  • It subsidizes voice phone service with built-in incentives for inefficiency on the part of providers.
  • It subsidizes wireless voice service without limiting the subsidy to one essential connection per household, so it has effectively created an entitlement to both wired and mobile phone service in rural areas.
  • The FCC does not measure or track the outcomes produced by the subsidies to see what they actually accomplish for the public. (Section 201 of the draft Boucher-Terry USF reform bill would require the FCC to adopt outcome-oriented performance measures.)
  • The contribution mechanism acts like a percentage tax that discourages use of price-sensitive services like long-distance, wireless voice, and wireless broadband.
  • The “death of distance” has slashed long-distance phone charges, which means wireless bears a growing percentage of the burden and the funding mechanism may well be unsustainable.

(For more detail on these issues, read the assortment comments on USF reform by various Mercatus Center colleagues and me here, here, here, here, here, here, here, here, here, and here. BTW, did I mention this issue has been beaten to death?)

So is the FCC jumping the gun, rushing to judgment on universal service before the comments are in?  Heck no. It’s about time.

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The strangest Thanksgiving story ever told

by on November 25, 2009 · 0 comments

Let’s give thanks for the miracle of the modern Internet, which makes darn near any bit of fine literature or obscure doggerel available at our fingertips.  A case in point: My search for Larry the Cable Guy’s “The Story of the First Thanksgiving as Told by my Drunk Grandpa” immediately returned a readable link:

Grandpa’s Thanksgiving Story Lyrics

Please do not click on that if you are offended by crude or politically incorrect humor.  Oops, too late!

Happy Thanksgiving!

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The Opera Ain't Over til E-Commerce Sings

by on November 18, 2009 · 0 comments

Be prepared next week for a cacophony of hand-wringing and prognosticating about retail sales figures reported on “Black Friday.” Retailers traditionally count on holiday shoppers to put them “in the black” for the year with a surge of purchases on the Friday after Thanksgiving.

But if you really want to understand this year’s retail sales picture, wait til the Monday after Thanksgiving. “Black Monday” is day a lot of people return to work, fire up the computer, and begin their online holiday shopping. 

Recent reports suggest that the recession has boosted rather than harmed electronic commerce, for one simple reason: the Internet makes it a lot easier to find the best price for many common purchases. Numerous recent posts tell this story:

Harsh Economy Can’t Shake Love for Online Retailers

Internet Supermaket Booms in Bad Times

Is Online Shopping Affected by a Recession?

The most popular online sites on STORES Magazine’s list include those of established merchants, such as Walmart, Best Buy, JC. Penney, and Target. They also include the pure online plays, such as Amazon.com, eBay, and Overstock.com.  Craigslist — the site where I hunt for used and free stuff — made Stores’ “Top 50” list for the first time this year.  That’s surely a sign that the recession has been a boon to online shopping!

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