targeting – Technology Liberation Front

New Mercatus Center Report on Industrial Policy

Adam Thierer — Wed, 17 Nov 2021 21:21:29 +0000

The Mercatus Center has just released a new special study that I co-authored with Connor Haaland entitled, “Does the United States Need a More Targeted Industrial Policy for High Tech?” With industrial policy reemerging as a major issue — and with Congress still debating a $250 billion, 2,400-page industrial policy bill — our report does a deep dive into the history various industrial policy efforts both here and abroad over the past half century. Our 64-page survey of the historical record leads us to conclude that, “targeted industrial policy programs cannot magically bring about innovation or economic growth, and government efforts to plan economies from the top down have never had an encouraging track record.”

We zero in on the distinction between general versus targeted economic development efforts and argue that:

whether we are referring to federal, state, or local planning efforts—the more highly targeted development efforts typically involve many tradeoffs that are often not taken into consideration by industrial policy advocates. Downsides include government steering of public resources into unproductive endeavors, as well as more serious problems, such as cronyism and even corruption.

We also stress the need to more tightly define the term “industrial policy” to ensure rational evaluation is even possible. We argue that, “industrial policy has intentionality and directionality, which distinguishes it from science policy, innovation policy, and economic policy more generally.” We like the focus definition used by economist Nathaniel Lane, who defines industrial policy as “intentional political action meant to shift the industrial structure of an economy.”

Our report examines the so-called “Japan model” of industrial policy that was all the rage in intellectual circles a generation ago and then compares it to the Chinese and European industrial policy efforts of today, which many pundits claim that the US needs to mimic. We find problems with those models and argue that:

America’s goal should not be to “imitate China” or “copy its playbook” when it comes to targeted industrial policy and technological governance of AI and other high-tech sectors. Europe’s approach, although not as heavy-handed, is also not a good model. Not only would the Chinese and European approaches potentially undermine the permissionless innovation ethos that made America’s tech companies become global powerhouses, but expanded industrial policy efforts would entail massive state bets on risky ventures using taxpayer resources.

We discuss the public choice dynamics surrounding many industrial development efforts and note that, “what is often described as “industrial policy” is in reality nothing more than industrial politics.” We highlight how many of the largest industrial policy programs have been prone to highly inefficient contracting procedures and massive cost overruns. Sometimes outright corruption even becomes a problem with some of the largest programs. But that’s not the only cost. Sometimes, in their effort to promote specific industrial outputs or outcomes, government undermines the very innovation they hope to spur.

When governments repress the entrepreneurial spirit of their most innovative creators and companies, this is bound to have negative ramifications for long-term competitiveness and economic growth. Heavy-handed industrial policy schemes can contribute to this sort of repression as the state gains more levers of control over private companies.

We note how that has certainly been the case in the European Union, where “countries have adopted a highly precautionary regulatory model for new digital sectors that shuns risk-taking and focuses on maximizing other values at the expense of disruptive change. This approach has resulted in fewer national champions, and it has cost Europe in terms of global competitive advantage,” we note. We also highlight the long string of failed European industrial policy programs.

Ours is not a doctrinaire analysis; we take a pragmatic approach to the evaluation of industrial policy programs and proposals. Some of them may succeed based simply on the reality that “if government officials roll the proverbial industrial policy dice enough times, some bets are bound to pay off, at least indirectly.” But any serious analysis of these efforts, we argue, must fully weigh the trade-offs associated with the potential tax and compliance burdens associated with funding them to begin with.

But we admit that, “industrial policy will always be with us to some extent, given the sheer size of government and the many existing programs already devoted to economic development or high-tech initiatives.” Toward that end, we wrap up the paper with a variety of high-level recommendations about industrial policy. We highlight how:

The priority should be generalized economic development over targeted development efforts. The most important thing that policymakers can do to boost economic opportunities is to create a legal and regulatory environment that is conducive to entrepreneurship, investment, innovation, and free trade. [. . . ] government should focus on setting the table for entrepreneurial activity instead of trying to determine everything on the plate. To put this differently, policymakers need to avoid the “fun stuff” and focus on “boring” issues that often get neglected.

We apply these insights to the ongoing debate over regional economic development and the specific effort currently underway at the federal level to encourage “regional innovation hubs,” as federal and state lawmakers look to create “the next Silicon Valley” elsewhere.

In terms of our nation’s overall investment in R&D, we note that “[t]he United States has the most vibrant venture capital (VC) market in the world, and this market helps support risky ventures without gambling with taxpayer dollars.” While some bemoan the fact that private enterprise provides the bulk of R&D expenditures in the US – and that amount is increasing relative to governmental sources – this is actually something that should be celebrated. The strength of private-funded R&D helps set the US apart and make investment markets nimbler and more responsive to real-world needs. Moreover, global unicorn growth in the US continues at a healthy clip. From 2010 to mid-2021, the US created 53 percent of global unicorns, compared with 20 percent for China. These facts are often overlook in industrial policy debates.

While our paper is comprehensive, admittedly, there are some things we leave out of the analysis or do not spend as much time discussing. For example, there is a never-ending debate about the relationship between national security and industrial policy that raises many hard questions. A nation needs military hardware to defend itself, and almost every program to provide weapons and military equipment in the US involve private contracting to get them. These are the biggest industrial policy programs at all, but we don’t spend a lot of time focus on them in our paper because that would have taken us far afield.

We have a short section on these issues that notes how “defense-related programs have also been prone to highly inefficient contracting procedures and massive cost overruns.” Many of these programs remain vital, however, and must find a way to make them more efficient and cost-effective. But there are still other issues related to national security and industrial policy that raise hard questions, including: export or import controls, trade restrictions, and more. These continue to be challenging issues and I personally hope to revisit some of them in upcoming essays.

With Congress still trying to finalize its mega industrial policy bill, our paper is relevant to the short-term debate over these issues. But our hope is that this paper offers a big-picture, long-term framework for thinking through the challenges associated with industrial policy issues both here and abroad.

Here is the outline of the paper and, again, you can find it at this link. (The report can also be found on SSRN & Research Gate).

Introduction: Definitional Challenges 5
Calls for Expanding Industrial Policy to Boost High-Tech Innovation 8
Some (Quickly Forgotten) Recent History 11
The Romantic View of Industrial Policy vs. Reality 15
The Challenge of Creating “National Champions”: Europe’s Failures 20
Adverse Effects of State-Led Promotion: The China Model Examined 23
Where Does Real Competitive Advantage Come From? 27
Industrial Policy Did Not Give Us the Internet and the iPhone 33
Evaluating Other Industrial Policy Efforts 39
Using Competitions and Prizes to Encourage Innovation More Efficiently 46
Conclusion: Generality Is Better Than Targeting

Additional Reading:

Adam Thierer, “Industrial Policy Advocates Should Learn from Don Lavoie,” Discourse, November 5, 2021.
Adam Thierer, “Government Planning and Spending Won’t Replicate Silicon Valley,” Discourse, August 18, 2021.
Adam Thierer, “To Promote Tech Hubs Across the Country, Governments Should Focus on Improving the General Business Environment,” Discourse, September 9, 2021.
Adam Thierer, “‘Japan Inc.’ and Other Tales of Industrial Policy Apocalypse,” Discourse, June 28, 2021.
Adam Thierer, “Industrial Policy as ‘Casino Economics‘,” The Hill, July 12, 2021.
Adam Thierer & Connor Haaland, “Should the U.S. Copy China’s Industrial Policy?” Discourse, March 11, 2021.
Connor Haaland & Adam Thierer, “Can European-Style Industrial Policies Create Tech Supremacy?” Discourse, February 11, 2021.
Matthew D. Mitchell and Adam Thierer, “Industrial Policy is a Very Old, New Idea,” Discourse, April 6, 2021.
Adam Thierer, “On Defining ‘Industrial Policy,’” Technology Liberation Front, September 3, 2020.
Adam Thierer, “Skeptical Takes on Expansive Industrial Policy Efforts,” Technology Liberation Front, ongoing series.

Can Government Reproduce Silicon Valley Everywhere?

Adam Thierer — Sun, 12 Sep 2021 17:36:07 +0000

Wishful thinking is a dangerous drug. Some pundits and policymakers believe that, if your intentions are pure and you have the “right” people in power, all government needs to do is sprinkle a little pixie dust (in the form of billions of taxpayer dollars) and magical things will happen.

Of course, reality has a funny way of throwing a wrench into the best-laid plans. Which brings me to the question I raise in a new 2-part series for Discourse magazine: Can governments replicate Silicon Valley everywhere?

In the first installment, I explore the track record of federal and state attempts to build tech clusters, science parks & “regional innovation hubs” using state subsidies and industrial policy. This is highly relevant today because of the huge new industrial policy push at the federal level is building on top of growing state and local efforts to create tech hubs, science parks, or various other types of industrial “clusters.

At the federal level, this summer, the Senate passed a 2,300-page industrial policy bill, the “United States Innovation and Competition Act of 2021,” that included almost $10 billion over four years for a Department of Commerce-led effort to fund 20 new regional technology hubs, “in a manner that ensures geographic diversity and representation from communities of differing populations.” A similar proposal that is moving in the House, the “Regional Innovation Act of 2021,” proposes almost $7 billion over five years for 10 regional tech hubs. Meanwhile, the Biden administration also is pitching ideas for new high-tech hubs. In late July, the Commerce Department’s Economic Development Administration announced plans to allocate $1 billion in pandemic recovery funds to create or expand “regional industry clusters” as part of the administration’s new Build Back Better Regional Challenge. Among the possible ideas the agency said might win funding are an “artificial intelligence corridor,” an “agriculture-technology cluster” in rural coal counties, a “blue economy cluster” in coastal regions, and a “climate-friendly electric vehicle cluster.”

In my essay, I note that the economic literature on these efforts has been fairly negative, to put it mildly. There is no precise recipe for growing tech clusters, as most economists and business analysts note.

“Despite several attempts, Silicon Valley has not been successfully copied elsewhere,” notes Mark Zachary Taylor, author of “The Politics of Innovation: Why Some Countries Are Better Than Others at Science and Technology.” Judge Glock, a senior policy adviser with the Cicero Institute, offers a more blistering assessment of such efforts: “Almost every American state has tried to fund the creation of biotech clusters, projects that almost inevitably end with weeds growing through the parking-lot pavement and a trail of corrupt bargains.”

I then highlight the key findings from several major studies of these efforts, all of which make it clear that, as cluster scholars by Aaron Chatterji, Edward Glaeser and William Kerr noted in 2014 after gathering all the research conducted on the topic: existing evidence “suggests that the regional foundation for growth-enabling innovation is complex and that we should be cautious of single policy solutions that claim to fit all needs.” Furthermore, “even if clusters of entrepreneurship are good for local growth, it is less clear that cities or states have the ability to generate those clusters.”

I also highlight research from my Mercatus Center colleagues on “The Economics of a Targeted Economic Development Subsidy” documenting costs of state-level planning & case study of Foxconn fiasco. They summarize the fairly miserable track record of state and local mini-industrial policy efforts. As they note, the extensive economic literature on this matter finds that “the net effect of targeted economic development subsidies is likely to be negative” because “the taxes funding the subsidies will discourage more economic activity than will be encouraged by the subsidies themselves.” Similarly, Harvard Business School economist Josh Lerner evaluated dozens of similar targeted development efforts from around the globe in his 2009 book Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed—and What to Do About It. He concluded that “for each effective government intervention, there have been dozens, even hundreds, of failures, where substantial public expenditures bore no fruit.”

In my essay, I also discuss the astonishing array of federal efforts to promote the geographic spread of high-tech sectors and jobs since 2000. Throughout Bush, Obama, Trump & Biden admins, there’s been a lot of spending, but not a lot of success. Just lots of new laws and bureaucracies:

In 2012, the Obama administration launched the multiagency Rural Jobs and Innovation Accelerator Challenge and Advanced Manufacturing Jobs and Innovation Accelerator Challenge. This occurred at roughly the same time President Obama was launching his Startup America initiative. He also signed the JOBS Act (Jump-start Our Business Startups) in 2012. All these efforts included various measures to support the spread of advanced manufacturing and high-tech startups across the U.S. But none of these efforts have borne much fruit so far.

In the second installment of this series, I explore better ways to encourage regional tech innovation and economic development without doubling down on failed programs of the past. Specifically, I explain why, when it comes to economic development efforts, policymakers would be wise to avoid the costly, ineffective “fun stuff” and refocus on time-tested “boring” strategies:

The boring approach to economic development seeks to promote an open innovation culture that is conducive to risk-taking, investment and growth without the need to extend targeted privileges to particular firms or industries. Such a culture comes down to a classic mix of simplified and equally applied taxes, streamlined permitting processes and sensible regulations, limits on frivolous lawsuits, and clear protection of contracts and property rights. As Matt Mitchell and I argued previously, policymakers need to resist the urge to go for broke with splashy policies and programs. They need to appreciate the benefits of generalized economic development policy (a.k.a. the boring approach) as opposed to far riskier targeted development efforts.

I also highlight recent research explaining how perhaps the simplest way to strengthen existing clusters, or give rise to new ones, is to make sure America’s immigration policies are hospitable to the best and brightest minds from across the globe.

And I note how, due to the problems associated with many other forms of government-sponsored R&D assistance, many scholars and policymakers are increasingly turning to the idea of government-sponsored competitions and prizes as a superior way to distribute R&D assistance.

With competitions, governments can set broad goals to help facilitate the search for important societal needs. The prizes then create a powerful incentive for innovators to pursue those goals, not only to win money, but also to gain recognition from peers and the public. Another alternative is just using lotteries to distribute R&D money instead of having agencies target grants. That at least avoids political shenanigans and paperwork delays, although it may not be a particularly effective approach.

There is also some good news is overlooked in today’s rush to make big industrial policy gambles: Venture capitalists and new startups are already spreading out naturally.

A 2021 study on “The State of the Startup Ecosystem” by Engine, a research and advocacy organization supporting startups, revealed that “as Series A funding grew over the last fifteen years, more of that growth has started to shift to areas located outside of the largest ecosystems.” Series A funding refers to the initial round of outside venture capitalist investment in startups. The report looked at Series A deals from 2003 to 2018 and found that “Series A rounds outside of the top five ecosystems grew nearly 900 percent, while the number of rounds outside of the top nine grew nearly tenfold.” Whereas Series A fundings outside of the top five ecosystems stood at 38% in 2003, they had jumped up to 43% in 2018. “The increase in deal location diversity over this period reflects an increasing spread in venture capital investment across the country and less centralization of investment in areas like Silicon Valley,” the report concluded.

Meanwhile, tech innovators and investors are increasingly engaging in innovation arbitrage as they move to cities and states across the nation that are more hospitable to entrepreneurial activities. Firms and investors are voting with their feet (and dollars) by flocking to areas where tech clusters can more naturally sprout because the general policy environment is sound.

But government efforts to artificially try to create regional innovation hubs in a top-down, technocratic fashion will almost certainly persist. As they do, some will argue that this time will be different! Perhaps, but it is more likely that the past is prologue; these new hubs will likely cause federal politicians to jockey for position to have their regions named one of the winners and get a big cut of all the new high-tech pork being served up by Washington. We can do better.

Jump over to Discourse to read both installments here and here.

Also, down below I list several other things I have written recently on industrial policy efforts more generally.

Adam Thierer & Connor Haaland, “Does the US Need a More Targeted Industrial Policy for AI & High-Tech?” Presentation for IHS Papers Workshop: Does America Need a New Industrial Policy?, 2021.
Adam Thierer, “Government Planning and Spending Won’t Replicate Silicon Valley,” Discourse, August 18, 2021.
Adam Thierer, “To Promote Tech Hubs Across the Country, Governments Should Focus on Improving the General Business Environment,” Discourse, September 9, 2021.
Adam Thierer, “‘Japan Inc.’ and Other Tales of Industrial Policy Apocalypse,” Discourse, June 28, 2021.
Adam Thierer, “Industrial Policy as ‘Casino Economics‘,” The Hill, July 12, 2021.
Adam Thierer & Connor Haaland, “Should the U.S. Copy China’s Industrial Policy?” Discourse, March 11, 2021.
Connor Haaland & Adam Thierer, “Can European-Style Industrial Policies Create Tech Supremacy?” Discourse, February 11, 2021.
Matthew D. Mitchell and Adam Thierer, “Industrial Policy is a Very Old, New Idea,” Discourse, April 6, 2021.
Adam Thierer, “On Defining ‘Industrial Policy,’” Technology Liberation Front, September 3, 2020.
Adam Thierer, “Skeptical Takes on Expansive Industrial Policy Efforts,” Technology Liberation Front, ongoing series.

Keeping Uncle Sam out of the Industrial Policy Casino

Adam Thierer — Fri, 16 Jul 2021 19:01:32 +0000

In my latest column for The Hill, I consider that dangers of government gambling our tax dollars on risky industrial policy programs. I begin by noting:

Roll the dice at a casino enough times, and you are bound to win a few games. But knowing the odds are not in your favor, how much are you willing to risk losing by continuing to gamble? This is the same issue governments confront when they gamble taxpayer dollars on industrial policy efforts, which can best be described as targeted and directed efforts to plan for specific future industrial outputs and outcomes. Throwing enough money at risky ventures might net a few wins, but at what cost? Could those resources have been better spent? And do bureaucrats really make better bets than private investors?

I continue on to note that, while the US is embarking on a major new industrial policy push, history does not provide us with a lot of hope regarding Uncle Sam’s betting record when he starts rolling those industrial policy dice. “How much tolerance should the public have for government industrial policy gambling?” I ask. I continue on:

Generally speaking, “basic” support (broad-based funding for universities and research labs) is wiser than “applied” (targeted subsidies for specific firms or sectors). With basic R&D funding, the chances of wasting resources on risky investments can be contained, at least as compared to highly targeted investments in unproven technologies and firms.

I also argue that “The riskiest bets on new technologies and sectors are better left to private investors,” and note how, “America’s venture capital industry remains the envy of the world because it continues to power world-beating advanced technology.” Accordingly, I conclude:

While some government investments will always be necessary, policymakers engaging in casino economics means bad industrial policy bets and taxpayer money squandered on risky ventures best made by private actors. We need to keep Uncle Sam’s gambling habits in check.

Read the whole thing here. And here’s a list of more of my recent writing on industrial policy:

Adam Thierer & Connor Haaland, “Does the US Need a More Targeted Industrial Policy for AI & High-Tech?” Presentation for IHS Papers Workshop: Does America Need a New Industrial Policy?, forthcoming, July 23, 2021.
Adam Thierer, “‘Japan Inc.’ and Other Tales of Industrial Policy Apocalypse,” Discourse, June 28, 2021.
Adam Thierer & Connor Haaland, “Should the U.S. Copy China’s Industrial Policy?” Discourse, March 11, 2021.
Connor Haaland & Adam Thierer, “Can European-Style Industrial Policies Create Tech Supremacy?” Discourse, February 11, 2021.
Matthew D. Mitchell and Adam Thierer, “Industrial Policy is a Very Old, New Idea,” Discourse, April 6, 2021.
Adam Thierer, “On Defining ‘Industrial Policy,’” Technology Liberation Front, September 3, 2020.
“Skeptical Takes on Expansive Industrial Policy Efforts,” Technology Liberation Front, ongoing series.

Skeptical Takes on Expansive Industrial Policy Efforts

Adam Thierer — Mon, 15 Mar 2021 17:09:11 +0000

[Last updated 3/25/22]

Industrial Policy is a red-hot topic once again with many policymakers and pundits of different ideological leanings lining up to support ambitious new state planning for various sectors — especially 5G, artificial intelligence, and semiconductors. A remarkably bipartisan array of people and organizations are advocating for government to flex its muscle and begin directing more spending and decision-making in various technological areas. They all suggest some sort of big plan is needed, and it is not uncommon for these industrial policy advocates to suggest that hundreds of billions will need to be spent in pursuit of those plans.

Others disagree, however, and I’ll be using this post to catalog some of their concerns on an ongoing basis. Some of the criticisms listed here are portions of longer essays, many of which highlight other types of steps that governments can take to spur innovative activities. Industrial policy is an amorphous term with many definitions of a broad spectrum of possible proposals. Almost everyone believes in some form of industrial policy if you define the term broadly enough. But, as I argued in a September 2020 essay “On Defining ‘Industrial Policy‘,” I believe it is important to narrow the focus of the term such that we can continue to use the term in a rational way. Toward that end, I believe a proper understanding of industrial policy refers to targeted and directed efforts to plan for specific future industrial outputs and outcomes.

The collection of essays below is merely an attempt to highlight some of the general concerns about the most ambitious calls for expansive industrial policy, many of which harken back to debates I was covering in the late 1980s and early 1990s, when I first started a career in policy analysis. During that time, Japan and South Korea were the primary countries of concern cited by industrial policy advocates. Today, it is China’s growing economic standing that is fueling calls for ambitious state-led targeted investments in “strategic” sectors and technologies. To a lesser extent, grandiose European industrial policy proposals are also prompting new US counter-proposals.

All this activity is what has given rise to many of the critiques listed below. If you have suggestions for other essays I might add to this list, please feel free to pass them along. FYI: There’s no particular order here.

Scott Lincicome and Huan Zhu, “Questioning Industrial Policy: Why Government Manufacturing Plans Are Ineffective and Unnecessary,” Cato Institute Working Paper, June 16, 2021.

[I]ndustrial policy – properly defined – has an extensive and underwhelming history in the United States, featuring high costs (seen and unseen), failed objectives, and political manipulation. Surely, not every U.S. industrial policy effort has ended in disaster, but facts here and abroad argue strongly against new government efforts to boost “critical” industries and workers and thereby fix alleged market failures. Such efforts warrant intense skepticism – skepticism that today is unfortunately in short supply.

Adam Thierer, “Industrial Policy as Casino Economics,” The Hill, July 12, 2021.

While some government investments will always be necessary, policymakers engaging in casino economics means bad industrial policy bets and taxpayer money squandered on risky ventures best made by private actors. We need to keep Uncle Sam’s gambling habits in check.

Adam Thierer, “Thoughts on the America COMPETES Act: The Most Corporatist & Wasteful Industrial Policy Ever,” Technology Liberation Front, January 26, 2022.

As far as industrial policy measures go, the COMPETES Act is one of the most ambitious and expensive central planning efforts in American history. It represents the triumph of top-down, corporatist, techno-mercantilist thinking over a more sensible innovation policy rooted in bottom-up competition, entrepreneurialism, private investment, and free trade.

Adam Thierer & Connor Haaland, “Does the US Need a More Targeted Industrial Policy for AI & High-Tech?” Mercatus Center at George Mason University, Special Study, November 2021.

This paper considers how both the recent history of high-tech industrial policy efforts at the national and international level—as well as some state and local economic development efforts in the United States—might better inform the wisdom of proposed efforts for AI or other high-tech sectors. That history is spotted with some limited successes alongside a long string of costly failures. We explore the reasons for those failures and recommend that the US refocus on the policy prerequisites that helped give rise to the computing and internet revolutions: a more generalized approach to economic development rooted in light-touch regulation and taxation of emerging technology.

Samuel Gregg, “Can America Build A Broad-Based Economy?” Law & Liberty, March 1, 2022

Of course, if a government decides to put enough money and resources behind a given industrial policy, it will likely produce some results. Yet the same is true of the gambler. If she stays in the casino long enough and spends enough money, she will win a few hands of cards. But the odds are that she will also lose a great deal of money, especially if she is as inept a gambler as the government is maladroit at identifying industry trends or entrepreneurial opportunities. Moreover, just as a compulsive gambler’s behavior will have numerous negative effects on her family’s well-being, so too does industrial policy risk inflicting wider damage upon a nation’s economy and political system. The harms range from gross misallocations of resources to the rampant cronyism and rent-seeking that seems inseparable from industrial policy (which, I again note, its advocates studiously avoid discussing), to name just a few.

Phil Gramm & Mike Solon, “Peace Through Strength Requires Economic Freedom,” Wall Street Journal, March 1, 2022.

The America Competes Act is the House’s effort to outdo the Chinese Communist Party’s latest five-year plan. The 2,900-page bill would make an old Soviet commissar blush. [. . . ] America’s success in the world economy has never depended on industrial policy or government subsidies. It has come from the relative absence of government planning and subsidies. This is hardly news. The U.S. government provided support for the efforts of Samuel Langley, the greatest aviation expert of the 1890s, in his effort to make America first in powered flight. His manned Aerodrome flopped into the Potomac River. It was the Wright brothers, two unsubsidized but determined bicycle makers from Dayton, Ohio, who flew at Kitty Hawk, N.C., and changed the world.

Scott Lincicome, “Moving Fast and Breaking Things,” Capitolism, February 2, 2022.

Adam Thierer, “The Coming Industrial Policy Hangover,” The Hill, February 16, 2022.

In the rush to pass legislation, we’ve barely heard a peep about the $250-$350 billion price tag. This follows a massive splurge of recent government borrowing, which led to the U.S. national debt hitting another lamentable new record: $30 trillion. China already owns over $1 trillion of that debt, making one wonder if we’re really countering China by adopting a massive, new and unfunded industrial policy that they will end up financing indirectly.

Podcast: “What’s Wrong with Industrial Policy,” Hold These Truths with Rep. Dan Crenshaw, February 16, 2022.

Tad DeHaven and Adam Thierer, “ The Military-Industrial Complex Offers a Cautionary Tale for Industrial Policy Planning,” Discourse, March 25, 2022.

Wayne Crews, “What To Do Instead Of The America COMPETES Act,” Forbes, February 2, 2022.

All this spending and expansion of the federal government, atop which our leaders would lay the America COMPETES Act and doubtless its own accompanying guidebook, has massive, ignored regulatory effects. Trillions in government spending (”investment”) have altered and will alter the entire trajectory and competitive environment of industries engaged in large-scale enterprises and transactions. This removes vast swaths of business activity from free competitive enterprise altogether, and creates displacements and distortions such that the restoration of free enterprise becomes a near-impossible disentanglement. The result is, after 100 years of big government and seduction of and fusion with big business, the greatest endeavors—from infrastructure to artificial intelligence, from smart cities to space—now consist of “partnerships” with governments rather than free enterprise, at scales and at costs so gigantic they can only be ignored.

Adam Thierer, “‘Japan Inc.’ and Other Tales of Industrial Policy Apocalypse,” Discourse, June 28, 2021.

Perhaps the most ironic indictment of industrial policy punditry lies in the way all the earlier books and essays about Japanese planning not only failed to forecast the many flops associated with it, but also did not foresee China as a potential future economic juggernaut. [. . .] What might that tell us about the ability of experts to predict the future course of countries and economies?

Adam Thierer, “Can Government Reproduce Silicon Valley Everywhere?” Technology Liberation Front, September 12, 2021.

government efforts to artificially try to create regional innovation hubs in a top-down, technocratic fashion will almost certainly persist. As they do, some will argue that this time will be different! Perhaps, but it is more likely that the past is prologue; these new hubs will likely cause federal politicians to jockey for position to have their regions named one of the winners and get a big cut of all the new high-tech pork being served up by Washington.

Weifeng Zhong, “Beijing Can’t Make Sense of Biden’s China Strategy. Can Biden?” Washington Examiner, July 01, 2021.

America is not China, and it would be a fatal mistake to equate competing with China with imitating what China does. Doing so would risk the advantageous U.S. position as the world’s chief innovator, whose ideas are turned into products by vibrant private sectors both domestically and internationally.

Mike Watson, “Industrial Policy in the Real World,” National Affairs, Summer 2021.

Given the nature of industrial policymaking in the United States, there’s little reason to believe future attempts at industrial planning will result in a more coherent, rational, or strategic allocation of resources than they have in the past. [. . .] In short, industrial policy in the United States cannot be steered by a small group of enlightened individuals, because a small group of enlightened individuals will never be at the helm. Indeed, in some sense, there is no single “helm” to speak of.

Samuel Gregg, “Industrial Policy Mythology Confronts Economic Reality,” Law & Liberty, September 3, 2021.

If prizes in policy debates were given out for persistence, those advocating for more widespread use of industrial policy in America would be first in line. No matter how many times it is pointed out that they don’t understand the nature and workings of comparative advantage; or avoid acknowledging how industrial policy fosters rampant cronyism and corruption; or highlight what they consider examples of countries in which industrial policy has been employed successfully (only to have it demonstrated that it didn’t quite work out the way they suggested), they don’t give up.

Elizabeth Nolan Brown, “If This Is How America COMPETES, We’re Going to Lose,” Reason, January 26, 2022.

the bill can’t simply address one main issue or a few critical needs. Instead, it tries to insert the government into every aspect of all sorts of industries and markets and pretend that bureaucrats can solve complex social and cultural issues.

Chang-Tai Hsieh, “Countering Chinese Industrial Policy Is Counterproductive,” Project Syndicate, September 15, 2021.

US political leaders have long tried to counter Chinese industrial policy. And now they seem to have decided that the best way to do that is to emulate it. But their agenda betrays a profound lack of understanding of the unique challenge posed by China’s coupling of an authoritarian political regime with a dynamic market economy.

Adam Thierer, “Industrial Policy Advocates Should Learn from Don Lavoie,” Discourse, November 5, 2021.

“In light of the inherent deficiencies of central planning,” Lavoie said, “it might be argued that the U.S. should instead try to reduce current government interference with the competitive process to the absolute minimum consistent with other political goals.” It remains wise advice for today’s policymakers.

Anne O. Krueger, “America’s Muddled Industrial Policy,” CGTN, June 25, 2021.

Governments have a poor track record of identifying “winners” – be it a company or a category of technology – whereas private companies have proved better at transforming new discoveries into new products or cost savings. That is why the U.S. state traditionally has stuck to funding basic research.

Eric Boehm, “Massive Subsidies Won’t Solve the Semiconductor Supply Chain Crisis,” Reason, January 28, 2022.

Tracy C. Miller, “The Case for Limiting Government Semiconductor Subsidies,” The Hill, June 26, 2021.

Without the subsidies, firms would be more cautious about building or expanding foundries. If long-term production capacity is truly insufficient, high prices and anticipated profits give firms the right incentives to build or expand and satisfy demand at cost-covering prices.

Scott Lincicome, “The ‘Endless Frontier’ and American Industrial Policy,” Cato Institute Blog, May 26, 2021.

U.S. industrial policy has a long history of struggling to overcome political pressures, just as public choice predicts, and the EFA is no different. None of this means that all legislating is bad, or that politicians don’t at least occasionally vote in the national interest. Instead, the public choice framework simply adds another hurdle—along with things like the “knowledge problem,” seen and unseen costs, and misaligned incentives—to designing and implementing commercial policies specifically intended to beat the admittedly messy and imperfect situation that the market generates. It’s imperative that we understand these risks before supporting policies that, while they might look good on paper, could easily morph into a counterproductive boondoggle—one we’ve seen countless times with respect to U.S. industrial policy.

Daniel W. Drezner, “Is the United States capable of industrial policy in 2021?” Washington Post, June 14, 2021.

To believe that the United States can pursue a high-caliber industrial policy, however, requires assuming a more competent state than I have seen in the past decade.

Douglas Holtz-Eakin, “The Nicest Thing I Can Write About Supply Chain Policy,” The Daily Dish, June 10, 2021.

Nevertheless, the Senate just passed a provision for $50 billion to subsidize chip fabrication – something the president had requested – and the House will doubtlessly concur. That might seem like an industry victory, but wait until it realizes that the administration will assume it gives it the right to insist on union jobs, micromanage the design of chips, and dictate the pricing and distribution of the products. Good luck with that. As the definitive volume on policy analysis (Benjamin Franklin’s Poor Richard’s Almanack) put it, “He that lieth down with dogs shall rise up with fleas.”

Lipton Matthews, “Industrial Policy—a.k.a. Central Planning—Won’t Make America Great,” Mises Wire, November 5, 2021.

Although industrial policy is in vogue, the evidence suggests that it is not necessary for long-term development. Moreover, despite the popularity of industrial policy in China, America remains the world’s economic power, and by following China, it may lose this vaunted position.

Richard Beason, “Japanese Industrial Policy: An Economic Assessment,” National Foundation for American Policy, November 2021.

There is no evidence to support the claim that Japanese industrial policy during the 1955-1990 period enhanced growth rates by sector, industries with economies of scale (greater efficiency when produced in increased amounts), productivity growth or “competitiveness.” The reality of the political process and government spending priorities makes it very difficult for such policies to be effective. Furthermore, even if political pressures had not intervened, it seems questionable to suggest that government policymakers would be better than actual market participants in determining the most efficient allocation of resources to produce the best economic outcomes.

Douglas Irwin, “ Memo to the Biden administration on how to rethink industrial policy,” Peterson Institute for International Economics, October 2020.

The challenge for policymakers is to identify such industries without succumbing to the notion that every industry is vital to some public objective. For example, the goal of “economic security” is so broadly defined and open-ended that virtually every domestic producer could claim the need for government support on that basis. The risk is that ill-conceived government programs will encourage corrupt behavior in which industries benefit themselves without contributing to national welfare.

Jim Pethokoukis, “Will Biden’s embrace of industrial policy pay off?” AEI Blog, January 15, 2021.

The history of such efforts in advanced capitalist economies gives ample reason for skepticism about the effectiveness of such top-down government planning, from Japanese economic stagnation to the now-mothballed Concorde supersonic jet to France’s failed attempt to create a thriving tech sector. The Internet might seem like the exception that negates the rule, but what turned out to be a successful partnership of government and entrepreneurs didn’t arise out of some master plan from Washington. And what do even the smartest plans look like when filtered through the dodgy quality of American governance? Maybe as an excuse for cronyism and protectionism.

Adam Thierer & Connor Haaland, “Should the U.S. Copy China’s Industrial Policy?” Discourse, March 11, 2021.

America needs to embrace its already vibrant venture capital market, the benefits of basic science and prize competitions, and a light-touch regulatory approach instead of gambling taxpayer dollars on grandiose industrial policy schemes that would likely become boondoggles.

Connor Haaland & Adam Thierer, “Can European-Style Industrial Policies Create Tech Supremacy?” Discourse, February 11, 2021.

Thus far, however, the Europeans don’t have much to show for their attempts to produce home-grown tech champions. Despite highly targeted and expensive efforts to foster a domestic tech base, the EU has instead generated a string of industrial policy failures that should serve as a cautionary tale for U.S. pundits and policymakers, who seem increasingly open to more government-steered innovation efforts.

Phil Levy & Christine McDaniel, “ Does the U.S. Need a Vigorous Industrial Policy?” Discourse, February 16, 2021.

we are certainly hearing new enthusiasm these days about industrial policy. It seems to have proponents or converts on both sides of the aisle. This either means that a new consensus has emerged, or it means that the term is being used so loosely that it has lost its original meaning. I’ll go with the latter; it now means different things to different people.

Wall Street Journal columnist Greg Ip discussing why “ The traditional skepticism toward industrial policy is well deserved.”

The traditional skepticism toward industrial policy is well deserved. Once Washington starts writing checks for semiconductors, other industries may get in line with the outcome determined more by political clout than economic merit. As in shipbuilding, the targeted companies may end up in perpetual need of federal protection and unable to compete internationally

David Ignatius, “The U.S. is quietly mobilizing its economy against China,” Washington Post, March 4, 2021.

The industrial policy the AI commission recommends could unlock talent and innovation. But if officials aren’t careful, government intervention could also afflict our best companies with the dead weight and dysfunction of our broken political system. We need government to spawn brainpower, not bureaucracy.

Veronique de Rugy, “Support for Industrial Policy is Growing,” AIER, January 18, 2020.

Looking at the federal government today tells me that the problems surrounding R&D programs in the past continue today, and will continue tomorrow, because they are simply a consequence of the normal functioning of government. It is hard to wish these problems away, even in the face of the private sector’s “imperfections.” Those arguing for more funding in R&D should proceed with caution.

Ben Reinhardt on concerns about The Endless Frontier Act

This bill is proposing to give money with risk-averse restrictions to a risk-averse organization (the NSF) to be dispersed among other risk-averse organizations (Universities) into a system with increasingly risk-averse incentives. Note that I’m not saying “it’s all fubar’d lets burn it to the ground!” but I am suggesting that instead of slamming on the accelerator, we should be asking “what would a tune-up and an oil change look like instead?”

Ryan Bourne, “Do Oren Cass’s Justifications for Industrial Policy Stack Up?” Cato Commentary, August 15, 2019.

Oren Cass asserts that markets cannot generally allocate resources efficiently by industry. Yet he provides no meaningful metrics to show this is the case, nor shows why his policies would deliver better outcomes. His two main claims about the benefits of a manufacturing sector — “stable employment” and “strong productivity growth” — are directly contradictory. A plethora of evidence suggests as countries’ get richer due to automation and technological improvements, they demand relatively more services, and so the industrial sector declines in employment terms.

Scott Lincicome, “ Manufactured Crisis: ‘Deindustrialization, Free Markets, and National Security,” Cato Policy Analysis No. 907, January 27, 2021.

This skepticism—mostly absent from Washington—is indeed warranted: analyses of the U.S. manufacturing sector and the relationship between trade and national security, as well as the United States’ long and checkered history of security‐related protectionism, undermine the theoretical justifications for imposing protectionism and industrial policy in the name of national defense. Instead, open trade, freer markets, and global interdependence will in almost all cases produce better outcomes in terms of national security and, most importantly, preventing wars and other forms of armed conflict.

Matthew Lau, “Trudeau government’s ‘industrial policy’ creates all the wrong incentives,” Toronto Sun, March 16, 2021.

Targeted Advertising for Cable TV & Skype

Adam Thierer — Mon, 07 Mar 2011 17:34:20 +0000

We’ve said it here before too may times to count: When it comes to the future of content and services — especially online or digitally-delivered content and services — there is no free lunch. Something has to pay for all that stuff and increasingly that something is advertising. But not just any type of advertising — targeted advertising is the future. We see that again today with Skype’s announcement that it is rolling out an advertising scheme as well as in this Wall Street Journal story (“TV’s Next Wave: Tuning In to You“) about how cable and satellite TV providers are ramping up their targeted advertising efforts.

No doubt, we’ll soon hear the same old complaints and fears trotted out about these developments. We’ll hear about how “annoying” such ads are or how “creepy” they are. Yet, few will bother detailing what the actual harm is in being delivered more tailored or targeted commercial messages. After all, there’s actually a benefit to receiving ads that may be of more interest to us. Much traditional advertising was quite “spammy” in that it was sent to the mass market without a care in the world about who might see or hear it. But in a diverse society, it would be optimal if the ads you saw better reflected your actual interests / tastes. And that’s a primary motivation for why so many content and service providers are turning to ad targeting techniques. As Skype noted in its announcement today: “We may use non-personally identifiable demographic data (e.g. location, gender and age) to target ads, which helps ensure that you see relevant ads. For example, if you’re in the US, we don’t want to show you ads for a product that is only available in the UK.” Similarly, the Journal article highlights a variety of approaches that television providers are using to better tailor ads to their viewers.

Some will still claim it’s too “creepy.” But, as I noted in my recent filing to the Federal Trade Commission on its new privacy green paper:

If harm is reduced to “creepiness” or even “annoyance” and “unwanted solicitations” as some advocate, it raises the question whether the commercial Internet as we know it can continue to exist. Such an amorphous standard leaves much to the imagination and opens the door to creative theories of harm that are sure to be exploited. In such a regime, harm becomes highly conjectural instead of concrete. This makes credible cost-benefit analysis virtually impossible since the debate becomes purely about emotion instead of anything empirical. … Importantly, nothing in the Commission’s proceeding has thus far demonstrated that online data collection and “tracking” represent a clear harm to consumers per se, or that any “market failure” exists here. Such a showing would be difficult since using data to deliver more tailored advertising to consumers can provide important benefits to the public..

I’ve already noted one possible benefit to consumers: ads that are more relevant to them and, therefore, potentially less “annoying.” But the far more important benefits would be (1) keeping costs for content and services reasonable, and/or (2) just keeping that content flowing or those services in business. I go into more detail about both of these potential benefits in my FTC filing, but the reasoning here is pretty straightforward. Again, advertising is the great subsidizer of the press, media, content, and online services. The reason we already have access to some much great content and so many great (and often free) online services is because of advertising.

But the market for content and services is becoming more cut-throat competitive every day. There’s simply so much stuff to choose from that both the content/service providers and the advertisers are being forced to evolve and change their business models. Locking them into to yesterday’s (or even today’s) advertising and marketing methods limits their ability to respond to competitive pressures and concoct more innovate models going forward. Targeting will clearly be part of the mix, and if it can help companies continue to provide their content and services to the public — or, better yet, provide them at a more competitive price — then policymakers must take those potential benefits into account when considering privacy regulations, even if some feel such ads are “creepy.” Again, it’s unclear how “creepiness” is a harm and, even if it is, it has to be stacked against the many potential benefits or more targeted forms of advertising. There’s no guarantee those methods will succeed, of course, but they should at least be given a chance.

Again, read my FTC comments for more detail. And let’s say it once more, with feeling: There is no free lunch!

___

Addendum: I just noticed this follow-up Wall Street Journal blog post by Jessica E. Vascellaro on “Calculating the Benefit of a Targeted TV Ads,” which concludes by noting that: “A test of targeted TV ads by Comcast in 2009 found that homes receiving targeted advertising tuned away from the commercials 32% less of the time than homes that received non-targeted ads.” Stated differently, those consumers seeing targeted ads found them 32% less “annoying”! And, again, more effective advertising means more dollars for content and services.

That also reminded me of this eMarketer article I saw last month on how “Targeting Boosts Low Facebook Click Rates.” It noted that:

Just as not all advertisers are created equal, neither are all ads. Facebook’s self-serve ad targeting platform provides marketers with a wide variety of options for narrowing down the audience for their campaigns and targeting them appropriately. And according to data from BLiNQ Media, targeting can provide a dramatic increase in ad effectiveness. Clickthrough rates for campaigns run through the company’s platform were 7.5 times higher for ads targeted with demographic characteristics or interest information gleaned from profiles than for ads that were not targeted.

Indeed, not all advertising is created equal, and more targeted forms of advertising could create more value for content creators, services providers, and consumers. If it’s given a chance, that is.

Chairman Leibowitz’s Disconnect on Privacy Regulation & the Future of News

Adam Thierer — Wed, 13 Jan 2010 20:49:12 +0000

by Adam Thierer & Berin Szoka, Progress Snaphot 6.1

Stephanie Clifford of the New York Times posted a very interesting article this week summarizing a recent “on-the-record chat” the Times staff had with Federal Trade Commission (FTC) chairman Jon Leibowitz and FTC Bureau of Consumer Protection chief David Vladeck. The interview [discussed by Braden here] is profoundly important in that it reveals an alarming disconnect regarding the relationship between “privacy” regulation and the future of media, which were the subjects of their discussion with Times staff. Namely, Leibowitz and Vladeck apparently fail to appreciate how the delicate balance between commercial advertising and journalism is at risk precisely because of the sort of regulations they apparently are ready to adopt. Because the value of online advertising depends on data about its effectiveness and consumers’ likely interests, and because advertising is indispensable to funding media, what’s ultimately at stake here is nothing short of the future of press freedom.

The “Day of Reckoning” Is Upon Us

Leibowitz and Vladeck spend the first half of The Times interview wringing their hands about “privacy policies,” the declarations made by websites and advertising networks about their data collection and use practices (for which the FTC can and must hold them accountable). But the two feel that privacy policies don’t adequately inform consumers. Chairman Leibowitz claims that online companies “haven’t given consumers effective notice, so they can make effective choices.” And Mr. Vladeck states that advise-and-consent models “depended on the fiction that people were meaningfully giving consent.” But he and the FTC seem ready to abandon the notice and choice model because the “literature is clear” that few people read privacy policies, Vladeck told the Times. He and Leibowitz continue:

“Philosophically, we wonder if we’re moving to a post-disclosure era and what that would look like,” Mr. Vladeck said. “What’s the substitute for it?” He said the commission was still looking into the issue, but it hoped to have an answer by June or July, when it plans to publish a report on the subject. Mr. Leibowitz gave a hint as to what might be included: “I have a sense, and it’s still amorphous, that we might head toward opt-in,” Mr. Leibowitz said.

This clearly foreshadows the regulatory endgame we have long suspected was coming. When the FTC released its “Self-Regulatory Principles for Online Behavioral Advertising” eleven months ago, we asked: “What’s the Harm & Where Are We Heading?” Their answers to both questions have become clearer with each new calculated comment—all apparently intended to slowly “turn up the heat” on the advertising industry so that the proverbial frog will stay in the pot until the water finally boils. Leibowitz’s FTC has simply dodged the “harm” question with a four-part strategy:

Cobble together a “record” full of sympathy-evoking anecdotes submitted by advocates of regulation in comments and the FTC’s ongoing “Exploring Privacy” Roundtables;
Let the most extreme Chicken Littles fulminate about the grand conspiracy of “neuromarketing manipulation” and the like (and sometimes even shout down FTC staff in panel discussions) in order to redefine the “reasonable center” of the debate;
Define-down “harm” as purely a matter of “consumer expectations” or consumers’ “dignity interests” (whatever that vague and infinitely elastic term means); and
Attack the effectiveness of “consent” itself by suggesting that consumers cannot be trusted to understand privacy policies or be expected to make any effort to protect their own privacy.

Conveniently, this strategy leads right back to the “day of reckoning” Chairman Leibowitz threatened was coming last February: We are heading precisely where he told us we would be—to full-on, opt-in regulation. The writing on the wall becomes more apparent every day: Leibowitz set out to bring online advertising to heel even before becoming Chairman, and his Commission is reprising almost precisely the same approach that led to the passage of the Children’s Online Privacy Protection Act (COPPA) of 1998: building a case for new authority, dismissing industry self-regulation as ineffective, and finally presenting a report to Congress intended to produce a rapid legislative response. After the FTC presented its report on the need for regulation in congressional testimony in June 1998, it took Congress just four months to pass COPPA—and much of that time was consumed by the summer recess. In short, Leibowitz is mounting a carefully choreographed campaign for increased regulation.

The only real question is whether Leibowitz will somehow try to use the FTC’s existing authority over “unfair or deceptive” trade practices or wait for expanded authority from Congress. While most observers typically assume that such expanded authority would come in the form of a privacy-specific bill—be it a broad “baseline” privacy bill or one specifically focused on online data collection for advertising purposes—the authority Leibowitz yearns for could just as easily come in the form of increased rulemaking authority as part of a broader bill that allows the FTC to preemptively regulate practices that are not deceptive but merely deemed “unfair.”

This would take the agency “ Back to the Future”—to the late 1970s, when the agency reached the height of its efforts to regulate purely on “unfairness” grounds by trying to ban advertising to children. The agency’s behavior earned it the moniker “National Nanny” from the Washington Post, hardly a bastion of regulatory skepticism.[1] That outpouring of popular resentment caused a heavily Democratic Congress to cut-off the Democratic-led agency’s regular funding and prohibit it from regulating advertising merely on the grounds of “unfairness.” In essence, they told the agency to “go back to its knitting” and focus on protecting consumers from demonstrated harms.^{^[2]} Duly chastened (and actually shut down for several days), the FTC formulated a meaningful legal standard for “unfairness,” which Congress codified in 1994: for a practice to be unfair, the injury it causes must be (1) substantial, (2) without offsetting benefits, and (3) one that consumers cannot reasonably avoid.

Under this statutory standard, as FTC Commissioner Thomas Rosch has argued, the commission must carefully consider:

[the] legitimate pro-consumer and pro-competitive benefits that result from [targeted advertising]. Absent hard data weighing these benefits against the limited “invasion of privacy interests” involved, it would seem difficult to conclude that treating that practice as an actionable violation of the “unfairness” prong of Section 5 will pass muster.[3]

So Leibowitz and Vladeck either need to get serious about weighing the costs and benefits of targeted advertising—or, in the absence of such actually measuring these trade-offs, get Congress to give them the authority to regulate. But one thing is clear from their past statements: they are in a hurry to do something. As Vladeck told The Times last August, “There is a sense of urgency around here… Consumers, I don’t think are sufficiently protected under the current regime.” Apparently, the case is closed in their minds.

“Left Hand, Meet Right Hand”

The second half of the Times interview concerns the future of news. Chairman Leibowitz is not optimistic:

“There are some areas where you clearly see positive creative destruction,” Mr. Leibowitz said, giving the example of travel agents who were replaced by Orbitz and other online-booking systems. The news, he said, was not one of those. “When you’re dealing with something as critical as news is to a democracy, you need to ensure, certainly, that it’s independent, but also that it’s vibrant going forward,” he said. Areas like investigative reporting, foreign and domestic bureaus, and state-house reporting, he said, would likely falter under blog operations because of “economies of scale.”

He said he wasn’t sure what the solution was, but threw out a few ideas discussed at the conference: maybe special tax treatment for newspapers, a Corporation for Public Broadcasting-like fund, or for the newspaper industry to charge fees for the re-use of its content, similar to the model that the American Society of Composers, Authors and Publishers uses. [emphasis added]

Mr. Chairman, with all due respect, haven’t you forgotten about the solution that has powered private media for a few centuries in this country? You know— advertising! Indeed, what’s stunning about these comments is the complete disconnect with what Leibowitz and Vladeck said earlier in the interview. It certainly may be the case that they said more on the subject than what The Times has reported, but given their escalating rhetoric, it seems likely that significantly increased FTC regulation is on the horizon. And, yet, as Chairman Leibowitz marches us into this brave new world of regulating Internet media through their key funding source, he and Mr. Vladeck seem to have little appreciation of the vital role played by advertising in sustaining a truly free and vibrant press.

An Attack on Advertising Is an Attack on Media Itself

Let’s step back and revisit Media Economics 101. Almost every serious scholar in the field acknowledges this truism: Advertising cross-subsidizes media platforms and the creation of valuable information—especially news. “Advertising is the mother’s milk of all the mass media,” Wall Street Journal technology columnist Walt Mossberg has noted. Similarly, Harold L. Vogel, author of Entertainment Industry Economics, the leading text in the field, has noted, “Advertising is the key common ingredient in the tactics and strategies of all entertainment and media company business models. Indeed, it might further be said that advertising has substantively subsidized the production and delivery of news and entertainment throughout the last century.”[4] Mossberg agrees and notes, “Without ads, most editorial products and other programming would be either unavailable or prohibitively expensive.”

The reason for the indispensability of advertising is simple: Information (including news and other forms of “content”) has “public good” characteristics that make it is very difficult (and occasionally impossible) for information-publishers to recoup their investments. Simply put, they quite literally lack pricing power: Whatever they charge, someone else will charge less for a close substitute, inevitably leading to “free” distribution of the content, even though the content is anything but free to produce. Advertising is the one business model that has traditionally saved the day by rewarding publishers for attracting the attention of an audience.

Which raises another under-appreciated point: Private advertising promotes press independence. “Newspapers, magazines, radio, television, and many websites all receive their primary income from advertising,” notes William F. Arens, author of Contemporary Advertising, another leading textbook in the field. “This facilitates freedom of the press and promotes more complete information” he concludes.[5] Why? Because, contrary to what some critics claim, advertising and marketing help keep private media providers independent of the need for taxpayer subsidies or private patrons. This begs an even more profound question: If not advertising, then what else?

A “Public Option” for the Press?

What’s most troubling about Chairman Leibowitz’s comments to the Times is that he has apparently found his alternative to advertising: a “public option” for the press! He mentions special tax treatment for newspapers or a new CPB-like fund (don’t we already have one?) as two possibilities. That certainly will be music to the ears of radical, pro-regulatory activist groups like the ironically-named “Free Press,” which wants to see a massive “public works” program for the media sector.

Free Press recently filed comments with the FTC in the agency’s recent workshop, “Can Journalism Survive the Internet Age?” and proposed a far-reaching industrial policy for “saving the news.” They call for over $50 billion in subsidies for the Corporation for Public Broadcasting and other bureaucracies, a “journalism jobs program” for that would be part of AmeriCorps, a variety of new tax incentives for struggling media operations or individuals who support favored institutions, and an assortment of government incentives to encourage local ownership and media divestiture (by handing over control to smaller operators or minority-owned groups). Ironically, “Free Press” has also floated the concept of “a small tax on advertising” as one way to pay for a press bailout.

The organization’s founder Robert W. McChesney, the prolific neo-Marxist media scholar, penned an essay with John Nichols of The Nation last year, claiming that saving journalism essentially requires that media become an appendage of the State. Although advertising has supported journalism as a “public good” for centuries, the only way they can conceive to provide a public good is to socialize its means of production. Thus, journalism, like education and national defense, requires constant government oversight and support: “A moment has arrived at which we must recognize the need to invest tax dollars to create and maintain news gathering, reporting and writing with the purpose of informing all our citizens.” They ask us to consider the $60 billion in government spending they propose as a “free press ‘infrastructure project,’” which would “keep the press system alive.”

Some in Congress seem willing to listen. The Senate has already held hearings about the future of journalism. And Senator Benjamin L. Cardin (D-MD) recently introduced what he has called the “Newspaper Revitalization Act,” which would allow newspapers to become nonprofit organizations in an effort to help them stay afloat. Importantly, however, the bill would also disallow political endorsements on newspaper editorial pages—which, like campaign finance restrictions, would be a boon for incumbent politicians. That bill should serve as fair warning to journalists about the sort of strings lawmakers will attach to press-welfare efforts going forward. What other “golden shackles” might come with media subsidies?

To be clear, Chairman Leibowitz hasn’t called for a complete press takeover along the lines of the Free Press plan. Yet, he hasn’t answered a key question in this debate: Who pays for news? He appears ready to endorse a bold new regulatory scheme for the Internet and online media that, in the name of “protecting privacy” would put at risk the one traditionally successful method of supporting private media operations—advertising. As the Pew Research Center’s Project for Excellence in Journalism noted in its latest State of the News Media report, “The problem facing American journalism is not fundamentally an audience problem or a credibility problem. It is a revenue problem—the decoupling… of advertising from news.” There’s probably no way policymakers can stop this process, nor should they try. But they shouldn’t be creating new obstacles to the survival of traditional media creators, either.

Unfortunately, that’s exactly what Chairman Leibowitz’s new regulatory scheme would do. The revenue “delta” between “smart” advertising (tailored to consumers’ likely interests and measured for effectiveness in producing clicks, purchases, etc.) and “dumb advertising” (based purely on surrounding keywords or demographics of users presumed to visit the site) is difficult to measure but potentially enormous—even 10 times as great for some sites.[6] The difference between opt-in and opt-out could be nearly as dramatic, because it’s difficult to get consumers to opt-in for anything, especially for small players—which means that opt-in regulation could, perversely, force consolidation in the online advertising and content markets. If the FTC cares about its statutory responsibility to safeguard competition, they should take this dynamic seriously and be hyper-cautious about heavy-handed mandates that could derail smarter advertising.

Finally, to be fair, in his interview, the Chairman also suggests the newspaper industry might want to find new way “to charge fees for the re-use of its content.” We’re certainly not opposed to the notion and think that, if it could somehow be made to work (especially by removing antitrust obstacles), it could part of a diverse revenue mix for digital journalism. But, there’s the rub. Micropayments inevitably face the problem of “mental transaction costs” that likely swamp the perceived value of most content and, like pay-walls, have generally worked only in media environments characterized by a scarcity of providers and a uniqueness of a sufficiently valuable product. These cold, hard economic realities are why advertising remains indispensable.

The Principled Alternative to Regulation

Convinced that privacy policies simply don’t work, Leibowitz and Vladeck are asking what a “post-disclosure era” would look like. We appreciate the continued sensitivities expressed by certain groups and individuals about online privacy and data use more generally. But there is another way forward. We have proposed the following “5-E” layered approach to concerns about online privacy, focusing on restraining government access to data as a clear harm, rather than crippling the private sector uses of data that directly benefit consumers:

Erect a higher “Wall of Separation between Web and State” by increasing Americans’ protection from government access to their personal data—thus bringing the Fourth Amendment into the Digital Age.
Educate users about privacy risks and data management in general as well as specific practices and policies for safer computing.
Empower users to implement their privacy preferences in specific contexts as easily as possible.
Enhance self-regulation by industry sectors and companies to integrate with user education and empowerment.
Enforce existing laws against unfair and deceptive trade practices as well as state privacy tort laws.

Such a layered approach would not only be a “less restrictive” alternative to top-down, one-size-fits-all government regulation, but also potentially more effective in key respects than government data use/collection mandates. In an ideal world, adults would be fully empowered to tailor privacy decisions, like speech decisions, to their own values and preferences (“household standards”). Consumers would have (1) the information necessary to make informed decisions and (2) the tools and methods necessary to act upon that information. Importantly, those tools and methods would give them the ability to block the things they don’t like—annoying ads or the collection of data about them, as well as objectionable content—while also helping them find the information and content they desire.

But of course, the devil’s in the details. Leibowitz and Vladeck would set the bar so high as to what constitutes “effective” consumer choice that current privacy policies necessarily fail their test—if only because most users don’t care enough to make the “right” privacy choices. Privacy policies, even if read by relatively few consumers, nonetheless allow privacy advocates, journalists and watchdog-bloggers to scrutinize what companies say they’re doing—promises to which the FTC should hold companies stringently. That’s clearly not good enough for Leibowitz and Vladeck, who want to give up on “notice and choice” and move on to “opt-in” mandates. But why not first try to make “notice” more effective? The advertising industry is currently developing standardized interfaces that could communicate key information about privacy practices in a single icon, label or other easily-digested “consumer touch point.”

More radically, why focus on tinkering with consumer interfaces, when standardized data disclosure formats like the Protocol for Privacy Preferences (P3P) could distill legalistic privacy policies into “machine-readable” code? Such disclosures could provide a powerful form of “notice” that the ordinary consumer could “use”: simply setting their own privacy preferences in a browser tool that automatically implements those preferences by blocking tracking that users object to. Such a privacy disclosure format could also allow the FTC to automate enforcement of its existing authority to punish unfair or deceptive trade practices.

Conclusion

And so we return to the question the FTC asked in its recent workshop, “Can Journalism Survive the Internet Age?” Answer: Not if the FTC kills the golden goose that lays the golden eggs through onerous advertising regulations and data controls in the name of “privacy.” Chairman Leibowitz and Bureau Chief Vladeck shouldn’t foreclose the possibility that advertising can play a central role in the future of a free press in the Digital Age—just as it has done historically in the United States. Indeed, they would be wise to remember that advertising has always been with us. As the Supreme Court noted in its 1996 decision, 44 Liquormart, Inc. v. Rhode Island.

Advertising has been a part of our culture throughout our history. Even in colonial days, the public relied on “commercial speech” for vital information about the market. Early newspapers displayed advertisements for goods and services on their front pages, and town criers called out prices in public squares. Indeed, commercial messages played such a central role in public life prior to the founding that Benjamin Franklin authored his early defense of a free press in support of his decision to print, of all things, an advertisement for voyages to Barbados.[7]

Of course, for advertising to continue to play the role as sustainer of the press, it must be allowed to evolve. Media operators—large and small alike—must be allowed to craft new strategies, some of which may require data collection and marketing practices that will make some privacy-sensitive users uncomfortable, but will also ensure that the goose keeps on laying golden eggs for them and everyone else.

While Chairman Leibowitz may decry the creative destruction at work in the news sector and information industries today, that shakeup will continue and, no doubt, be painful for incumbent players. Advertising alone may not “save the day” for media as it has in the past, but it will likely remain essential to sustaining private media platforms and providers going forward— if federal policymakers allow it. The alternative—massive government intervention into the news and media sectors—is too horrifying to think about.

Adam Thierer is President of The Progress & Freedom Foundation and Director of PFF’s Center for Digital Media Freedom. Berin Szoka is a PFF Senior Fellow and Director of PFF’s Center for Internet Freedom. The views expressed herein are their own, and are not necessarily the views of the PFF board, fellows or staff.

[1] Washington Post, March 1, 1978.

[2] Congress terminated the FTC’s efforts to prohibit advertising to children, and barred the agency from issuing any advertising regulation predicated solely on unfairness for three years. FTC Improvements Act, Pub. L. No. 96-252, § 11 (May 1980). See generally J. Howard Beales, Director of the Bureau of Consumer Protection, Federal Trade Commission, The FTC’s Use of Unfairness Authority: Its Rise, Fall, and Resurrection, www.ftc.gov/speeches/beales/unfair0603.shtm.

[3] Thomas Rosch, Some Reflections on the Future of the Internet: Net Neutrality, Online Behavioral Advertising, and Health Information Technology, Remarks at U.S. Chamber of Commerce Telecommunications & E-Commerce Committee Fall Meeting, October 26, 2009, 13, www.ftc.gov/speeches/rosch/091026chamber.pdf.

[4] Harold L. Vogel, Entertainment Industry Economics (Cambridge, MA: Cambridge University Press, 7th Edition, 2007), at 46.

[5] William F. Arens, Contemporary Advertising (McGraw-Hill Irwin, 10^th Ed., 2006) at 50.

[6] See Berin Szoka & Mark Adams, The Benefits of Online Advertising & Costs of Privacy Regulation, PFF Working Paper, Nov. 8, 2009, www.scribd.com/doc/22445754/Benefits-of-Online-Advertising-Paper.

[7] 517 U.S. 484, 495 (1996), http://www.law.cornell.edu/supct/html/94-1140.ZO.html

______________________________

Related PFF Publications

Privacy Trade-Offs: How Further Regulation Could Diminish Consumer Choice, Raise Prices, Quash Digital Innovation & Curtail Free Speech, Berin Szoka, Comments to the Federal Trade Commission “Exploring Privacy” Roundtable, November 10, 2009.
Online Advertising & User Privacy: Principles to Guide the Debate, Berin Szoka & Adam Thierer, Progress Snapshot 4.19, Sept. 2008.
Targeted Online Advertising: What’s the Harm & Where Are We Heading?, Berin Szoka & Adam Thierer, Progress on Point 16.2, April 2009.
Privacy Polls v. Real-World Trade-Offs, Berin Szoka, Progress Snapshot 5.10, Oct. 2009.
The Benefits of Online Advertising & Costs of Privacy Regulation, Berin Szoka & Mark Adams, PFF Working Paper, Nov. 8, 2009.
Benefits of Online Advertising, Berin Szoka, Mark Adams, Howard Beales, Thomas Lenard & Jules Polonetsky, PFF Capitol Briefing, July 2009.
Public Option for Press Should Get the Red Pen, Adam Thierer, The Daily Caller, Jan. 12, 2010.

What Unites Advocates of Speech Controls & Privacy Regulation?

Adam Thierer — Tue, 11 Aug 2009 17:31:04 +0000

What Unites Advocates of Speech Controls & Privacy Regulation? [pdf]

by Adam Thierer & Berin Szoka The Progress & Freedom Foundation, Progress on Point No. 16.19

Anyone who has spent time following debates about speech and privacy regulation comes to recognize the striking parallels between these two policy arenas. In this paper we will highlight the common rhetoric, proposals, and tactics that unite these regulatory movements. Moreover, we will argue that, at root, what often animates calls for regulation of both speech and privacy are two remarkably elitist beliefs:

People are too ignorant (or simply too busy) to be trusted to make wise decisions for themselves (or their children); and/or,
All or most people share essentially the same values or concerns and, therefore, “community standards” should trump household (or individual) standards.

While our use of the term “elitism” may unduly offend some understandably sensitive to populist demagoguery, our aim here is not to launch a broadside against elitism as Time magazine culture critic William H. Henry once defined it: “The willingness to assert unyieldingly that one idea, contribution or attainment is better than another.”^[1] Rather, our aim here is to critique that elitism which rises to the level of political condescension and legal sanction. We attack not so much the beliefs of some leaders, activists, or intellectuals that they have a better idea of what it in the public’s best interest than the public itself does, but rather the imposition of those beliefs through coercive, top-down mandates.

That sort of elitism—elitism enforced by law—is often the objective of speech and privacy regulatory advocates. Our goal is to identify the common themes that unite these regulatory movements, explain why such political elitism is unwarranted, and make it clear how it threatens individual liberty as well as the future of free and open Internet. As an alternative to this elitist vision, we advocate an empowerment agenda: fostering an environment in which users have the tools and information they need to make decisions for themselves and their families.

I. The Elitism of Speech Regulation

First, consider how those two elitist beliefs identified above are on display when lawmakers or regulatory advocates make efforts to control speech or content.^{^[2]} Calls to regulate free speech are often premised on the belief that something must be done to “protect The Children.”^{^[3]} Personal and parental responsibility ^{^[4]} are regarded as inadequate safeguards ^{^[5]} since some parents will inevitably fall down on the job by not adequately shielding their children’s eyes and ears from potentially objectionable (or supposedly harmful) speech. Therefore, government must regulate content that is indecent, profane, excessively violent, and so on. The definition of those things is then left to unelected bureaucrats and judges to make on our behalf.

But it’s not just about “The Children.” Some regulatory advocates believe that even the choices made by consenting adults must be disregarded because some people fail to understand the supposedly destructive nature of the speech they are consuming. Government must act to protect people from making what some regulatory advocates regard as destructive or even immoral choices that could bring harm to them or their loved ones.

In sum, regulatory advocates are essentially saying that people cannot be trusted or left to their own devices and, therefore, government must intervene and establish a baseline “community standard” on behalf of the entire citizenry to tell them what‘s best for them.^{^[6]} Even if those citizens have tools and information at their disposal to make sensible decisions about objectionable content, that’s not good enough because they might not do the job properly. Government must do it for them!

II. The Elitism of Privacy Regulation

This same mentality motivates calls for privacy regulations. Those who call for government interventions to “protect privacy” often claim that people too willingly surrender personal information about themselves and that they don’t understand the adverse consequences of those actions.^{^[7]} Alternatively, regulatory advocates claim that advertising and marketing efforts are inherently “manipulative” and that people do not realize they are being duped into surrendering personal information or into buying products or services they supposedly don’t need.^{^[8]} Of course, those regulatory advocates rarely pause to explain to us how it is that they were not also duped and manipulated by the same things—again revealing their deeply-rooted elitism! (As discussed below, this makes it clear how the psychological phenomenon of “third-person effect hypothesis” is driving much of this debate.)

“Protecting The Children” is also used as a rhetorical cover for regulation here, but not as often in debates over speech controls.^{^[9]} Instead, regulatory advocates mostly focus on adults who are presumed not to know what is in their own best interest—necessitating paternalistic government intervention on their behalf.

III. Intellectual Schizophrenia on Both the Left & Right

What is particularly interesting about all this is the way these two issues expose a sort of intellectual schizophrenia at work on both the Left and Right of the political spectrum. Left-leaning policymakers and intellectuals typically decry censorship efforts (except where “commercial speech,” “hate speech” and “bias” are at issue), but are quick to rally around proposals to layer privacy regulations on the Internet. The opposite is often true of many on the Right of the political spectrum: They typically declare privacy regulations to be paternalistic and antithetical to free enterprise (or perhaps just erosive of efforts to legislate morality),^[10] but in the next breath advocate controls on content they find objectionable.

Few on either side stop to consider the relationship between speech and privacy. In fact, they are but two sides of the same coin. After all, what is your “right to privacy” but a right to stop me from observing you and speaking about you?^{^[11]} “Protecting privacy,” therefore, typically means restricting speech rights in the process. Advocates of privacy regulation often insist that the use, processing and collection of information are “conduct” unprotected by the First Amendment, but in fact, the First Amendment broadly protects the gathering and distribution of information as part of the process of communication (“speech”).^[12] Similarly, attempts to “clean up” speech or “protect The Children,” often require regulations that would betray the privacy of adults by expanding the role of government, and impose serious burdens on businesses and markets—such as age verification mandates ^[13] or extensive data retention requirements.^[14]

IV. Common Tactics & Regulatory Mechanisms

The two movements also share common political tactics and regulatory approaches. Privacy advocates generally favor “opt-in” mandates as the federal “baseline standard” for any website collecting information about users, especially their browsing habits (regardless of whether the information is “personally identifiable”). In other words, the law would create a property right in such “personal information” (ironically, many advocates of this approach criticize or reject intellectual property.) In a similar vein, many advocates of speech controls push for mandatory parental control tools or restrictive default settings.^{^[15]} That is, if government won’t censor speech outright, regulatory advocates want lawmakers to at least (1) require that media, computing and communications devices be shipped to market with parental controls embedded or included (as proposed in Australia and with China’s “Green Dam” filter),^[16] and possibly, (2) that such controls be defaulted to their most restrictive position—forcing users to opt-out of the controls later if they want to consume media rated above a certain threshold.

More sophisticated advocates of speech controls and privacy regulation will likely argue that their paternalism is less elitist or intrusive because they merely want to “nudge” the public into making “better” decisions. Economist Richard Thaler and legal scholar Cass Sunstein (director of President Obama’s Office of Information and Regulatory Affairs, responsible for analyzing most new federal regulations) popularized this approach with their 2008 book Nudge: Improving Decisions about Health, Wealth, and Happiness. Based on behavioral economics studies, they argue that both government and private actors must inevitably make decisions about “choice architecture” and that, by setting defaults, incentives and rules smartly, “choice architects” can and should improve decision-making without blocking, fencing-off or significantly burdening choices.^[17]

In this regard, Sunstein and Thaler’s approach parallels the work of Lawrence Lessig, one of the most influential Internet policy thinkers. Lessig has argued that the “architecture” of “code” (how software is written) “regulates” all online activities and requires government oversight and intervention to keep in check. Otherwise, he warned ominously a decade ago, “Left to itself, cyberspace will become a perfect tool of control.”^[18] Lessig’s hyper-pessimistic predictions have proven unwarranted, however. Far from fostering a world of “perfect control,” code and cyberspace have proven remarkably difficult to regulate, but nonetheless has generally benefited consumers and citizens without centralized direction.^[19] Still, Lessig, Sunstein, and others of this ilk persist in their advocacy of “nudges” of many varieties to impose their will on cyberspace through mandates from above.

But while it might be possible to define “better decisions” and argue that poor choice architecture leads people to choose things they clearly don’t want in contexts like investment decisions and mortgages, how can elites know what other people really want in highly subjective contexts like privacy and speech? Should they rely on opinion polls—the highly subjective results of which depend heavily on “choice architecture” of question-crafting—to guess what the right default should be?^[20] Was the Chinese proposal to mandate deployment of “Green Dam” just a harmless “nudge” because users weren’t barred from uninstalling the filtering software that must accompany their computers (i.e., “opting-out”)? The problem becomes even more difficult where trade-offs among competing values are inevitable. For example, data collection about Internet users raises privacy concerns for some but benefits all, creating more funding for “free” content (i.e., speech) and services users prefer by making more valuable the advertising that supports online publishers. In short, regulations of speech and privacy are likely to be pure paternalism, even when billed as “libertarian paternalism as Thaler and Sunstein label their approach.^[21]

What might be called “regulatory blackmail” is also a time-honored tradition among both advocates of speech controls and privacy regulation. When censorship advocates have previously been impeded by the First Amendment, they have worked behind the scenes with lawmakers or regulatory agencies to use indirect pressure and strong-arming tactics to extract “voluntary concessions” from companies or others.^[22] For example, in 2004, the FCC strong-armed radio giant Clear Channel into agreeing to a “voluntary” consent decree that involved taking Howard Stern off the air.^[23] Similarly, in 2008, XM and Sirius Satellite Radio finally agreed to set aside 4% of their system capacity for use by politically favored racial minorities (a kind of speech control) as a “voluntary condition” of their merger—after the FCC had sat on their application for nearly 16 months.^[24] This race-based preference would have been unconstitutional if the FCC had imposed it directly.^{^[25]} While the FTC has been far less prone to such abuse and actually plays a key role in holding companies to their promises, its current Chairman, Jon Leibowitz, has hung the “regulatory sword of Damocles” over the heads of the online advertising industry, threatening them with a “day of reckoning” if he doesn’t get what he wants from industry self-regulatory efforts.”^[26] The sword could actually fall if the FTC turns self-regulation into the European model of “co-regulation,” where the government steers and industry simply rows.^[27]

V. The Crisis Mentality that Drives Regulation

Speech and privacy regulatory advocates share another trait in common: an affinity for the use of a crisis mentality as a method of spurring political action. In his 1995 book The Vision of the Anointed: Self-Congratulation as a Basis for Social Policy, political philosopher and economist Thomas Sowell formulated a model that he argued drives ideological crusades to expand government power over our lives and economy. “The great ideological crusades of the twentieth-century intellectuals have ranged across the most disparate fields,” noted Sowell. But what they all had in common, he argued, was “their moral exaltation of the anointed above others, who are to have their different views nullified and superseded by the views of the anointed, imposed via the power of government.”^[28] These government-expanding crusades shared several key elements, which Sowell identified as follows:

Assertion of a great danger to the whole society, a danger to which the masses of people are oblivious.
An urgent need for government action to avert impending catastrophe.
A need for government to drastically curtail the dangerous behavior of the many, in response to the prescient conclusions of the few.
A disdainful dismissal of arguments to the contrary as either uninformed, irresponsible, or motivated by unworthy purposes.

We see this model at work on a daily basis today with our government’s various efforts to reshape our economy, but the model is equally applicable to debates over speech controls and privacy regulation. In particular, the various “technopanics”^[29] we have witnessed in recent years fit this model. For example, consider how this model plays out in the debate over online social networking:

Assertion of a great danger to the whole society [online sexual predators], a danger to which the masses of people are oblivious.
An urgent need for government action [such as mandatory online age verification ^[30] or the Deleting Online Predators Act ^[31]] to avert impending catastrophe.
A need for government to drastically curtail the dangerous behavior of the many [must stop kids and adults from being online together on same sites], in response to the prescient conclusions of the few [some state Attorneys General].^[32]
A disdainful dismissal of arguments to the contrary as either uninformed, irresponsible, or motivated by unworthy purposes [child safety researchers and others are told that their research is meaningless or offbase].^[33]

We also see this model in play in other debates, such as efforts to regulate “excessively violent” video games and television programming.^[34] And consider how this model plays out on the privacy front:

Assertion of a great danger to the whole society [amorphous privacy violations], a danger to which the masses of people are oblivious.
An urgent need for government action [“baseline federal privacy regulation”] to avert impending catastrophe.
A need for government to drastically curtail the dangerous behavior of the many [anyone who shares information online], in response to the prescient conclusions of the few [a handful of privacy advocacy groups].
A disdainful dismissal of arguments to the contrary as either uninformed, irresponsible, or motivated by unworthy purposes [any suggestion that privacy concerns are being overblown and that most information-sharing is socially beneficial is dismissed out-of-hand].

Worse yet, regulatory intervention in these cases simply begets more and more intervention to correct the inevitable failures of, or dissatisfaction with, previous interventions.^[35] Thus, the “crisis” cycle never ends.

VI. Third-Person Effect Hypothesis as an Explanation

Something more profound than simple political elitism seems to be at work here, however. A phenomenon psychologists refer to as the “third-person effect hypothesis” can explain many calls for government intervention, especially in the media world.^{^[36]} Simply stated, speech and privacy critics sometimes seem to only see and hear in media or communications what they want to see and hear—or what they don’t want to see or hear. When they encounter perspectives or preferences that are at odds with their own, they are more likely to be concerned about the impact of those things on others throughout society and come to believe that government must “do something” to correct those perspectives. Many people desire regulation because they think it will be good for others, not necessarily for themselves. The regulation they desire has a very specific purpose in mind: “re-tilting” speech or market behavior in their desired direction.

The third-person effect hypothesis was first formulated by W. Phillips Davison in a seminal 1983 article:

In its broadest formulation, this hypothesis predicts that people will tend to overestimate the influence that mass communications have on the attitudes and behavior of others. More specifically, individuals who are members of an audience that is exposed to a persuasive communication (whether or not this communication is intended to be persuasive) will expect the communication to have a greater effect on others than on themselves.^[37]

Davison used this hypothesis to explain how media critics on both the Left and Right seemed to simultaneously find “bias” in the same content or reports when they couldn’t possibly both be correct. In reality, their own personal preferences were biasing their ability to fairly evaluate that content. Davison’s article prompted further research by many other psychologists, social scientists, and public opinion experts to test just how powerful this phenomenon was in explaining calls for censorship and other social phenomena.^{^[38]} In these studies, third-person effect has been shown to be the primary explanation for why many people fear—or even want to ban—various types of speech or expression, including news,^{^[39]} misogynistic rap lyrics,^{^[40]} television violence,^{^[41]} video games,^{^[42]} and pornography.^{^[43]} In each case, the subjects surveyed expressed strong misgivings about allowing others to see or hear too much of the speech or expression in question, but greatly discounted the impact of that speech on themselves. Such studies thus reveal the strong paternalistic instinct behind proposals to regulate speech. As Davison notes:

Insofar as faith and morals are concerned… it is difficult to find a censor who will admit to having been adversely affected by the information whose dissemination is to be prohibited. Even the censor’s friends are usually safe from the pollution. It is the general public that must be protected. Or else, it is youthful members of the general public, or those with impressionable minds.^{^[44]}

It’s easy to see how this same phenomenon is at work in debates about privacy. Regulatory advocates imagine their preferences are “correct” (right for everyone) and that the masses are being duped by external forces beyond their control or comprehension, even though the advocates themselves are somehow immune from the brain-washing and privy to some higher truth that the hoi polloi simply cannot fathom. Again, this is Sowell’s “Vision of the Anointed” at work.

Consider the flare-up in 2004 over the introduction of Gmail, Google’s free email service. At a time when Yahoo! mail (then as now the leading webmail provider) offered customers less than 10 megabytes of email storage, Gmail offered an astounding gigabyte of storage that would grow over time (now over 7 GB). Rather than charging some users for more storage or special features, Google paid for the service by showing advertisements next to each email “contextually” targeted to keywords in that email—a far more profitable form of advertising than “dumb banner” ads previously used by other webmail providers.^[45] Self-appointed (or, to extend Sowell’s framework, “self-anointed”) privacy advocates howled that Google was going to “read users’ email,” and led a crusade to ban such algorithmic contextual targeting.^[46] Thierer responded to these critics by pointing out that the service was purely voluntary and noted:

you don’t speak for me and a lot of other people in this world who will be more than happy to cut this deal with Google. So do us a favor and don’t ask the government to shut down a service just because you don’t like it. Privacy is a subjective condition and your value preferences are not representative of everyone else’s values in our diverse nation. Stop trying to coercively force your values and choices on others. We can decide these things on our own, thank you very much.^[47]

Interestingly, however, the frenzy of hysterical indignation about Gmail was followed by a collective cyber-yawn: Users increasingly understood that algorithms, not humans, were doing the “reading” and that, if they didn’t like it, they didn’t have to use it. Today, nearly 150 million of people around the world use Gmail, and it has a steadily growing share of the webmail market. Even though cyber-consumers have embraced the service, some privacy advocates persist in their effort to shut down Gmail. They appear determined to stop at nothing to impose their will on others—the essence of political elitism—even if that means cutting off free email service for 150 million people!^{^[48]}

A similar debate has played out more recently regarding targeted online advertising in general. Advertising on search engines is, much like Gmail, targeted “contextually” based on search terms entered by users and most advertising on other websites is based on the nature of content on a site or page. But certain data is collected about users as they browse to make that advertising more effective—by measuring its performance, reducing fraud, preventing over-exposure, etc. Some privacy advocates have insisted that industry self-regulation of such practices (even if enforced by the FTC) is inadequate and have called for preemptive regulation. They are even more offended by “behavioral advertising” which allows publishers whose content would have little value as the basis for contextually targeting advertising on their own sites to compete for more highly valued advertising by showing ads to users based on other sites they’ve visited. In both cases, data collection can increase the funding available to publishers to produce more of the content and services preferred by users, thus conferring an enormous indirect benefit on users, but also directly benefits users by increasing the relevance of the advertising they see.^[49] For some of the more extreme advocates of privacy regulation, however, there are no trade-offs, only absolutist “solutions:” To them, privacy is so obviously desirable that they feel at ease in deciding what’s best for everyone else. Such absolutists often respond with righteous indignation and conspiratorial fulmination when challenged to identify the harm against which they’re protecting consumers, while disdainfully dismissing all talk of the benefits of online advertising as self-serving industry propaganda.^[50]

VII. The Principled Alternative: Trust People & Empower Them

There is an alternative to this elitist mentality: freedom and personal responsibility. Individuals should be permitted to live a life of their own, even if they sometimes make mistakes or choices that are at odds with what elites think is best for them. ^[51]

Of course, the world isn’t perfect. In an ideal world, adults would be fully empowered to tailor speech and privacy decisions to their own values and preferences. Specifically, in an ideal world, adults (and parents) would have (1) the information necessary to make informed decisions and (2) the tools and methods necessary to act upon that information. Importantly, those tools and methods would give them the ability to not only block the things they don’t like—objectionable content, annoying ads or the collection of data about them—while also finding the things they want.

Achieving that ideal is likely impossible, but the good news is that we are moving closer to it with each passing day. Citizens have more tools and methods at their disposal than ever before which enable them to make decisions for themselves and their families. And this is true for both parental controls ^{^[52]} and privacy controls.^{^[53]}

Of course, some speech and privacy elitists will argue that we can’t trust empowerment tools ( e.g., filters, rating systems, or other controls) that are created by companies or other affected parties. But rather than trying to enhance those tools and educate users about how to use them, these elitists skip right past user empowerment and channel their energies into regulations that would impose a top-down, one-size-fits all standard on all adults and families—or even into trying to craft the perfect “nudge” that will help users make what elites believe to be the “right” decisions. Of course, these tools can, and should, be improved. Those groups worried about speech/content and privacy issues should focus on how we might drive such protections from the bottom-up by empowering individuals instead of government bureaucrats. The goal in both cases should be a “let-a-thousand-flowers-bloom” approach, which offers diverse tools and strategies for our diverse citizenry.^{^[54]} We need not accept “one-size-fits” all approaches, whether they be regulatory mandates or “nudges,” based on the presumption that elites know best.

Finally, it is vital not to lose sight of what’s ultimately at stake here. If regulatory approaches trump the empowerment agenda we have described, the future of a free and open Internet—indeed, as technology converges, the future of all media—is at risk.^[55] By imposing technological solutions from the top-down that can never keep pace with technological change, regulation necessarily forecloses freedom and innovation.^[56] By contrast, individual empowerment allows innovation to flourish. The better approach across the board is education, not regulation.^{^[57]} Empowerment, not elitism, is the path forward. The digital elite should be leading this effort by developing and promoting technologies of empowerment, not crafting regulatory mandates to force their will upon us.^[58]

#

Adam Thierer is a Senior Fellow with The Progress & Freedom Foundation and the director of its Center for Digital Media Freedom. Berin Szoka is a Senior Fellow with PFF and the Director of PFF’s Center for Internet Freedom.

[1] . William A. Henry, In Defense of Elitism (1995) at 2-3.

[2] . See Adam Thierer, The Progress & Freedom Foundation, Congress, Content Regulation, and Child Protection: The Expanding Legislative Agenda, Progress Snapshot 4.4, Feb. 2008, www.pff.org/issues-pubs/ps/2008/ps4.4childprotection.html. Like American courts, we use the term “speech” as a broad catch-all for communications, including both actual speaking as well as other forms of transmitting, as well as receiving, information (“content”).

[3] . See generally Adam Thierer, Don’t Scapegoat Media, USA Today, Dec. 4, 2008, www.pff.org/issues-pubs/ps/2008/ps4.24scapegoatmedia.html; Marjorie Heins, Not in Front of the Children, “Indecency,” Censorship, and the Innocence of Youth (2001); Karen Sternheimer, It’s Not the Media: The Truth about Pop Culture’s Influence on Children (2003); Karen Sternheimer, Kids These Days: Facts and Fictions about Today’s Youth (2006).

[4] . See Adam Thierer, The Progress & Freedom Foundation, FCC Violence Report Concludes that Parenting Doesn’t Work, PFF Blog, Apr. 26, 2007, http://blog.pff.org/archives/2007/04/fcc_violence_re.html.

[5] . See Adam Thierer, The Progress & Freedom Foundation, Sen. Rockefeller Gives Up on Parenting at Senate Violence Hearing, PFF Blog, June 26, 2007, blog.pff.org/archives/2007/06/sen_rockefeller_1.html.

[6] . Adam Thierer, Conservatives, Porn, and “Community Standards,” The Technology Liberation Front, March 2, 2009, http://techliberation.com/2009/03/02/conservatives-porn-and-community-standards.

[7] . Berin Szoka & Adam Thierer, The Progress & Freedom Foundation, Online Advertising & User Privacy: Principles to Guide the Debate, Progress Snapshot 4.19, Sept. 2008, www.pff.org/issues-pubs/ps/2008/ps4.19onlinetargeting.html.

[8] . Jeff Chester, for decades the great gadfly of American advertising, has decried “the system … developed to track each and every one of us and our behavior for one-on-one marketing efforts” as “manipulative, intrusive and un-democratic.” Wendy Melillo, Q&A: Chester Writes the Book on Privacy, Dec. 11, 2007, www.gfem.org/node/227. For instance, Chester and other leading “privacy advocates” ridicule the idea of smart phones as a “liberating technology” and insist that,

Despite the glowing words about customization and personalized service, what marketers and advertisers are increasingly offering consumers is merely the illusion of free choice. Mobile operators offer their various options and services, not on an individual basis, but preconfigured according to segmented demographic profiles.

Center for Digital Democracy and U.S. Public Interest Research Group, Complaint and Request for Inquiry and Injunctive Relief Concerning Unfair and Deceptive Mobile Marketing Practices, Jan. 13, 2009 (emphasis original), www.democraticmedia.org/files/FTCmobile_complaint0109.pdf. See generally Berin Szoka & Adam Thierer, The Progress & Freedom Foundation, Targeted Online Advertising: What’s the Harm & Where Are We Heading?, Progress on Point 16.2, Feb. 2009, www.pff.org/issues-pubs/pops/2009/pop16.2targetonlinead.pdf.

[9] . Berin Szoka & Adam Thierer, The Progress & Freedom Foundation, COPPA 2.0: The New Battle over Privacy, Age Verification, Online Safety & Free Speech, Progress on Point 16.11, May 2009, www.pff.org/issues-pubs/pops/2009/pop16.11-COPPA-and-age-verification.pdf.

[10] . The Supreme Court has used a “right to privacy” to strike down laws against the use of contraception by married couples, Griswold v Connecticut, 381 U.S. 479 (1965), and abortion, Roe v. Wade, 410 U.S. 113 (1973).

[11] . Eugene Volokh, Freedom of Speech and Information Privacy: The Troubling Implications of a Right to Stop People From Speaking About You, 52 Stanford L. Rev. 1049 (2000), available at www.pff.org/issues-pubs/pops/pop7.15freedomofspeech.pdf.

[12] . See , Amicus Brief for Association Of National Advertisers, Cato Institute, Coalition For Healthcare Communication, Pacific Legal Foundation And The Progress & Freedom Foundation In Support Of Appellants, IMS Health v. Sorrell, No. 09-1913-cv(L), 09-2056-cv(CON) (2nd Cir. 2009), available at www.pff.org/issues-pubs/filings/2009/071309-Brief-Amici-Curiae-ANA-et-al-Second-Circuit-(09-1913-cv).pdf.

[13] . See Adam Thierer, The Progress & Freedom Foundation, Social Networking and Age Verification: Many Hard Questions; No Easy Solutions, Progress on Point No. 14.5, March 2007, www.pff.org/issues-pubs/ pops/pop14.8ageverificationtranscript.pdf; www.pff.org/issues-pubs/pops/pop14.5ageverification.pdfAdam Thierer, The Progress & Freedom Foundation, Statement Regarding the Internet Safety Technical Task Force’s Final Report to the Attorneys General, Jan. 14, 2008, www.pff.org/issues-pubs/other/090114ISTTFthiererclosingstatement.pdf; Nancy Willard, Why Age and Identity Verification Will Not Work—And is a Really Bad Idea, Jan. 26, 2009, www.csriu.org/PDFs/digitalidnot.pdf; Jeff Schmidt, Online Child Safety: A Security Professional’s Take, The Guardian, Spring 2007, www.jschmidt.org/AgeVerification/Gardian_JSchmidt.pdf.

[14] . Adam Thierer, The Progress & Freedom Foundation, Mandatory Data Retention: How Much is Appropriate, PFF Blog, June 26, 2006, http://blog.pff.org/archives/2006/06/mandatory_data.html

[15] . Adam Thierer, The Progress & Freedom Foundation, The Perils of Mandatory Parental Controls and Restrictive Defaults, Progress on Point 14.4, Apr. 11, 2008, www.pff.org/issues-pubs/pops/2008/pop15.4defaultdanger.pdf.

[16] . Adam Thierer, China’s Green Dam Filter and the Threat of Rising Global Censorship, PFF Blog, June 17, 2009, http://blog.pff.org/archives/2009/06/chinas_green_dam_filter_and_threat_of_rising_globa.html

[17] . They define choice architecture as follows: “A structure designed by a choice architect(s) to improve the quality of decisions made by homo sapiens. Often invisible, choice architecture is the specific user-friendly shape of an organization’s policy or physical building when homo sapiens come into contact with it. Examples of choice architecture include a voter ballot, a procedure for handling well-meaning people who forget a deadline, or a skyscraper.” Nudge Glossary of Terms, www.nudges.org/glossary.cfm.

[18] . Lawrence Lessig, Code and Other Laws of Cyberspace (1999) at 6.

[19] . See Adam Thierer, Code, Pessimism, and the Illusion of “Perfect Control,” Cato Unbound, May 2009, www.cato-unbound.org/2009/05/08/adam-thierer/code-pessimism-and-the-illusion-of-perfect-control

[20] . See Solveig Singleton & Jim Harper, With A Grain of Salt: What Consumer Privacy Surveys Don’t Tell Us, 2001, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=299930.

[21] . As Cato Institute scholar Will Wilkinson has argued, the book’s “agreeably banal doctrine of choice-preserving helpfulness” blurs the lines between paternalism and libertarianism, and thus “the thrust of the conceptual renovation behind the term libertarian paternalism is to empower, not limit, political elites.” Why Opting Out Is No “Third Way,” Reason, October 2008, www.reason.com/news/show/128916.html. See also Adam Thierer, The Progress & Freedom Foundation, Sunstein’s “Libertarian Paternalism” is Really Just Paternalism, PFF Blog, April 7, 2008, http://blog.pff.org/archives/2008/04/sunsteins_liber.html.

[22] . See Robert Corn-Revere, “’Voluntary’ Self-Regulation and the Triumph of Euphemism,” in Rationales & Rationalizations: Regulating the Electronic Media (Robert Corn-Revere, ed., 1997), at 183-208.

[23] . Telecom Policy Report, Commission Settles Indecency Charges, But At What Cost?, June 30, 2004, http://findarticles.com/p/articles/mi_m0PJR/is_25_2/ai_n6091525.

[24] . See Adam Thierer, XM-Sirius, Regulatory Blackmail, and Diversity, June 17, 2008, http://blog.pff.org/archives/2008/06/xmsirius_regula.html.

[25] . See Comments of W. Kenneth Ferree on Implementation of Sirius-XM Merger Condition, The Progress & Freedom Foundation, MB Docket No. 07-57, March 30, 2009, www.pff.org/issues-pubs/filings/2009/033009siriusXMconditionfiling.pdf.

[26] . See Szoka & Adam Thierer, supra note 8 at 3.

[27] . See id. at 2.

[28] . Thomas Sowell, The Vision of the Anointed: Self-Congratulation as a Basis for Social Policy (1995) at 5.

[29] . Alice Marwick, To Catch a Predator? The MySpace Moral Panic, First Monday, Vol. 13, No. 6-2, June 2008, www.uic.edu/htbin/cgiwrap/bin/ojs/index.php/fm/article/view/2152/1966; Wade Roush, The Moral Panic over Social Networking Sites, Technology Review, Aug. 7, 2006, www.technologyreview.com/communications/17266; Anne Collier, Why Techopanics are Bad, Net Family News, April 23, 2009, www.netfamilynews.org/2009/04/why-technopanics-are-bad.html; Adam Thierer, Parents, Kids & Policymakers in the Digital Age: Safeguarding Against ‘Techno-Panics,’ Inside ALEC, July 2009, at 16-17, www.alec.org/am/pdf/Inside_July09.pdf; Adam Thierer, Progress & Freedom Foundation, Technopanics and the Great Social Networking Scare, PFF Blog, June 10, 2008, http://techliberation.com/2008/07/10/technopanics-and-the-great-social-networking-scare.

[30] . Supra note 13.

[31] . In the 109th Congress, former Rep. Michael Fitzpatrick (R-PA) introduced the Deleting Online Predators Act (DOPA), which proposed a ban on social networking sites in public schools and libraries. DOPA passed the House of Representatives shortly thereafter by a lopsided 410-15 vote, but failed to pass the Senate. The measure was reintroduced just a few weeks into the 110th Congress by Senator Ted Stevens (R-AK), the ranking minority member and former chairman of the Senate Commerce Committee. It was section 2 of a bill that Sen. Stevens sponsored titled the “Protecting Children in the 21st Century Act” (S. 49), but was later removed from the bill. See Declan McCullagh, Chat Rooms Could Face Expulsion, CNet News.com, July 28, 2006, http://news.com.com/2100-1028_3-6099414.html?part=rss&tag=6099414&subj=news.

[32] . See Emily Steel & Julia Angwin, MySpace Receives More Pressure to Limit Children’s Access to Site, Wall Street Journal, June 23, 2006, online.wsj.com/public/article/SB115102268445288250-YRxkt0rTsyyf1QiQf2EPBYSf7iU_20070624.html; Susan Haigh, Conn. Bill Would Force MySpace Age Check, Yahoo News.com, March 7, 2007, www.msnbc.msn.com/id/17502005.

[33] . See, e.g., Letter of Henry McMaster, Attorney General, South Carolina to Attorney General Richard Blumenthal and Attorney General Roy Cooper Regarding Internet Safety Task Force (“ISTTF”) Report, January 14, 2009, www.scag.gov/newsroom/pdf/2009/internetsafetyreport.pdf

[34] . See Adam Thierer, The Progress & Freedom Foundation, Video Games and “Moral Panic,” PFF Blog, Jan. 23, 2009, http://blog.pff.org/archives/2009/01/video_games_and_moral_panic.html ; Adam Thierer, The Progress & Freedom Foundation, Fact and Fiction in the Debate over Video Game Regulation, Progress Snapshot 13.7, March 2006, www.pff.org/issues-pubs/pops/pop13.7videogames.pdf.

[35] . “All varieties of interference with the market phenomena not only fail to achieve the ends aimed at by their authors and supporters, but bring about a state of affairs which—from the point of view of their authors’ and advocates’ valuations—is less desirable than the previous state affairs which they were designed to alter. If one wants to correct their manifest unsuitableness and preposterousness by supplementing the first acts of intervention with more and more of such acts, one must go farther and farther until the market economy has been entirely destroyed and socialism has been substituted for it.” Ludwig von Mises, Human Action, at 858 (3rd ed. 1963) (1949).

[36] . See generally Adam Thierer, The Progress & Freedom Foundation, Media Myths: Making Sense of the Debate over Media Ownership (2005) at 119-123, www.pff.org/issues-pubs/books/050610mediamyths.pdf (Explaining how the third-person effect serves as a powerful explanation for the heated backlash that followed an FCC effort to moderately liberalize media ownership rules in 2003-04).

[37] . W. Phillips Davison, The Third-Person Effect in Communication, 47 Public Opinion Quarterly 1, Spring 1983, at 3.

[38] . For the best overview of third-person effect research, see Douglas M. McLeod, Benjamin H. Detenber, and William P. Eveland., Jr., Behind the Third-Person Effect: Differentiating Perceptual Processes for Self and Other, 51 Journal of Communication, Vol. 51, No. 4, 2001, at 678-695.

[39] . Vincent Price, David H. Tewksbury & Li-Ning Huang, Third-person Effects of News Coverage: Orientations Toward Media, Journalism & Mass Communications Quarterly, Vol. 74, at 525-540.

[40] . Douglas M. McLeod, William P. Eveland & Amy I. Nathanson, Support for Censorship of Violent and Misogynic Rap Lyrics: And Analysis of the Third-Person Effect, Communications Research, Vol. 24, 1997, at 153-174.

[41] . Hernando Rojas, Dhavan V. Shah, and Ronald J. Faber, For the Good of Others: Censorship and the Third-Person Effect, International Journal of Public Opinion Research, Vol. 8, 1996, at 163-186.

[42] . James D. Ivory, Addictive, But Not For Me: The Third-Person Effect and Electronic Game Players’ Views Toward the Medium’s Potential for Dependency and Addiction, University of North Carolina at Chapel Hill, School of Journalism and Mass Communication, Aug. 2002.

[43] . Albert C. Gunther, Overrating the X-rating: The Third-person Perception and Support for Censorship of Pornography, Journal of Communication, Vol. 45, No. 1, 1995, at 27-38

[44] . Supra note 37 at 14. Along these lines, a December 2004 Washington Post article documented the process by which the Parents Television Council, a vociferous censorship advocacy group, screens various television programming. One of the PTC screeners interviewed for the story talked about the societal dangers of various broadcast and cable programs she rates, but then also noted how much she personally enjoys HBO’s “The Sopranos” and “Sex and the City,” as well as ABC’s “Desperate Housewives.” Apparently, in her opinion, what’s good for the goose is not good for the gander! See Bob Thompson, Fighting Indecency, One Bleep at a Time, The Washington Post, Dec. 9, 2004, at C1, www.washingtonpost.com/wp-dyn/articles/A49907-2004Dec8.html.

[45] . See Chris Anderson, Free: The Future of a Radical Price at 112-118 (2009).

[46] . See Letter from Chris Jay Hoofnagle, Electronic Privacy Information Center, Beth Givens, Privacy Rights Clearinghouse, Pam Dixon, World Privacy Forum, to California Attorney General Lockyer, May 3, 2004, http://epic.org/privacy/gmail/agltr5.3.04.html.

[47] . See email from Adam Thierer to Declan McCullaugh on Politech Email discussion group, April 30, 2004, http://lists.jammed.com/politech/2004/04/0083.html (emphasis added).

[48] . See Complaint and Request for Injunction of the Electronic Privacy Information Center against Google, Inc., March 17, 2009, http://epic.org/privacy/cloudcomputing/google/ftc031709.pdf; see also Ryan Radia, Should the FTC Shut Down Gmail and Google Docs Because of an Already-Fixed Bug?, Technology Liberation Front Blog, March 18, 2009, http://techliberation.com/2009/03/18/should-the-ftc-shut-down-gmail-and-google-docs-because-of-an-already-fixed-bug/.

[49] . See Berin Szoka & Mark Adams, The Progress & Freedom Foundation, The Benefits of Online Advertising & the Costs of Regulation, PFF Working Paper, forthcoming.

[50] . Anti-advertising crusader Jeff Chester often resorts to questioning the motives of those who question whether his regulatory prescriptions would actually benefit consumers, see, e.g., http://techliberation.com/2009/06/17/behavioral-advertising-industry-practices-hearing-some-issues-that-need-to-be-discussed/#comment-11698840. See generally Jeff Chester, Digital Destiny: New Media and the Future of Democracy (2007).

[51] . “The only freedom which deserves the name is that of pursuing our own good in our own way, so long as we do not attempt to deprive others of theirs or impede their efforts to obtain it. Each is the proper guardian of his own health, whether bodily or mental and spiritual.” John Stuart Mill, On Liberty (Penguin Classics, 1859, 1986) at 72.

[52] . Adam Thierer, The Progress & Freedom Foundation, Parental Controls & Online Child Protection, Special Report, Version 4.0, Summer 2009, www.pff.org/parentalcontrols.

[53] . Adam Thierer, Berin Szoka & Adam Marcus, The Progress & Freedom Foundation, Privacy Solutions, PFF Blog, Ongoing Series, http://blog.pff.org/archives/ongoing_series/privacy_solutions.

[54] . Comments of Adam Thierer, The Progress & Freedom Foundation, In the Matter of Implementation of the Child Save Viewing Act; Examination of Parental Control Technologies for Video or Audio Programming; MB Docket No. 09-26, April 16, 2009, www.pff.org/issues-pubs/filings/2009/041509-%5bFCC-FILING%5d-Adam-Thierer-PFF-re-FCC-Child-Safe-Viewing-Act-NOI-(MB-09-26).pdf.

[55] . See Adam Thierer, FCC v. Fox and the Future of the First Amendment in the Information Age, Engage, Feb. 20, 2009, www.fed-soc.org/doclib/20090216_ThiererEngage101.pdf

[56] . “To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm.” Friedrich von Hayek, “The Pretence of Knowledge,” in The Essence of Hayek, (Hoover Inst., 1984), at 276.

[57] . Adam Thierer, The Progress & Freedom Foundation, Two Sensible, Education-Based Legislative Approaches to Online Child safety, Progress Snapshot 3.10, Sept. 2007, www.pff.org/issues-pubs/ps/2007/ps3.10safetyeducationbills.pdf.

[58] . See, e.g., Berin Szoka, Google, CDT, Online Advertising & Preserving Persistent User Choice Across Ad Networks Through Plug-ins, Technology Liberation Front Blog, March 13, 2009, http://techliberation.com/2009/ 03/13/google-cdt-online-advertising-preserving-persistent-user-choice-across-ad-networks-through-plug-ins/.

Behavioral Advertising Industry Practices Hearing: Some Issues that Need to be Discussed

Berin Szoka — Thu, 18 Jun 2009 04:20:58 +0000

by Berin Szoka & Adam Thierer

This morning, the House Energy & Commerce Committee will hold a hearing on “Behavioral Advertising: Industry Practices And Consumers’ Expectations.” If nothing else, it promises to be quite entertaining: With full-time Google bashers Jeff Chester and Scott Cleland on the agenda, the likelihood that top Google officials will be burned in effigy appears high!

Chester, self-appointed spokesman for what one might call the People for the Ethical Treatment of Data (PETD) movement, is sure to rant and rave about the impending techno-apocalypse that will, like all his other Chicken-Little scenarios, befall us all if online advertisers were permitted to better tailor ads to consumers’ liking. After all, can you imagine the nightmare of less annoying ads that might actually convey more useful information to consumers? Isn’t serving up “untargeted” dumb banner ads for Viagra to young women and Victoria’s Secret ads to Catholic school kids the pinnacle of modern online advertising? Gods forbid we actually make advertising more relevant and interest-based! (Those Catholic school boys may appreciate the lingerie ads, but few will likely buy bras.)

Anyway, according to National Journal’s Tech Daily Dose, the hearing lineup also includes:

Charles Curran, Executive Director, Network Advertising Initiative
Christopher Kelly, Chief Privacy Officer, Facebook
Edward Felten, Director, Center for IT Policy, Princeton University
Anne Toth, Chief Privacy Officer & Vice President, Policy, Yahoo!
Nicole Wong, Deputy General Counsel, Google

That’s an interesting group and we’re sure that they will say interesting things about the issue. Nonetheless, because four of them have a corporate affiliation that fact will inevitably be used by some critics to dismiss what they have to say about the sensibility of more targeted or interest-based forms of online advertising. So, we’d like to offer a few thoughts and pose a few questions to make sure that Committee members understand why, regardless of what it means for any particular online operator, targeting online advertising is very pro-consumer and essential to the future of online content, culture, and competition. As Wall Street Journal technology columnist Walt Mossberg has noted, “Advertising is the mother’s milk of all the mass media.” Much of the “free speech” we all cherish isn’t really free, but ad-supported!

Our Approach

We have previously set forth a framework for analyzing advertising policy issues in two PFF reports: “Online Advertising & User Privacy: Principles to Guide the Debate” and “Targeted Online Advertising: What’s the Harm & Where Are We Heading?” At root, our model depends heavily on two common-sense, and inter-related, principles:

We live in a world of trade-offs; and
There is no free lunch.

Their Approach

We are deeply concerned that too few people are talking about—or even understand the relevance of—those two principles in the debate over targeted online advertising. It seems that too many who wish to retard the further evolution of the advertising marketplace are living a lie based upon the antithesis of our model. Many privacy advocates seem to imagine that regulatory actions don’t have consequences and that Congress can simply mandate new privacy standards for the Internet without having any impact on the free flow of ideas supported by, and direct facilitated through, advertising.

Simply put, the privacy critics often imagine that their values are indicative of everyone’s values. Our blogging colleague Jim Harper of the Cato Institute has referred to this as “preference imposition” but we’ll use a simpler term: Elitism. In essence, privacy advocates seem to believe that:

People are too ignorant, busy or just plain stupid, and cannot be trusted to make wise decisions for themselves (or their children); and/or
Everyone shares the same values or concerns when it comes to privacy such that a national “baseline” regulatory standard (namely, mandatory “opt-in” regulations for data collection and use) should govern the entire online marketplace.

Let’s be clear: Such a mandate, and the thinking behind it, would greatly impoverish the future Internet economy. Too many people think of the Internet as a magic box that just keeps cranking out free goodies. But something powers that box of goodies: advertising. More than anything else, it’s advertising that keeps the Internet “Free, Innovative & Open,” to borrow the slogan of our friends at CDT, which seems to flirt with joining the PETD movement, despite their well-earned reputation for pragmatic skepticism of government interference with the Internet.

The regulatory advocates complain that giving consumers the right to opt-out of data collection and use isn’t meaningful because very few consumers will exercise the opt-out. Again, they presume that this must be because users just don’t know what’s good for them because of course if they really understood what was being done with “their data,” they would never choose to just “give it away” for a few scraps from the advertisers’ table. It never occurs to them that (i) many, perhaps most, users just don’t care and that (ii) that their “ignorance” about the all specific details of “how the sausage is made” (online data collection and use practices for targeting advertising) may be completely rational.

But just as importantly, would-be privacy regulatory don’t seem to understand—or perhaps simply don’t care—that what’s true of opt-out is also true of opt-in: in practice, few people will bother doing either. In a world of perfect information and infinite time, of course, there would be no difference in outcomes with the two different rules. But in the real world with real constraints on time, knowledge and everything else, mandating opt-in would make all the difference in the world by severely limiting the ability of advertisers to target advertising.

The Ignored Trade-offs

We’ve been assembling evidence on the real-world costs of restricting targeted advertising. Here are just a few data points we’ve seen to give you a sense of what’s at stake:

Relevance to Users: The best evidence that users prefer seeing more relevant ads is their increased likeliness to actually click on an ad—instead of just ignoring it or trying to block it. The most recent study of this issue concluded that Click-Through Rates (CTR) can be improved by as much as 670% by using basic behavioral targeting as compared to simple contextual targeting—0r even more than 1000% using more sophisticated targeting. Conversion rates (the percentage of clicks that actually result in a sale) also strongly indicate that consumers find ads more interesting, and in one 2005 study, were estimated to increase up to 3000% with behavioral targeting.
Macro: More Revenue to Fund All Services & Content: eMarketer (in June 2008) estimated that U.S. spending on behavioral targeting would grow from $.775 billion in 2008 to $4.4 billion in 2012—representing fully a quarter of display ad spending. The total amount of money at stake is huge: U.S. online ad revenues totaled $23.5 billion in 2008.
Micro: More Revenue for Individual Publishers: Estimates on the increased profitability of behavioral targeting range as high as 1200% (eMarketer).

While these examples illustrate the broad outlines of the trade-offs ignored by privacy regulatory advocates, the key dilemma to understand is this: If, under an opt-in regime, publishers would be able to target advertising for webpages based on the keywords contained within those pages, and not on other content the user has looked at, the value of most Internet content will depend not on how many eyeballs it attracts but primarily on the economic value of the keywords that are directly associated with it. Pages with keywords related to products and services will fetch a fine price because advertisers will be able to make money off ads on those pages ( e.g., a site for digital camera reviews). But content with little commercial value will generate little revenue. Indeed, this is perhaps the single greatest problem faced by journalism sites. Who wants to advertise on a story about North Korea? How many users are going to be interested in taking a honeymoon in the DMZ?

But if such websites could target advertising to users’ user’s likely interests based on an anonymous profile of their interests created by collecting data about their browsing “behavior,” web content becomes valuable because of the audience it attracts, not just because the content itself serves as a rough proxy for a user’s interests. This democratization of Internet advertising revenue is essential for sustaining the future of journalism in particular, but also for “free” culture more generally.

As we noted in our response to the FTC’s proposed self-regulatory guidelines on data collection for advertising:

Depending on how regulation is structured, therefore, it is possible that new privacy mandates would severely curtail the overall quantity of content and services offered—and greatly limit the ability of new providers to enter the market with innovative offerings. Alternatively, or perhaps additionally, companies would change the character of their offerings and water-down sophisticated services that cater to consumer demand; in other words, the quality of service would deteriorate. Bottom line: Something must give because there is no free lunch. Regulation is a giant game of economic whack-a-mole: Attempting to control one of the primary variables of price, quantity, or quality inevitably results in non-optimal adjustments in the other two variables. The absence of price as a variable in this context means there is one less variable for the government to control in the first place. Simply stated, stifling the evolution of the online advertising marketplace will likely result in fewer free online services and less content, less high-quality online services and content, or some combination of both… We stand at an important crossroads in the debate over the online marketplace and the future of a “free and open” Internet. Many of those who celebrate that goal focus on concepts like “net neutrality” at the distribution layer, but what really keeps the Internet so “free and open” is the economic engine of online advertising at the applications and content layers. If misguided government regulation chokes off the Internet’s growth or evolution, we would be killing the goose that laid the golden eggs…. These observations are even more relevant to the online marketplace, where advertising has been shown to be the only business model with any real staying power. Walled gardens, pay-per-view, micropayments, and subscription-based business models are all languishing. Consequently, the overall health of the Internet economy and the aggregate amount of information and speech that can be supported online are fundamentally tied up with the question of whether we allow the online advertising marketplace to evolve in an efficient, dynamic fashion. Heavy-handed privacy regulation (or co-regulation) could, therefore, become the equivalent of a disastrous industrial policy for the Internet that chokes off the resources needed to fuel e-commerce and online free speech going forward.

Our Challenge to the Advocates of Privacy Regulation

For these reasons, we have repeatedly issued the following three-part challenge in our previous work to those who advocate the regulation of online advertising:

Identify the harm or market failure that requires government intervention.
Prove that there is no less restrictive alternative to regulation.
Explain how the benefits of regulation outweigh its costs.

We’re still waiting…

We’ve also made it clear that there is an alternative to the pre-emptive, one-size-fits-all regulation demanded by the regulatory advocates: We’ve proposed a “layered approach” based on user education, user empowerment, self-regulation and FTC enforcement of privacy policies. Our goal is as follows:

The ideal state of affairs would be to create a system of tools and data disclosure practices that would empower each user to implement their personal privacy preferences while also recognizing the freedom of those who rely on advertising revenues to “condition the use of their products and services on disclosure of information”—not to mention the viewing of ads! Self-regulatory efforts can be refined, especially through technological innovation to better satisfy the concerns of policymakers, privacy advocates, and average consumers. For example, if websites and ad networks participating in a self-regulatory framework supplemented their current “natural language” privacy policies with equivalent “machine-readable” code [ e.g., P3p], that data could be “read” by browser tools that would implement pre-specified user preferences by blocking the collection of information depending on whether the privacy policies of certain websites or ad networks met the user’s preferences about data-use. Such robust and granular disclosure, if implemented for behavioral advertising, would exceed the wildest dreams of those who argue that users currently do not read privacy policies—without disrupting the browsing experience or cluttering websites. But this system would only work if users had to make real choices about “pay*ing+ for ‘free’ content and services by disclosing their personal information.”

A Final Word About Advertising

On some level, this debate isn’t about user privacy at all, but about the alleged evils of advertising as inherently manipulative. Jeff Chester straddles both camps. His rantings about the use of “neuromarketing” boil down to the same simple idea that the Neo-Marxists have been pushing for decades: Since people are stupid, ignorant and/or lazy (see above), they’re easy to control and trick with shiny objects, pretty faces, memorable slogans, and catchy jingles. No better response to this argument has ever been made than was offered in this 1959 magazine ad by the ad firm Young & Rubicam (emphasis added for Chester’s benefit):

There is no chestnut more overworked than the critical whinny: “Advertising sells people things they don’t need.” We, as one agency, plead guilty. Advertising does sell people things they don’t need. Things like television sets, automobiles, catsup, mattresses, cosmetics, ranges, refrigerators, and so on and on. People don’t really need these things. People don’t really need art, music, literature, newspapers, historians. wheels, calendars, philosophy, or, for that matter, critics of advertising, either. All people really need is a cave, a piece of meat and, possibly, a fire. The complex thing we call civilization is made up of luxuries. An eminent philosopher of our time has written that great art is superior to lesser art in the degree that it is “life-enhancing.” Perhaps something of the same thing can be claimed for the products that are sold through advertising. They enhance life, to whatever degree they can.

Targeted Online Advertising: What’s the Harm & Where Are We Heading?

Berin Szoka — Fri, 13 Feb 2009 21:30:21 +0000

Statue at FTC Headquarters: “Man Controlling Trade” (We’re rooting for the horse!)

Adam Thierer and I have just released a new PFF paper entitled “Targeted Online Advertising: What’s the Harm & Where Are We Heading?” (PDF) about the FTC’s new “Self-Regulatory Principles for Online Behavioral Advertising.” Adam lampooned some of the attitudes at play in this debate in a great rant yesterday.

But we give the FTC credit for resisting calls to abandon self-regulation, and for its thoughtful consideration of the danger in stifling advertising-the economic engine that has supported a flowering of creative expression and innovation online content and services. That said, we continue to have our doubts about the FTC’s approach, however-well intentioned:

Where is this approach heading? Will a good faith effort to suggest best practices eventually morph into outright government regulation of the online advertising marketplace?
What, concretely, is the harm we’re trying to address? We have asked this question several times before and have yet to see a compelling answer.
What will creeping “co-regulation” mean for the future of “free” Internet services? Is the mother’s milk of the Internet-advertising-about to be choked off by onerous privacy mandates?

We stand at an important crossroads in the debate over the online marketplace and the future of a “free and open” Internet. Many of those who celebrate that goal focus on concepts like “net neutrality” at the distribution layer, but what really keeps the Internet so “free and open” is the economic engine of online advertising at the applications and content layers. If misguided government regulation chokes off the Internet’s growth or evolution, we would be killing the goose that laid the golden eggs.

The dangers of regulation to the health of the Internet are real, but the ease with which government could disrupt the economic motor of the Internet (advertising) is not widely understood-and therein lies the true danger in this debate. The advocates of regulation pay lip service to the importance of advertising in funding online content and services but don’t seem to understand that this quid pro quo is a fragile one: Tipping the balance, even slightly, could have major consequences for continued online creativity and innovation.

As we conclude: Self-regulatory efforts can be refined, especially through technological innovation to better satisfy the concerns of policymakers, privacy advocates, and average consumers. For example, if websites and ad networks participating in a self-regulatory framework supplemented their current “natural language” privacy policies with equivalent “machine-readable” code, that data could be “read” by browser tools that would implement pre-specified user preferences by blocking the collection of information depending on whether the privacy policies of certain websites or ad networks met the user’s preferences about data-use. Such robust and granular disclosure, if implemented for behavioral advertising, would exceed the wildest dreams of those who argue that users currently do not read privacy policies-without disrupting the browsing experience or cluttering websites. But this system would only work if users had to make real choices about paying for”‘free” content and services by disclosing their personal information.

Truly privacy sensitive users should be free to opt out of whatever tracking they find objectionable-but not without a cost: The less data they agree to share, the less content and services they can fairly expect to receive for free. Concretely, this means that they might not be able to access certain sites, content, or functionality without watching extra (untargeted ads), or paying for that content or service (assuming such a micropayment model can be worked out). Of course, there will always be ways to “cheat” in such a system, but Commissioner Harbour is exactly right on one point: Each content creator and service provider must be “free to strike whatever balance it deems appropriate.” This freedom is vital to the Internet’s future because the easier we make it for some users to get “something for nothing,” the smaller will be the economic base for the content and services everyone else takes for granted. Again, there is no free lunch.

You can download our paper in PDF form on the PFF website or view it below in Scribd. (Click the rectangle-in-rectangle button at the top right to maximize the iPaper viewer.)

http://d1.scribdassets.com/ScribdViewer.swf?document_id=12597638&access_key=key-w24vu2am83q5vcch31v&page=1&version=1&viewMode=list

Microsoft, Google, the Innovator’s Dilemma and the Future of Search & Web Ads

Berin Szoka — Sat, 17 Jan 2009 23:23:20 +0000

Jerry Yang’s departure as Yahoo! CEO opens the door to a renewed bid by Microsoft to buy Yahoo!’s search business (or Yahoo! itself). Such a merger could produce a significantly stronger challenger to Google in the search market. With this possibility in mind, the WSJ just ran a fascinating history of the “paid search” business—the placement of “contextually targeted” ads next to search engine results based on the search terms that produced those results.

In a nutshell, Microsoft failed to see (back in 1998-2003) the enormous potential of paid search—just as small start-ups (such as Google) were starting to develop the technology and business model that today account for a $12+ billion/year industry, which is twice the size of the display ad market and which supports a great deal of the online content and services we have all come to take for granted online. Microsoft first put its toe in the water of paid search with a small-scale partnership with Goto.com in 1999-2000. But this partnership failed because of internal resistance from the managers of Microsoft’s display-ad program. In 2000, Google launched Adwords and thus began its transformation from start-up into economic colossus. By 2002, Microsoft realized that it needed to catchup fast, and approached Goto.com (by then renamed Overture) about a takeover. But Microsoft ultimately chose in 2003 not to buy the startup because Bill Gates and Steve Ballmer “balked at Overture’s valuation of $1 billion to $2 billion, arguing that Microsoft could create the same service for less.”

Microsoft, meanwhile, spent the next 18 months deploying hundreds of programmers to build a search engine and a search-ad service, which it code-named Moonshot. The company launched its search engine in late 2004 and its search-ad system in May 2006.

But Microsoft’s ad system came too late:

Advertisers applauded Moonshot for its technical innovation. But Microsoft had trouble coaxing people to migrate to its search engine from Google; advertisers were unwilling to spend large sums on MSN’s search ads. By building a new system instead of buying Overture, Mr. Mehdi says, “we really delayed our time to market.”

What’s most fascinating about the piece is that it seems to suggest that Microsoft missed its opportunities to get into paid search not because it was “dumb,” “uninnovative” or a “bad” company, but for the same sorts of reasons that big, highly successful and even particularly innovative companies fail. The reasons companies generally succeed in mastering “adaptive” innovation of the technologies behind their established business models are the very reasons why such great companies struggle to encourage or channel the “disruptive” innovation that renders their core technologies and business models obsolete. This dynamic was described brilliantly in Harvard Business School professor Clayton Christensen’s classic 1997 book The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail. (Read chapter one here and Tim Lee’s recent discussion of the book here.)

Whatever one thinks about the debate over whether antitrust intervention is necessary to restrain Google’s growth, I’m sure we’d all applaud the evolution of increased competition in the paid search market through market forces. Let’s hope that Microsoft—as well as Yahoo!—have carefully studied the vast literature produced by business schools in the wake of Christensen’s book about how big companies can avoid the Innovator’s Dilemma by promoting—and capitalizing on—radical innovation from within. Indeed, this seems to be precisely what has guided Google’s own strategy as it has grown from “disruptive innovator” to become the very sort of behemoth that cannot easily escape the Dilemma, even if corporate managers are fully aware of the problem on a theoretical level. If Google can do it, Microsoft should be able to, too. But let’s also not discount the possibility that, no matter how hard Google’s management might try to retain the innovative culture of a start-up, the giant can’t do that well enough to prevent its own apparent market dominance from being disrupted by new upstart innovators in search and advertising technologies.

The head of Google Research talked about some of these possibilities in July 2007 and the Google has recently covered other possibilities. Here are my own bets—for what little they’re worth—as to what such “disruptors” might be:

Semantic search and social search – whichever search engine masters these tools will likely dominate the market for search, and thus search advertising.
Micro-payments to search users for using a search engine and discounts for clicking on ads – something Microsoft has pioneered with its Cashback system but which is probably still only in its infancy.
Behavioral targeting that can make display ads competitive with search ads by making display ads as relevant to consumers as search ads (or even more so), rather than simply trying to target display ads based on the context of a page—which limits the economic value of the ad “display inventory” that websites try to fill with ads, especially for smaller websites in the Internet’s “long tail” whose subject matter might have little relevance to the keywords for products or services that are more highly valued by advertisers.
Technologies that allow contextual targeting of ads in or around videos based on the contents of the video (and associated discussion by viewers in comments). Even the imperfect ability to automatically create transcripts of a video, and then search for keywords, could hugely increased the value of advertising associated with video content.

I suspect we’d all be at least a little surprised if we could see what search engines—and online advertising—really looked like in, say, 2019. But I won’t be terribly surprised if Google—for all its ingenuity—ends up making some of the same mistakes Microsoft made with Search 1.0 ( c. 1998-2005).

PFF Launches Center for Internet Freedom

Berin Szoka — Fri, 24 Oct 2008 15:46:02 +0000

The Progress & Freedom Foundation has just launched the new Center for Internet Freedom. CIF offers an alternative to the proliferation of advocacy groups calling for government intervention online by offering timely analyses and critiques of proposals that diminish the vital role of free markets, free speech and property rights. We aim to drive the Internet policy debate in new directions by emphasizing a layered approach of technological innovation, user education, user self-help, industry self-regulation, and the enforcement of existing laws consistent with the First Amendment. Such an approach is a less restrictive—and generally more effective—alternative to increased regulation.

Here are some of the issues I’ll be working on as CIF’s Director in conjunction with my esteemed colleagues Adam Thierer, Adam Marcus, and adjunct fellows:

Defending online advertising as the lifeblood of online content & services, especially in the “Long Tail”;
Emphasizing market solutions to problems of privacy protection, especially regarding the use of cookies and packet inspection data;
Protecting online speech and expression both in the U.S. and abroad;
Defending Section 230 immunity for Internet intermediaries;
Opposing online taxation and legal barriers to e-commerce and digital payments, especially at the state and local levels; and
Ensuring that Internet governance remains transparent and accountable without hampering the evolution of the Internet.