Hazlett and Subsidies of High-Speed Data Networks

Thomas Hazlett and Richard Epstein write periodically in the "New Technology Policy Forum" in the "Technology" section of the Financial Times.  Anyone interested in telecommunications should keep up with their work.  As part of the stimulus bill, formally known as the American Recovery and Investment Act, the Congress allocated $7.2 billion to subsidize the spread of high-speed data networks in unserved and underserved areas.  Hazlett explains why this program as passed by the Congress will not stimulate economic activity ("Shovel-ready broadband stimulus," May 1, 2009).  It is illustrative of perverse incentives created by government programs to improve private economic activities through subsidies.

Plagued with the sharpest economic downturn in a generation, US policy makers scrolled through a series of emergency deficit-enhancement measures in 2008-09. The third and final such effort was enacted in February. At $800bn, it set a new standard for government red ink: 12 per cent of 2009 GDP – twice the previous post-World War II high.

The theory is that, by sweeping unemployed resources into the marketplace, society not only gets a bargain, it bucks up consumers and investors, instilling confidence. And don’t forget this stimulation: emergency spending projects are to Congress what free beer is to a college fraternity party.

Markets are yet to feel the buzz, but what society will be getting is, in some instances, already visible. Consider the $7.2bn subsidy spread across the Broadband Technology Opportunities Act (Department of Commerce) and the American Recovery and Investment Act (Department of Agriculture), monies to fund up to 80 per cent of the cost of building private high-speed data networks in “unserved” and “underserved” areas.

As much as it hurts me to say this about programs with such well-polled names, neither program will achieve what it advertises for the US economy. They do offer real hope, however, that the recession will soon be over for communications lawyers and shareholders of ridiculously inefficient rural telephone companies.

In macro-economic terms, meanwhile, the “broadband stimulus” may be perverse: firms that had been building rural broadband networks have reportedly halted operations, circling back to Washington. In March, industry consultant Joseph Upton noted that rural phone carriers were “paralysed,” unsure how to play the subsidy game. “One CEO told me that she had six previous quarters of 25 per cent growth in a company that had been on the skids,” wrote Upton, “but the minute the stimulus word came out, all business just stopped.”

In an unquoted section of the article, Hazlett explains that a reverse auction, which is supported by 71 economists including two Nobel Laureates and Hazlett, might solve some of the problems inherent in the bill and why the Congress will not support a more efficient method of allocating funds.
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Epstein on Sotomayor

Richard Epstein, writing on the Sotomayor nomination to the Supreme Court, expresses dismay over President Obama's and Sotomayor's lack of concern about the protection of property rights ("The Sotomayor Nomination," Forbes, May 26, 2009)

We have already seen a president whose professed devotion to the law takes a backseat to all sorts of other considerations. The treatment of the compensation packages of key AIG executives (which eventually led to the indecorous resignation of Edward Liddy), and the massive insinuation of the executive branch into the (current) Chrysler and (looming) General Motors bankruptcies are sure to generate many a spirited struggle over two issues that are likely to define our future Supreme Court's jurisprudence. The level of property rights protection against government intervention on the one hand, and the permissible scope of unilateral action by the president in a system that is (or at least should be) characterized by a system of separation of powers and checks and balances on the other.

Here is one straw in the wind that does not bode well for a Sotomayor appointment. Justice Stevens of the current court came in for a fair share of criticism (all justified in my view) for his expansive reading in Kelo v. City of New London (2005) of the "public use language." Of course, the takings clause of the Fifth Amendment is as complex as it is short: "Nor shall private property be taken for public use, without just compensation." But he was surely done one better in the Summary Order in Didden v. Village of Port Chester issued by the Second Circuit in 2006. Judge Sotomayor was on the panel that issued the unsigned opinion--one that makes Justice Stevens look like a paradigmatic defender of strong property rights.

I have written about Didden in Forbes. The case involved about as naked an abuse of government power as could be imagined. Bart Didden came up with an idea to build a pharmacy on land he owned in a redevelopment district in Port Chester over which the town of Port Chester had given Greg Wasser control. Wasser told Didden that he would approve the project only if Didden paid him $800,000 or gave him a partnership interest. The "or else" was that the land would be promptly condemned by the village, and Wasser would put up a pharmacy himself. Just that came to pass. But the Second Circuit panel on which Sotomayor sat did not raise an eyebrow. Its entire analysis reads as follows: "We agree with the district court that [Wasser's] voluntary attempt to resolve appellants' demands was neither an unconstitutional exaction in the form of extortion nor an equal protection violation."

Maybe I am missing something, but American business should shudder in its boots if Judge Sotomayor takes this attitude to the Supreme Court. Justice Stevens wrote that the public deliberations over a comprehensive land use plan is what saved the condemnation of Ms. Kelo's home from constitutional attack. Just that element was missing in the Village of Port Chester fiasco. Indeed, the threats that Wasser made look all too much like the "or else" diplomacy of the Obama administration in business matters.

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Scalia and Epstein on Economic Rights

Yesterday, Sonia Sotomayor was nominated for the Supreme Court by President Obama.  Many have written on her qualifications. As a change of pace, I am posting on a debate in the January/February 1985 issue of Regulation Magazine between Antonin Scalia ("On the Merits of the Frying Pan") and Richard Epstein ("The Active Virtues") on the Supreme Court's lack of desire to constitutionally challenge legislative intrusions into the economy.

At the time the written debate took place, Scalia was a judge on the United States Court of Appeals for the District of Columbia Circuit.  In a nut shell, Scalia defends the Supreme Court's inaction in protecting constitution economic rights by postulating that these efforts would be interpreted as judicial activism, justifying past and future activism, and that the Supreme Court might further limit economic freedom rather than protect it.  I selected a few quotes to illustrate his arguments.  He begins by defining the debate.

Fundamental or rarefied, the point is that we, the judiciary, do a lot of protecting of economic rights and liberties. The problem that some see is that this protection in the federal courts runs only by and large against the executive branch and not against the Congress. We will ensure that the executive does not impose any constraints upon economic activity which Congress has not authorized; and that where constraints are authorized the executive follows statutorily prescribed procedures and that the executive (and, much more rarely, Congress in its prescriptions) follows constitutionally required procedures. But we will never (well, hardly ever) decree that the substance of the congressionally authorized constraint is unlawful. That is to say, we do not provide a constitutionalized protection except insofar as matters of process, as opposed to substantive economic rights, are concerned.

Scalia makes his case.

...in my view the position the Supreme Court has arrived at is good-or at least that the suggestion that it change its position is even worse.

...my skepticism arises from misgivings about, first, the effect of such expansion on the behavior of courts in other areas quite separate from economic liberty, and second, the ability of the courts to limit their constitutionalizing to those elements of economic liberty that are sensible...

The second basis for my skepticism is the absence of any reason to believe that the courts would limit their constitutionalizing of economic rights to those rights that are sensible.  In this regard some conservatives seem to make the same mistake they so persuasively argue the society makes whenever it unthinkingly calls in government regulation to remedy a "market failure." It is first necessary to make sure, they have persuaded us, that the cure is not worse than the disease-that the phenomenon of  "government failure," attributable to the fact that the government, like the market, happens to be  composed of self-interested human beings, will not leave the last state of the problem worse than the first. It strikes me as peculiar that these same rational free-market proponents will unthinkingly call in the courts as a deus ex machina to solve what they perceive as the problems of democratic inadequacy in the field of economic rights. Is there much reason to believe that the courts, if they undertook the task, would do a good job?

Epstein was the James Parker Hall professor of law at the University of Chicago.  Epstein argues that we must compare the imperfections of the legislative branch relative to the judicial. 

IN MY VIEW, Scalia has addressed only one side of a two-sided problem. He has pointed out the weaknesses of judicial action. But he has not paid sufficient attention to the errors and dangers in unchanneled legislative behavior. The only way to reach a balanced, informed judgment on the intrinsic desirability of judicial control of economic liberties is to consider the relative shortcomings of the two institutions---judicial and legislative-that compete for the crown of final authority. The constitutionality of legislation restricting economic liberties cannot be decided solely by appealing to an initial presumption in favor of judicial restraint. Instead the imperfections of the judicial system must be matched with the imperfections of the political branches of government...

THE THEORY OF CONSTITUTIONALISM, as I understand it, tries to find a way to minimize the sum of the abuses that stem from legislative greed on the one hand, and judicial incompetence on the other. There is, by and large, no third alternative to this sorry state of affairs. What I fear is wrong with Scalia's  statement of the argument is this: by focusing exclusively on the defects he finds in the judicial part of the process, he tends to ignore the powerful defects that pervade the legislative part of the process. Our constitution reflects a general distrust toward the political process of government-a high degree of risk aversion. That is why it wisely spreads the powers of government among different institutions through a system of checks and balances...

Judicial restraint is fine when it keeps courts from intervening in areas where they have no business intervening. But the world always has two kinds of errors: the error of commission (type I) and the error of omission (type II). In the context of our discussion, type I error refers to the probability of judicial intervention to protect economic rights when such intervention is not justified by constitutional provisions. And type II error refers to the probability of foregoing judicial intervention to protect economic liberties when such intervention is justified. This second type of error cannot be ignored.

What Scalia has, in effect, argued for is to minimize type I error. We run our system by being most afraid of intervention where it is not appropriate. My view is that we should minimize both types of error.

Scalia may be tactically correct, but I believe Epstein's arguments are more sound.
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