To view this issue of the CEI Planet, please click here to download the PDF file. Below are selected articles from the March-April 2010 issue:
The EU Searches for a Monopolist, Finds Google
By Wayne Crews and Alberto Mingardi
Google isn’t a monopoly now, but the more it tries to become one, the better it will be for us all. Competition works in this way: Capitalist enterprises strive to gain profits and market share. In turn, competitors are forced to respond by improving their offerings. Innovation is the healthy output of this competitive game. The European Commission, while pondering complaints against the Internet search giant, might consider this point.
Google has been challenged by websites from Germany, Britain, and France for its dominant position in the market for Web search and online advertisement. The U.S. search engine is accused of imposing difficult terms and conditions on competitors and partners, who are now calling regulators into action. Business partners and competitors claim that Google’s search algorithm is “biased.”
Before resorting to the old commandments of antitrust, we should consider that the Internet world is still largely impervious and unknown to any one individual–including regulators. We are in terra incognita, and nobody knows how the market will evolve. But one thing is for sure: Online search can’t evolve properly if it’s improperly regulated–no matter the stage of evolution.
While the exact form of “remedy” is anyone’s guess depending upon the petitioner and the whims of regulators, intervention would mean shortcuts for Google’s competitors, such as regulatory guarantees of future search ranking or placement, limitations on future Google services that could undermine an emerging rival, oversight of pricing or advertising practices, coerced changes to the Google interface, or bureaucratic oversight of paid search results. The net effect would be to rescue Google’s competitors from the requirement to compete, and to give them access to Google customers whom they didn’t attract on their own merits.
Public policy is often schizophrenic, but using the language of monopoly to attack information services and communications is particularly perverse. Speech is the core freedom, and today’s competitive technologies, including search, vastly extend it for us all.
Google isn’t being targeted by regulators in Brussels alone. It enjoys declining popularity in many capitals, from Beijing to Washington, D.C. In the U.S., conservatives have been complaining about bias in Google’s search results, such as a purported deference toward Al Gore.
But so what? Let Google be the MSNBC of search engines. Somebody else can be the Fox News if consumers want it. Today, as in the mid-1990s when Sergey Brin and Larry Page got started, if you create a search engine, nobody can stop you. Nobody can stop Microsoft from creating one either. Oh, wait…
Everyone seems to think Google is theirs to regulate, that they have more of a right to prescribe Google’s algorithm or business policies than Google itself does.
In search, as in the media itself, competing biases are good; pretended or forced objectivity, not so good. The decisions about how to rank search or what to reveal in a search are integral to Google’s free speech, not anyone else’s to decide. Differences of opinion and preferences about rankings are properly dealt with by competition from Microsoft or Yahoo!; Teoma, the “theory of everything” Steven Wolfram engine; or something we don’t know about yet being hatched in a dorm room. Other pressures include consumer demands, and Google’s own business partners. Monopoly leads to reduced demand, and if Google truly “monopolizes,” then its own business partners are hurt by its behavior and will defect and go elsewhere.
The policy environment should maximize the possibility of rival search technologies emerging in response to inappropriate bias. Today’s approach is the opposite. It creates a stunted search environment because everyone is afraid or reluctant to create an aggressive new search algorithm–why invest, if success means regulation and confiscation? The search capabilities needed for tomorrow’s Internet won’t come to be if policy makers freeze 2010 conditions into regulation.
Various types of search already optimize for various types of biased results. As centuries of experience with freedom of speech tell us, biases in information services are perfectly appropriate, perhaps even necessary in free societies. If regulators do not know this, they need to be removed from their jobs.
Any European Commission inquiry should be a short one. Would that global recessions selectively disemploy government regulators and academics who make a living by tearing down what others have created. Regulators rarely bring anything to the table but an appetite for more power.
Wayne Crews ([email protected]) is Vice President for Policy at CEI. Alberto Mingardi is Director General of Istituto Bruno Leoni in Milan, Italy. A version of this article originally appeared in The Wall Street Journal Europe.
Message from the President
Liberty is too Important to Remain an Abstraction
Statists know what they want–government and more of it! But, what do free market advocates seek? Blocking the Bush-Obama blitzkrieg attack on the economy–yes–but then what? Is our goal simply to stabilize the economy of today? Surely we wish to expand the entrepreneurial sphere and move toward the more limited government envisioned by our Founders.
Occasionally, limited government advocates find a leader–the rare Reagan or Thatcher–who helps foster economic liberalization. As the late economist Hendrik Houthakker noted, the dominant trend is to roll up the regulatory carpet by the foot while laying it out by the yard! This is true not only for regulations, but entitlements, government mandates, and guarantees.
Our challenge is to expand liberty–not stand pat. As Lincoln duly noted, America “cannot endure, permanently half slave and half free.” Free market advocates are effective at communicating the virtues of economic liberty, but we have yet to clearly map out the path to that end.
To combat statism our ideals must be translated into practical, incremental steps towards freedom. At CEI, we think these baby steps should be:
Stop Digging. It is more important to control the future than to discipline the present. Why should our children be born into entitlement slavery? Why must immigrants be drafted into the regulatory welfare state? Ensuring voluntary options for the future limits the budgetary trap that has so far paralyzed entitlement reform.
No Regulation without Representation. Regulations have become the preferred tool for statist intervention. The regulatory process is dominated by economic and ideological interest groups. The citizenry are missing from those (no longer) smoke-filled back rooms. CEI has long advocated restoring congressional accountability: Each proposed major rule should be examined by relevant congressional committees and when finalized sent back to Congress for an up or down vote.
Restart the Evolution of the Institutions of Liberty. The greatest success of the progressive movement was to block the evolution of property rights in environmental resources, groundwater, the electromagnetic spectrum, and many other areas. New homesteading legislation could encourage the development of property rights in these resources, reopening the door to a freer America.
Create a Viable Risk Assumption Process. In health care and other areas, risks are real and cannot be regulated away. The Precautionary Principle (don’t let people try anything until we know everything) is a recipe for stagnation. We have successful procedures for mitigating risk in some areas, such as the Qualified Investor Rule, which allows individuals to assume the risks of their investments. Why not extend this concept into health care? A Qualified Patient Rule would allow individuals to explore the future for all of us.
Our goal must be to combine the ideals of freedom with the incremental practicality necessary for a democratic marketplace. For too long, we’ve pointed out the virtues of a freer world and naïvely expected others to develop the implementation plan. CEI and others must outline the practical steps toward economic liberty and remain vigilant that our principles not be distorted by our statist adversaries. The goal of liberty is too important to remain an abstraction.
Stay Classy, Sacramento
By William Yeatman and Jeremy Lott
In many countries, electric utilities struggle to keep up with demand, and often fail. The World Bank estimates that almost 1.5 billion men, women, and children lack reliable access to electricity. They want it, but they can’t have it. In new-agey California, it’s the other way around. The centerpiece of California’s energy policy is the absence of energy.
If that sounds crazy–and it is!–consider this impressive web of regulation that the government has spun:
In 2006, the State Water Resources Control Board (SWRCB) ruled that 19 coastal natural gas power plants were in violation of the Clean Water Act for using a process called “once-through cooling,” by which ocean water is pumped into a power plant in order to condense steam into water to be reused. This can harm aquatic wildlife, so, at the behest of environmental groups, the SWRCB ordered coastal power plants to make costly refurbishments. According to the Energy Commission, “[I]t is likely that plant operators will choose retirement in the face of costly retrofits.”
California doesn’t have generation capacity to spare, so it will have to replace these plants, most of which are located in the southern part of the state. But the south California air basin is out of compliance with air quality standards for particulate emissions. It is well nigh impossible for utilities to obtain an air quality permit for a natural gas plant from the South Coast Air Quality Management District.
Existing nuclear power is also under attack. In 2006, the legislature passed a bill requiring the Energy Commission to assess the nuclear plants’ vulnerability to earthquakes. In fact, the legislation was designed to stack the deck against nuclear power when these plants come up for relicensing. It is unlikely that California utilities can meet demand for electricity without these 21 power plants. Yet California’s elected officials, in Sacramento and elsewhere, seem to think that conventional energy is unnecessary as long as the Golden State aggressively pursues conservation and renewable energy.
That’s the theory anyway. However, the state’s anti-energy policies make even the generation of alternative energy difficult.
California is the country’s leading dairy state, and the Energy Commission has identified methane emitted by cows as a major source of renewable energy. But it is impossible to make use of this “bio-methane” from California’s dairy farms because air quality agencies refuse to permit a generating facility. The state’s deserts are obvious locations for generating solar power. Yet California Senator Dianne Feinstein is trying to block the construction of solar power plants in the Mojave in order to protect a species of turtle.
California’s mountain ranges are ideal for wind power. However, many environmentalists find wind turbines unacceptable because the giant, rotating blades kill animals that fly. A California wind power developer recently told The New York Times: “Regulators are concerned about birds; now they’re concerned about bats.” Next they’ll be concerned about taxpayers.
Just kidding on that last point. Renewable energies are far more expensive than burning fossil fuels, but that’s only a start. To meet the state’s current renewable energy targets (20 percent of the state’s electricity was supposed to come from renewable energy sources by this year), the Public Utilities Commission reports that California utilities would have to build seven transmission lines, at a cost of $12 billion, to move electricity generated by renewables in remote regions to the urban centers where the electricity is consumed.
However, there could be a catch. Transmission lines are almost impossible to build in California due to the onerous permitting process designed to mitigate environmental impact.
No problem, said Governor Arnold Schwarzenegger. When it became clear that the state couldn’t meet its 2010 goals, he simply moved the goalposts. He signed an executive order that increased the unworkable renewable energy targets and postponed them–by a decade.
California’s story should be a cautionary tale of how not to manage energy policy. Instead, it is touted by politicians and all too often swallowed hook, line, and sinker by gullible journalists.
There is something like a consensus among economists that “greening” the energy industry harms economic growth. But Schwarzenegger claims California “can grow the economy and simultaneously protect the environment,” and Sen. Barbara Boxer maintains that California’s energy policies have boosted employment by creating “green jobs.”
Los Angeles congressman and chairman of the powerful Energy and Commerce Committee Henry Waxman ushered major climate change legislation through the House of Representatives last year. He based the renewable energy parts of the bill on his own state’s flawed model.
Barack Obama bragged in an Earth Day speech last year that the average Californian uses 50 percent less energy than the average American because the state government “put in some good policy early on that assured that they weren’t wasting energy.” (It’s worth batting that down, briefly. California has a moderate climate, high urban density, and an energy policy that drives up the cost of electricity. So, less air conditioning + less heat + high energy prices + fewer energy intensive industries because most have fled the state = lower per capita energy usage.)
Writing in The Atlantic, Ronald Brownstein celebrated the “California Experiment,” which “has consistently defined the forward edge of energy policy in America.” In Time, Michael Grunwald argued that, “California is not just ahead of the game” when it comes to energy, but that, “it’s playing a different”–altogether better–“game.” Think of it as Monopoly, except in this version everybody goes broke and has to sleep on the street.
Everybody except the well-connected, that is. One California program that’s being celebrated at the moment is called “decoupling plus.” It is supposed to give utilities an incentive to pursue energy efficiency. Here’s how it works: California regulators allow utilities to increase electricity rates to fund programs that lower energy consumption. If these programs reduce energy use below targets set by the state, then the utilities get to keep some of the value of the saved electricity.
Decoupling plus is supposed to restructure the utilities’ interest calculus so that they give priority to energy efficiency. In practice, it’s a huge transfer of wealth from taxpayers to favored utilities, with little enforcement. In September, the Public Utilities Commission slashed the utilities’ savings targets for 2012 by 42 percent. According to a staff analysis, “review of the PUC’s actions relating to energy efficiency incentives…reveals how the scales have been tipped further and further in favor of utility shareholders.”
Brownstein writes that decoupling plus has “changed the motivation of utility companies.” He’s right, just not in the way he thinks. The program has given the utilities the motivation to lobby politicians and regulators in order to reap windfall profits.
For 2010-2012, the Public Utilities Commission has increased electricity rates by $3.1 billion to pay for energy efficiency programs, and it has complete discretion over how much of this rate increase will end up with the utilities. So a utility’s success will be achieved by overcharging rate payers and currying favor with politicians, who will then, no doubt, blather on about how Sacramento has saved us from ourselves.
William Yeatman ([email protected]) is an Energy Policy Analyst at CEI. Jeremy Lott ([email protected]) is Editor of Labor Watch at the Capital Research Center. A version of this article originally appeared in The American Spectator.
The Good, the Bad, and the Ugly
THE GOOD: CEI Challenges EPA Power Grab
On February 16, the Competitive Enterprise Institute filed a lawsuit challenging the Environmental Protection Agency’s plan to regulate carbon dioxide (CO2) as a pollutant under the Clean Air Act. Several other groups joined CEI, including FreedomWorks and the Science and Environmental Policy Project, in the suit, which asks a federal appeals court to review the proposed EPA regulation. “EPA states that ‘the greatest warming occur[ed] over the last 30 years,'” the petitioners state. “But according to Dr. [Phil] Jones, [who until recently headed the University of East Anglia’s Climate Research Unit] for the periods 1860-1880, 1910-1940, 1975-1998, and 1975-2009, the warming rates did not show any accelerating trends. In his words, ‘the warming rates for all 4 periods are similar and not statistically significantly different from each other.'” “If there has been no change in warming rates, this contradicts one of EPA’s basic contentions.”
THE BAD: Obama Targets Foreign Insurers’ Status
In a particularly protectionist move, the Obama administration took aim at foreign insurers and reinsurers, claiming that their favorable foreign tax statuses amounted to unfair competition. Foreign insurers and reinsurers play a vital role in American commercial insurance markets, including terrorism insurance, and pass along the savings from incorporating in tax-friendly locales such as Bermuda back to their customers in the form of lower premiums. “What this would do is make it more expensive for these foreign insurance companies to do business in the U.S.,” said CEI Director of Insurance Studies Michelle Minton. “They will either need to charge their U.S. operations more or they’ll leave. Both options would please the domestic insurance companies that are pushing for this action because they can continue charging high premiums and have less competition.”
THE UGLY: New CARD Regulations Undermine Credit
The Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009 went into effect on February 22. While the law, passed in May 2009, is being hailed as pro-consumer, it’s already having unintended consequences. If you think tightening credit through new regulation while lawmakers are attempting to jump-start lending seems a bit strange, you’re not alone. But as CEI’s Director of the Center for Investors and Entrepreneurs John Berlau notes, increasing regulation on the payment card industry doesn’t just harm consumers, it harms entrepreneurs as well. “Startups often have limited collateral, making credit cards one of the only sources of financing for getting off the ground,” he says. “The Kauffman Foundation has found that almost half of all small businesses rely on personal credit cards for financing. One such entrepreneur is Sergey Brin, who used his personal credit cards as a college student in the 1990s to start the company that today is known as Google.” Congress could be killing off the next Google before it even has a chance to get off the ground.
Study: Capitalism Makes for a “Kinder” Society
Left-wing ideologues frequently denounce the free enterprise system as “cruel” and “inhumane,” blaming capitalism for every conceivable social ill. However, new research published in Science concludes that markets have likely led to a freer, more cooperative, and less violent society. “We live in a much kinder, gentler world than most humans have lived in,” says University of British Columbia anthropologist Joe Henrich, lead author of the study. The authors propose that markets have created a level playing field that enforces “fair” behavior, even though market interactions tend to be impersonal. They suggest that thousands of years of trading have rewired neural networks in the brain in a manner that fosters cooperative market behavior.
Parkings Authorities Ticket Flooded Cars
After the River Ouse flooded downtown York, England, many cars left on the streets were half-submerged by the dirty water. Adding insult to injury, several unfortunate drivers discovered they had been ticketed for parking illegally once the floodwaters had subsided. Pub owner Shaun Binns was shocked, telling reporters, “The inspector must have seen the cars had been flooded and you’d think they’d have a bit of compassion.” A city official claimed parking attendants were “unaware” that some cars had been flooded, and told owners of the ticketed cars that they were welcome to appeal the tickets.
Cuba to Require Health Insurance for Tourists
In March, communist Cuba announced that it planned to require all foreign tourists to purchase health insurance at their points of entry beginning on May 1. The move was met with disbelief. After all, this is the same Cuba that left-wing celebrities like Michael Moore and Sean Penn champion for its universal, cradle-tograve health care coverage. But even communists aren’t immune to global economic downturns. While the Cuban regime refuses to provide the relevant data, most observers believe this measure was needed to alleviate crushing health care costs and increasing shortages of basic pharmaceuticals and medical devices.
Criticizing Coffee Shop Photo-Op “Un-Canadian”
A day after Canadian Finance Minister Jim Flaherty called for government fiscal restraint in order to balance the budget, he flew from Ottawa to London, Ontario, on a private jet to participate in a photo-op at a Tim Hortons coffee shop. Total cost to taxpayers: $3,100. Critics blasted Flaherty for “hypocrisy,” noting that this is not the first time he has used private planes for questionable purposes. The transport minister answered critics by claiming they held an “un-Canadian” bias “against Tim Hortons.” But if Flaherty’s appearance was so crucial to Canadian national identity, why couldn’t the photo-op have been held at one of the other nearly 3,000 Hortons locations in Canada, including the 30 in Ottawa?