To say I've been busy these past few days would be a gross understatement. With elections in just one week from today, I've been losing my mind. But today's WSJ Editorial Page caught my attention. Well, not so much the editorials from the Journal itself, but some of their op-eds...

First is a basic lesson on economics from famed Prof, Thomas Sowell.

Usually just one ed or op-ed in a day is fantastic for any paper, but the Journal accompanies Sowell's piece with a great one on the future of Voice Over IP from Senator John Sunnunu. Now, readers of this log know that I am certainly not any fan of Senator Sunnunu's - not because of his strong stances on trade, on that we agree, but because of his weenie nature towards fighting terrorism. During that 2002 Primary, I was one of those calling him Johnny Jihad and Osama bin Sunnunu. But Senator Sunnunu has always been a strong advocate of lower taxes and free trade. He's a CATO guy, like myself - and is a very strong fighter on domestic issues. His support of VOIP especially warms my heart, as I am still a nerd at heart!

Low Taxes Do What?


Some years ago, the distinguished international-trade economist Jagdish Bhagwati was visiting Cornell University, giving a lecture to graduate students during the day and debating Ralph Nader on free trade that evening. During his lecture, Prof. Bhagwati asked how many of the graduate students would be attending that evening's debate. Not one hand went up.

Amazed, he asked why. The answer was that the economics students considered it to be a waste of time. The kind of silly stuff that Ralph Nader was saying had been refuted by economists ages ago. The net result was that the audience for the debate consisted of people largely illiterate in economics and they cheered for Mr. Nader.

Prof. Bhagwati was exceptional among leading economists in understanding the need to confront gross misconceptions of economics in the general public, including the so-called educated public. Nobel Laureates Milton Friedman and Gary Becker are other such exceptions in addressing a wider general audience, rather than confining what they say to technical analysis addressed to fellow economists and their students. By and large, the economics profession fails to educate the public on the basics, while devoting much time and effort to narrower and even esoteric research.

The net result is that fallacies flourish in discussions of economic policy issues, while the refutations of those fallacies lie dormant in old books and academic journals gathering dust on library shelves. As former House Majority Leader Dick Armey -- an economist by trade -- put it: "Demagoguery beats data in making public policy."

Sometimes the fallacies are based on something as simple as a failure to define terms accurately. Everyone has heard the claim that a high-wage country like the U.S. loses jobs to low-wage countries when there is free trade. When the North American Free Trade Agreement went into effect a decade ago, there were dire predictions of "a giant sucking sound" as American jobs were drawn away, to Mexico especially.

In reality, the number of jobs in the U.S. increased by millions after Nafta went into effect and the unemployment rate fell to low levels not seen in years. Behind the radically wrong predictions was a simple confusion between wage rates and labor costs.

Wage rates per unit of time are not the same as labor costs per unit of output. When workers are paid twice as much per hour and produce three times as much per hour, the labor costs per unit of output are lower. That is why high-wage countries have been exporting to low-wage countries for centuries. An international study found the average productivity of workers in the modern sector of the Indian economy to be 15% of that of American workers. In other words, if you paid the average Indian worker one-fifth of what you paid the average American worker, it would cost you more to get the job done in India.

In particular industries, such as computer software, Indian workers are more comparable, which is why there is so much outsourcing of computer work to India. But virtually every country has a comparative advantage in something, whether it is a high-wage country or a low-wage country.

Those who complain loudly about how many jobs have been "exported" to other countries because of international free trade totally ignore all the jobs that have been imported to the American economy because of that same free trade. Siemens alone employs tens of thousands of American workers and Toyota has already produced its ten millionth car in the U.S. Management guru Peter Drucker has said that this country imports far more jobs than it exports and no one has contradicted him. Indeed, those who are loudest in denouncing the exporting of jobs totally ignore the importing of jobs.

Free international trade produces both the benefits of increased productivity and the adjustment problems that all other forms of increased productivity produce -- namely, job losses in the less competitive firms and industries. The typewriter industry was devastated by the rise of the computer, as the horse and buggy industry was devastated by the rise of the automobile. Histories of the industrial revolution lament the plight of the handloom weavers when power looms were introduced.

* * *
International trade has no monopoly on economic illiteracy. One of the apparently invincible fallacies of our times is the belief that President Ronald Reagan's tax cuts caused the federal budget deficits of the 1980s. In reality, the federal government collected more tax revenue in every year of the Reagan administration than had ever been collected in any year of any previous administration. But there is no amount of money that Congress cannot outspend. Here again, the confusion is due to a simple failure to define terms.

What Mr. Reagan's "tax cuts for the rich" actually cut were the tax rates per dollar of income. Out of rising incomes, the country as a whole -- including the rich -- paid more total taxes than ever before.

At the state and local levels, this confusion of tax rates and tax revenues has led some local politicians to see higher tax rates as the answer to budget problems, even though higher tax rates can drive businesses out of the city or state, with adverse effects on the total amount of tax revenues collected.

Price controls are another area where very elementary economics is all that is needed to show what the consequences are: shortages, quality deterioration and black markets. It has happened repeatedly in countries around the world, over a period of centuries. Yet politicians keep selling the idea of price controls and voters keeping buying it.

Many economic issues are complex, but sometimes a single fact will tell you all you need to know. When you know that central planners in the Soviet Union had to set 24 million prices -- and keep adjusting them, relative to one another, as conditions changed -- you realize that central planning did not just happen to fail. It had no chance of succeeding from the outset. It is a wholly different ball game when hundreds of millions of people individually keep track of the relatively few prices they need to know for their own decision-making in a market economy.

Simple stuff like this is not very exciting for economists and there is no payoff in one's professional career for clarifying such things for the general public. The only reason to do it is that it very much needs to be done -- especially during an election year.

VOIP of the People


Should local governments have an inherent right to regulate and tax any communication between two individuals that utilizes a human voice? Should we discourage the use of broadband networks for fast, reliable and cheap communications simply because a new technology doesn't fit neatly into an existing regulatory slot? Should regulations discriminate between two data files simply because one carries instant messaging and the other someone's voice?

Until quite recently, these questions were relegated to circles of academics, techies or regulation junkies (yes, they do exist) speculating about how the Internet might affect entrenched telephony providers. Today, these issues have become practical, substantive questions that will make or break the implementation of Voice Over Internet Protocol (VOIP) -- a new technology that utilizes the packet-based method of Internet communications and, in some instances, the architecture of the Internet to bring new voice applications to consumers. VOIP generates significant network efficiencies, reduces capital expenditures and produces considerable cost savings. Moreover, the innovative features and robust functions underscore that VOIP is not just a fancy phone network and must not be treated as such.

The debate has just begun, but the wagons are already being circled by those determined to protect a regulatory scheme based on the copper wire telephone system invented by Alexander Graham Bell. Our goal should be to allow this new technology to evolve, which will dramatically reduce the cost of voice communication to a level commensurate with that of any other bit of data transmitted over the Internet. To ensure that a misguided approach does not develop and to provide certainty to the marketplace, I will introduce VOIP legislation in the coming weeks to establish several key protections for this new technology.

• First, my legislation will treat VOIP as an information service. The broadband cable, DSL or high-speed line you are using does not care whether data packaged using the Internet Protocol is a spread sheet, e-mail, instant message or voice traffic. Recognizing this simple fact helps establish a level playing field for all forms of data in order to fit a regulatory system designed five, 10, 20, 30, 50 or 100 years ago. Conversely, there exists no sound basis for discriminating among different types of data. Would anyone argue that taxes for e-mail should be different from those imposed for transmitting financial spreadsheets or power point presentations? The same principle should extend to an Internet voice call as well.

• Second, we should establish federal jurisdiction over VOIP applications. Internet packet switching routes data across a global network requiring a national framework and treatment. Allowing thousands of state and local regulators to wrap their tentacles around VOIP will place costly and unnecessary burdens on a growing interstate communications network. What would happen to e-mail or instant messaging if states imposed regulations on those applications? The role of the federal government should be to establish a clear and efficient regulatory structure that will not discourage investment in the development of these new systems.

• Third, my bill will protect this data service from taxation. The Internet-access tax-moratorium debate has highlighted the need to prevent tax commissioners from imposing oppressive tax treatment for telecommunication on VOIP. Those who believe that e-mail should be taxed will disagree on principle. All others place themselves in the awkward position of trying to differentiate different sets of ones and zeros in binary code in order to protect tax collections or corporate revenues. Both attempts are signs of short-sightedness -- one on the part of big government, the other on the part of big business.

Since our nation's founding, legislators have justified regulations on the basis that they serve the public interest. A regulatory framework may be advanced to improve public safety, inform consumers or protect public health. In fact, public-interest concerns such as enhanced 911, disability access, and interaction with law enforcement will be among those considered by comprehensive legislation. But extending these obligations must be done with an understanding of the unique architecture and technical aspects of this new application. Unfortunately, within the developing VOIP debate, this governing principle of public interest has been turned on its head. The defenders of the existing regulatory scheme seek to protect the existing tax, distribution of revenues, or other vested interests, at the expense of sound public policy.

If there is one thing we have learned about the information economy, it is that innovation circumvents a flawed regulatory regime. Let's get this one right from the start.


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