The Weekly Sift

Should the economy be organized to benefit producers and consumers, or a few big middlemen? We’ve been answering that question wrong since Ronald Reagan, and we’re about to do it again.

The FCC, with its new Republican majority, is proposing to end the era of net neutrality. If you’re some kind of internet nerd, you probably already know exactly what that means and have had a strong opinion about it for a long time. If not, though, it probably sounds like one of those intense debates nerds often have about mysterious topics like databases or user interfaces: You have no idea what they’re talking about, you don’t bother to find out, and whatever results from the argument, it never seems to bite you.

This one is going to bite you. When the bite comes, it might arrive in a form you won’t easily connect back to this decision. But it is going to bite you. It’s going to bite the whole economy.

To explain how and why, let me detour through a subject you probably do care about: economic inequality. Here’s a graph I keep posting in one form or another, because I think it points to the most significant fact in American politics: Up until around 1980, median income closely tracked productivity. And then something happened to disconnect them. Productivity kept increasing, but median income stagnated.

Unsurprisingly, this has led to a concentration of income at the top: The people who make wages have lost ground, while the people who pay wages have gained.

And the greatest concentration has been at the very tip-top: The share of wealth held by the top tenth of a percent has reached levels not seen since the Great Depression.

So what happened in 1980? The facile answer is that Ronald Reagan was elected president. But that explanation is too simple, because a president doesn’t deal out national wealth like a deck of cards. What did Reagan do, if anything, that touched off this new Gilded Age of concentrated wealth?

Again, there’s a too-simple answer: He cut taxes on the rich, and he broke unions. Those actions certainly did help the wealthy and harm the middle class, but they’re not enough to explain what happened. If that were all he did, subsequent presidents should have been able to undo it.

To really understand the Reagan impact, you need to apply David Graeber’s definition of a successful revolution: Reagan changed the political common sense of his era in a way that has stuck ever since. Since Reagan, one of the basic debates in American politics has been framed as Freedom vs. Regulation, with a corollary debate of Productivity vs. Regulation. In each case, Regulation was framed as the wrong side to be on: It limits our freedom and strangles our productivity.

The result has been a completely reshuffled economy, which I first started discussing in a 2012 post “Monopoly’s Role in Inequality“.

[M]arkets are created by rules, and the rules can be structured to favor either the ends (producers and consumers) or the middle. Producers and consumers benefit from transparent markets, where the rules force middlemen to treat everyone more-or-less the same.

But markets can also be structured to give middlemen as much freedom as possible. The most profitable way to use that freedom is to create choke-points where a toll can be extracted or one producer can be played off against another. In an opaque market, the way to get rich is not to produce things, but to build middleman power that allows you to dictate terms up and down the supply chain.

What we have today, after nearly 40 years of freedom-for-the-middleman de-regulation, is an economy full of choke points. The path to vast wealth is not to make something people want (as Henry Ford made cheap automobiles) or to discover something people need (as J. Paul Getty and H. L. Hunt found oil), but to insinuate yourself between producers and consumers, create a monopolistic choke point, and charge tolls.

WalMart and Amazon, for example, are choke points; if you want to sell a product to the general public, you have to deal with them on their terms. Visa and MasterCard are choke points; retailers need them, and have to pay whatever fees they set. Cable companies are choke points; creators of TV shows can’t reach viewers without them. Google is a choke point; if you’re hoping to get around WalMart and Amazon by selling over the internet, your website needs to show up when people search for your type of product. [1]

The upshot is that post-Reagan America is no longer a place where you can build a better mousetrap and expect the world to beat a path to your door. Instead, you build the mousetrap, and then you pay off the owners of the choke points between yourself and the mousetrap-buying public. Maybe some small profit will be left for you and maybe it won’t, but the choke-point owners will do well. [2]

There are a few things worth noticing about this situation:

• In the short run, the choke-point owners often look like the good guys. Amazon has low prices; Visa gives you cash back. Middlemen often temporarily align with consumers in order to gain more power over producers. But the pattern of all monopolists remains: Once power is consolidated, it will encroach in both directions.
• We all need producers. You’re not just a consumer who spends money, you need to make money too. And since ordinary people have no chance of owning their own choke points, most of us have to make money by finding a place on the productive side of the economy, by participating in the delivery of some good or service. Choke points stop middle-class people from moving up by starting their own businesses, and they siphon money away from the kinds of productive businesses that hire people.
• “Freedom” can be anti-productivity. Given the prevailing post-Reagan political common sense, that sounds like a contradiction, but it really isn’t. If middlemen have freedom to play producers off against each other and keep the lion’s share of profits for themselves, then more of the economy’s investment will be in middlemen, and less in producers. Conversely, regulations that limit the power of middlemen are pro-productivity.

Now let’s get back to net neutrality: The point of net neutrality regulations is to control middlemen who own a major chunk of our economic infrastructure: the internet service providers like Comcast, Verizon, and AT&T. Once they’re freed from regulation, you can expect them to set up choke points and charge tolls. (This is how it works in Portugal.)

If you provide some service over the internet, for example, you will find yourself competing for the favor of ISPs rather than consumers. Maybe Netflix will pay Verizon so that its streaming service comes in faster and with higher quality than Amazon Prime; or maybe Amazon will outbid it. [3] In either case, the new revenue stream for Verizon either means higher prices for consumers or less spent by Amazon or Netflix on new content. It’s basically just a wound through which Verizon can suck blood out of the productive economy.

Wired suggests that we guess how the ISPs will use this power by looking at what they already do in data-limited plans:

When AT&T customers access its DirecTV Now video-streaming service, the data doesn’t count against their plan’s data limits. Verizon, likewise, exempts its Go90 service from its customers’ data plans. T-Mobile allows multiple video and music streaming services to bypass its data limits, essentially allowing it to pick winners and losers in those categories.

Consumers will likely see more arrangements like these, granting or blocking access to specific content … Net neutrality advocates have long worried that these sorts of preferential offerings harm competition, and by extension, consumers, by making it harder for smaller providers to compete. A company like Netflix or Amazon can likely shell out to sponsor data, but smaller companies don’t necessarily have the budget. … the future internet, then, could look a more extreme version of today’s mobile plans, with different pricing tiers for different levels of video quality for different apps. That means more customer choice, but perhaps not in the way anyone actually wants.

In the conservative fantasy world, the toll collectors will use some fraction of their windfall profits to improve their broadband networks (just as corporations in general will generously use their Trump tax cuts to hire more workers and pay them higher wages). In reality, though, it will be one more opportunity for parasites to latch on to the productive economy. The parasites will do well; ordinary people, not so much.

[1] Apple is an interesting hybrid. It makes things people want, like iPhones. But it too sees how the post-Reagan economy works and wants to evolve into a choke-point company. Already, its App Store is a choke point for software builders, iTunes is a choke point for music producers, and it would like ApplePay to become a choke point upstream from Visa and MasterCard.

[2] A choke point I face on this blog is Facebook. Three years ago, Facebook’s algorithms allowed posts on no-name blogs to go viral. (2014’s “Not a Tea Party, a Confederate Party” got more than half a million hits.) Now that’s much harder. (2017’s most popular Sift post has less than 4,000 hits.) Meanwhile, I’m constantly bombarded with suggestions that I should pay Facebook to get more visibility. I suspect Google does something similar to video bloggers on YouTube.

The analogy isn’t quite perfect, because I’m not trying to make money off my readers. But Josh Marshall at TPM is trying to make money, in an environment he described recently as a “digital media crash“. The situation was tough to begin with, and then …

Then came the platform monopolies: Google, Facebook and a few others. Over the last five years or so but accelerating rapidly in the last 24 months, they’ve gobbled up almost all of the growth in advertising revenue and begun to engross a substantial amount of the existing advertising revenue as well.

That increased flow of money to the platform monopolies takes it away from the actual journalists who find out things and explain them to you.

[3] One article endorsing the FCC proposal points to the ambiguous role of choke-point giants like Amazon and Google.

Net neutrality’s dubious value is made obvious by the misleading way Democrats and many news outlets reported the decision. “F.C.C. plans net neutrality repeal in a victory for telecoms,” wrote the New York Times. Missing from the headline or lede was that the decision was a loss for Netflix, Amazon, Google, and other corporate giants that provide content.

The logic of this should be obvious: Amazon and Google are on the side of the general public on this issue, but for their own reasons: They don’t want new choke points to be constructed upstream from their choke points.