Thursday, August 10, 2006

Beware the Cries of Woe, but Tread Carefully

Ray Perryman, in, 10 August, writes on a detailed problem in telecommunications billing in Texas. Apparently, a line item on phone bills, the Universal Service Fund (USR), is causing controversy among some customers who do not want to pay it. Cross-subsidisation of high-cost services is possible when a phone company has a monopoly (they don’t bother telling you), but when a service becomes competitive the subsidies are revealed.

I think Ray makes a good case both for the reasons for the cross-subsidisation being introduced over 60 years ago when telecoms were introduced in Texas – for largely social reasons of integration of sparsely populated areas such are common in Texas – and for changing the system now but only after much careful thought and reflection, and not rushing in to remove the subsidy ‘at a stroke’, as is usually recommended in these situations (especially by the more extreme wing of Libertarians).

Ray writes:

As I have frequently said in print and testimony to various legislative, regulatory and congressional bodies, markets are extremely powerful and achieve incredible things in a seemingly invisible and effortless manner, but they are not perfect. Markets are, in essence, a mechanism to allocate resources. If left unfettered, they do so with great efficiency. They do not, however, honor social policies and priorities beyond efficiency, and they do not capture social benefits or costs that extend beyond private transactions. These facts have long been recognized. Even in "The Wealth of Nations," Adam Smith's seminal work in 1766 which first fully exposited the structure of a market economy, he noted these phenomena and suggested numerous situations in which intervention was necessary and justified.”

After explaining the original purpose of the now visible subsidy, he develops a theme of being careful before abolishing it while the consequences are not clearly understood or anticipated:

The consequences could be substantial, and the existing approach appears to be generally achieving the desired outcome in a reasonable and effective manner.
Adequate and affordable phone service is essential to economic progress. However, many areas of the state are too sparsely populated or otherwise too high cost to be desirable business for some providers. Every fee, tax, subsidy and other market variation is worthy of examination now and then. But when it comes to eliminating or materially changing the Universal Service Fund, we had better be very careful about what we ask for

First, let me state my pleasure that Ray correctly introduces Adam Smith into the debate on the appropriate policy to follow and his reservations about markets in some situations – he was never an advocate of laissez faire, and certainly not an advocate of totally fee markets in all cases.

In his oft quoted chapter on free trade – the one where he uses the metaphor about the invisible hand (p 456) – he also discusses the practicalities of going from a regulated or monopolised market to free trade, and here, he exhibits the same caution suggested by Ray about the pace of any proposed changeover from monopoly and restricted trade to competitive and free trade.

Smith writes:

The case in which it may sometimes be a matter of deliberation, how far, or in what manner it is proper to restore the free importation of foreign goods, after it has been interrupted, is, when particular manufactures, by means of high duties or prohibitions upon all foreign goods which can come into competition them, have been so far extended as to employ a great multitude of hands. Humanity may in this case require that the freedom of trade should be restored only by slow gradations, and with a great deal of reserve and circumspection. Were those high duties and prohibitions taken away all at once, cheaper foreign goods of the same kind might be poured so fast into the home market, as to deprive all at once many thousands of our people of their ordinary employment and means of subsistence. The disorder which this would occasion might no doubt be considerable.” [WN IV.ii.40: p 468-9]

(Smith goes on to discuss why the anticipated disorder might ‘in all probability’ be ‘much less than commonly imagined”.)

However, the general point remains, take due care of what you do with people’s lives. They are not ‘wooden chess pieces’ on a chessboard moved at the will of the players. Think through about the human effects of a situation changing abruptly by the careless will of politicians or irate consumers demanding action through their lawyers, and aspiring politicians and ‘men of destiny’ broadcastng their 'remedies'.

Sure, be wary of the cries of woe, too (that’s what the innocent and the unscrupulous would cry, wouldn’t they?). But take a close look at the change and it consequences, weigh the change up as you would anything seriously affecting yourself, and then make your mind up and either modify the change or cancel it. That at least was what Adam Smith advised.


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