This is apparently a news site. It has been around for 15 years but I didn’t know that until yesterday. Below you will find a link to share this post on Facebook. But at the moment, Facebook won’t permit that. If you copy the link into a Facebook post, Facebook won’t permit you to post. As a site that reports opinions and often linked to news articles, this is confusing to me. As a site whose last post was in June 2020, I don’t think it even covers the ‘new’ part of ‘news.’ But no posts from the last 15 years can be shared on Facebook anywhere in the world now. Suffice it to say, I’m very upset. I feel censored.

My intention had been to stay out of commenting on the Australian government’s media bargaining code. This is for two reasons. The first is that I was an advisor to the ACCC’s Digital Platforms Inquiry and felt that I had been able to discuss what I needed to discuss as part of that process. I think that, by and large, the report was a good analysis of the issues. The second is that I am currently working for governments in enforcement action against large digital platforms and so want to ensure that the cause of being able to bring about increased competition in all elements of digital platform markets wasn’t compromised by anything I might write. However, I see that the Australian policy has elements in it so egregious that it may well compromise the ability of regulators to improve competitive outcomes. For this reason, I am writing this. It is my own opinion but it is a complement to my broader opinion that we need to address serious competitive issues with respect to digital platforms. However, that does not give license to enact bad policy. In other words, I believe strongly in the case for regulation but do not believe that this implies that any regulation is worthwhile especially when it is at the expense of good regulation.

The context

The broad issue is very simple. News and other content are shared on digital platforms. Some of that is by the content providers themselves posting links on social media. Some of that is by the digital platforms who look for links and post them on their platforms. Some of that is by users who post links to share with others. When that happens there are two beneficiaries. First, the digital platforms themselves who are permitting such links. Second, the content providers who are themselves permitting such links because they want people to click on them. (On the latter point, Google have long given content providers the ability to block their links appearing on that digital platform). What this means is that both beneficiaries are receiving benefits as they both have the ability to veto this practice.

For commercial content providers — of which this blog is not one — there are commercial interests in this arrangement. There are also competitive pressures that impact on the incentives to not veto link provision. For example, a news organisation that does not appear on Google may receive no links but because they are competing with others, they may also lose share as a result of that. The same competitive externality can apply to digital platforms. This can give rise to a situation where content providers say, “I may prefer a world where no one I compete with shares links but I have no choice because of competition.” That said, we have to remember that such incentives are often the whole point of competition: we want to apply pressure on content providers to provide content and not have a situation where they may all find it mutually beneficial to cooperate on not doing that.

From this perspective, the participants here have the power to say no. That power is diminished because of competition. But competition is what we want so that is fine. The issue we face is that we may want even more competition between digital platforms and that we may want even more competition between content providers. The goal of any competition-motivated policy is to enhance competition on both sides of that transaction. The end result is that consumers have better content to view and better content to share.

There is, however, editorial power in both of those broad markets. News organisations pride themselves on selecting what is “newsworthy” although, let’s face it, there is no objective standard and hence, we worry about both media bias and misinformation. Digital platforms pride themselves on selecting what their consumers want or, relatedly, what might produce the most advertising revenue. Again there is no objective standard and hence, we worry about both media bias and misinformation. In both cases, if there are sufficient options, we think consumers will be OK with editorial choices as they can select amongst them. That is why we want competition. But when we don’t have competition in the form of those options, then editorial power will mean that consumers are without sufficient power. This is something that the ACCC explicitly worried about in its digital inquiry and it is something most competition regulators are worried about. Editor power to change what is given priority is dangerous when those consuming content cannot easily switch to other editorial rules.

It is worth emphasising that the Internet — large digital platforms and all — has increased consumer options to choose editorial rules enormously. Previously, only large media organisations could do that and they faced little competition. Now there are many more editors of content on the Internet. Thus, we are in a world where, compared to two decades ago, there is significantly more competition. I read the submissions of news organisations to the ACCC. For the most part, they were complaining because they are facing more competition and would like less. Only relatively less often did they note that they were now subject to the editorial power that they had previously wielded in an unfettered way.

The code

The Australian government explains the new code here. There are the legal words, of course, and there is the thing that everyone understands. I am going to focus on the latter as that is what matters. One aspect of this code is something that is useful. When you are subject to the exercise of editorial power and you do not have sufficient exit options, you want to encourage voice. By providing a means by which a content provider can compel a digital platform to talk about some change to an editorial rule that was made, the code can enable that voice. What sort of voice? Here is what the explanation says:

The issues can be about remuneration or another topic but, in
order for the Code to apply, they must relate to the registered news
businesses’ covered news content which is made available on (or via) a
designated digital platform service.

It is about money or “other.” I actually think the other is useful here as it can allow a content provider to compel a digital platform to notify and explaining upcoming changes and then challenge them in some way.

But it is the money that all this is really about. The news organisations want more of it. Large digital platforms have it. It is that simple.

The code is perfectly designed to allow news organisations to get money from digital platforms. It does this by (a) requiring that a digital platform who does not want to pay cannot provide any links to any Australian news. This gives each individual news outlet the power to negotiate as if they can prevent a digital platform from allowing any of them to be linked to (thus, obviating the competitive pressure and so giving them monopoly power); (b) allowing deals to be made that are never authorised by any regulator acting say in the public interest; (c) ensuring that should deals not be freely made, there is a regulatory stop gap; and (d) ensuring that the regulatory stop gap is tilted in favour of an outcome that is in the private interest of one or the other parties.

This last step requires a little explanation. It is not unknown, especially in Australia, for competition policy to run by default. That is, two parties in a competition dispute are encouraged to come together and negotiate a solution and if they fail to do so they are sent to a regulatory process. But normally that regulatory process is designed to drive towards a socially desirable outcome. Also, this mechanism is put in place where it is a denial of competitive outcomes that is the issue and so the regulation will drive towards more competition — it is baked in. (Here is a paper on that from 1999).

So you would think, therefore, that the code would by all about empowering the little guy. Nope. It is, in fact, explicitly about not empowering them. They can be kicked off the platform if the platform does not like being in the news sharing business any more but actually have no role under the code. The media bargaining code is really the Big Media bargaining code. You have to be a large news outlet — in the top 0.1% of outlets banned by Facebook this week — to be empowered. In other words, rather than doing what any person would think is reasonable to promote competition, the code explicitly does not promote competition by keeping the entire thing amongst the already powerful.

What is more, the code obviates any risk to the powerful. The regulatory arbitration that may occur forces the arbitration to select between the two offers of the digital platform and news outlet. It is highly unlikely that either will be in the public interest. Why would they be? We are supposed to have regulators to come up with socially desirable regulators but the code pretty much says, it doesn’t want that. Well may we say WTF!

Let’s contrast this with, say, France whose government can get digital platforms to pay them if they serve news content. That is a tax. The French government may want more in taxes but when it comes to giving the money out at least, it won’t necessarily be doing so in some naked private interest. That isn’t necessarily about competition either but at least it provides a mechanism where good outcomes might occur.

The new oligarchy

As an economist, making predictions regarding what happens from these sort of policies is my bread and butter. Given the earlier content, a policy is a good one if (a) it will promote entry by more digital platforms and better products from existing ones and/or (b) it will promote entry by more news content providers and better products from existing ones. This policy looks like it will do neither.

First, the whole process requires a digital platform being designated as “responsible” by the Minister — in this case, the Treasurer of Australia. There is no judicial process. There are no real criteria. The Minister can do whatever they want here. But if they do designate a digital platform it may well mean work for them. Suffice it to say, at the moment, everyone seems to think that Google and Facebook will be designated.

Well, not really. First, the Minister is unlikely to designate a platform that no large media organisation has a problem with as this entails work. So if some arrangement can be made that quiets news outlets, then that will save a platform. Second, the Minister cannot designate a platform that doesn’t carry any Australian news. So if a digital platform wants out, it can get out.

We have seen both of these things start to come to pass in the last day — even before the code has been legislated. Google have done deals with some large news outlets and thereby signalled they will do deals with others to ensure they are not designated. That alleviates them from being responsible for all of the other voice outcomes that I argued where likely to be a good thing.

Facebook have opted out of the news content business altogether. They decided it wasn’t worth it them. For now at least. One reason for this is that Australians can still share news from around the world and it turns out that is the majority of the news Australians share! They don’t need to link for local news as they can talk about it anyway.

But there is another part to this. The code, by pushing Facebook to that option, actually could give them license to do so as part of negotiating a better deal. Let’s face it, the best weapon in the arsenal of a firm with market power is exclusion. If, yesterday, Facebook had banned Australian news content with the explicit goal of ensuring a lower price, the ACCC could have prosecuted it under Australian antitrust law for exclusionary conduct. However, the code gives Facebook a license to undertake that very exclusion and argue that it could not have been an exercise of market power as it was simply taking the identified route laid out by the government to not be regulated. Never mind that what this really means is that Facebook (a) has now demonstrated to news outlets how much they need Facebook and (b) that when those news outlets try to negotiate an outcome that allows them back, Facebook can end up getting them to agree to a much lower price and conditions. In other words, the entire process has the surely unintended consequence of enhancing the very market power that it was supposedly concerned about.

All those games aside: where will we end up? We will end up with the large digital platforms doing deals with the largest news outlets. Those deals will be multi-year lump-sum payments which otherwise enable everyone to go about their merry business. There will be no new digital platforms. The existing ones will change nothing. There will be no new content providers. The existing ones will change nothing. But the shareholders of digital platforms will be a few million dollars poorer and the shareholders of large Australian news outlets will be a few million dollars richer. In other words, there is no improvement in any competitive outcome whatsoever. It is the codification of an oligarchy. For those outside, notably Australian consumers, it offers nothing.

It’s worse

The Australian code is being touted as “world-beating.” And the rest of the world is taking notice. I see many folks in Europe, for example, giddy with excitement that someone is seemingly harming Google and Facebook. But these companies face billions of dollars of antitrust fines and costs should antitrust actions around the world be successful. By contrast, that won’t happen in Australia. And you know what is cooler than facing a billion dollar antitrust fine? A million dollar side-payment to silence news opponents.

What is more, this entire deal — and if you can’t imagine the smoke filled rooms with politicians and news outlets dreaming this up then you have no imagination — is basically a simple way of exercising the power large news outlets have over politicians. Why else would this whole arrangement fly though Australian political circles with no criticism from either side of government? Very simple. That criticism would not reach anyone because of the news outlet power. And worse, there may be retribution. What is world-beating from Australia was the invention of news outlet political influence. Now Australia is showing the rest of the world how to do that.

That is what I fear most. This entire cosy arrangement in the name of competition will spur other governments to do the same thing and will, in the process, solidify news outlet power and subvert the policy process that needs to take place to nullify digital platform power. That latter power extends beyond simply news content but a process that harms the efficacy of advertising-based business models on the internet. For the sake of innovation and consumer welfare, it needs to be addressed. But I worry that bad policy will drive out good policy. The apple is just too tempting for the would be oligarchists not to eat.

This year’s Nobel Prize in Economics has been shared by Bill Nordhaus and Paul Romer for “integrating innovation and climate with economic growth.” That is one way to thread the needle to link these fine recipients and I applaud the Nobel Committee for finding a way to do it. That said, there is a real reason that Nordhaus and Romer should be linked and it turns on the way they have made their ideas persuasive — not to the general public or even politicians but to economists.

Back in the 1980s, both climate policy and science/innovation policy faced significant barriers moving forward. In each case, the main constituents who were holding up such policies were economists — they were trained in textbook tools of economics and had very strong influence throughout governments due to their ability to frame arguments. In the case of climate policy, while the science pushed for action, the big unknown was precisely what the economic cost of mitigating greenhouse gases would be. In the case of innovation policy, while the costs were known, the big problem was what the return would be. Thus, for each type of policy, economists who had won the push for cost-benefit analysis in government, were able to point out — somewhat accurately — that one-side of the equation was missing in each case. My personal opinion is that uncertainty should not necessarily be a barrier to action but when it comes to dealing with policy advocacy uncertainty is a weapon that can be used by special interests to generate inaction and, at the time, economists were the, perhaps unwitting, wielders of that weapon.

Let me start will Bill Nordhaus. If we choose to mitigate greenhouse gas pollution, it will impact all manner of activity in the economy. From energy to food production to transportation networks, the effects would be widespread and profound. They would impact on different regions differently. In other words, the economic impact was complex and hard to think through. And there was a possibility the costs could be overwhelming.

What Nordhaus did was embed climate change and climate policy into our general equilibrium models of economic growth. He then found ways to quantify the costs that everyone was hitherto conjecturing about. As it turned out, the costs were significant but nowhere near the doomsday assertions that interested parties opposed to climate policy were claiming. Even without technological change, there were existing ways economies could adapt to climate policy and, in the process, self-limit the costs that many were worried about. It moved the debate away from economic assertion and I guess pushed interested parties from “reasonable” arguments to “denialism,” thereby, exposing their naked interests more clearly. While progress has been far from what we would want, the progress that has happened can be attributed to this critical work.

Moving on now to Paul Romer. I have known Paul for 30 years since I was a graduate student. I was deeply interested in economic growth as an undergraduate and felt it had been neglected and was fortunate to be doing my PhD soon after Paul’s work had been published. It drove my interest further and into the fields of innovation and entrepreneurship that I have worked on since. There was even a time I contemplated an offer to join Paul’s education startup but that is another story.

Romer’s contribution is the inventing of what has become termed, endogenous growth theory. The first real theories of economic growth — starting with Robert Solow and Trevor Swan — examined how investment could generate growth and found that it could not explain the growth we had seen over the past two centuries. The missing component was technological change but they had no theory of it. It was well-known that science and innovation were not costless and so such activity would likely be driven by markets, competition and prices just as other economic activity was. But it was also known that these activities were special in that they generated positive externalities although some returns could be internalised through the use of formal intellectual property protection. Many people knew this was the missing ingredient in growth as documented by David Warsh’s terrific history of economic thought (including the contributions of Romer). As an undergraduate in Australia, even I saw this piece of the puzzle and, without knowledge of Romer and others, wrote my thesis about it leading to my very first published article.

I wasn’t the only one. Phillipe Aghion, Peter Howitt, Gene Grossman and Elhanan Helpman all saw it too and made their own separate contributions to endogenous growth theory. Those models, however, still, in many respects, had a microeconomic flavour that meant their main contribution would be to an understanding of how competition (and its potential limitors including patents) would impact on innovation in a growth context. This is very important but it was not as closely related to the growth puzzle that Romer was tackling.

Romer took his time making progress. His PhD thesis led to some technical advances that showed it was possible to have a balanced growth path — consistent with what we knew about economic growth — and also have a role for increasing returns. But to do things properly, the standard assumption of perfect competition was not going to cut it. And so in 1990 Romer published his most famous paper that (a) put the foundations of growth on a model of monopolistic competition (as those in trade theory and economic geography had done previously) and (b) divided the economy into a real and an ideas sector (something that no one had really done). In so doing, the Romer model was able to articulate and identify the key determinants of the returns to innovation.

The first was that the returns to innovation were limited by competition. Even with perfect patents, knowledge itself would promote entry and compete both for profits and scarce resources that limit the returns to past innovation and, as a consequence, to future innovation itself. The second was that by allocating resources — particularly science and engineering human capital — to the production of ideas, those limitations could be mitigated and economic growth itself would accelerate. In other words, front and centre for the promotion of economic growth was the direct promotion of science. Yes, science had been seen as a public good before. But now science was firmly seen as an engine of economic growth. Things that promoted the creation and, importantly, diffusion of scientific research were not just like the arts — there for consumption — but instead were an economy and indeed world-wide force for economic prosperity. To be sure, identifying the precise returns to any particular project would be difficult. But the idea that it is was critical to have a system for science and innovation promotion was now on a solid foundation.

As a person who was closely involved in economic policy in Australia on both the environment and innovation, it is difficult to understate how important Nordhaus and Romer’s work were. They were present in every, single policy discussion and tipped the balance towards action in cases where there were significant barriers and hurdles. In so doing, each showed how a careful accounting of economic forces can lead to progress, reduce uncertainty and make the case. That is what ties these two together and I am very pleased to see the Nobel committee recognising this long and sustained contribution to our knowledge and discourse.

My book with Ajay Agrawal and Avi Goldfarb is out now. It is called Prediction Machines: The Simple Economics of Artificial Intelligence.

We have written some pieces that provide little excursions into the book.

• “A Simple Tool to Start Making Decisions with AI,” HBR Online, 17 April 2018.
• “Make sure AI is right for your business before taking the plunge,” The Globe and Mail, April 14, 2018.
• “AI in the Boardroom,” The Corporate Board, March/April 2018.

Also, we had a book launch and a video of it is available here.

Suffice it to say, if you like the material in this blog, it is a safe bet that you or your robot partner will like this book.

You might remember the case of German comedian Boehmermann and the poem with which he demonstrated what you could, by then-German law (paragraph 103 StGB, the Criminal Code), *not* say about high-office holders abroad. Because the poem targeted him, and since wanna-be dictators like him tend to lack a sense of humor, Turkish PM Erdogan fell into the trap and took Boehmermann to court, demanding at the same time that all traces of it, and the earlier brilliant song that motivated it, be removed by the German government. Much hilarity ensued. Also much publicity for both, the song (now at more than 12 million views on youtube alone) and the poem.

That obscure paragraph 103 StGB with which Erdogan tried to silence Boehmermann goes back to 1871 and had been invoked only a few times previously. Equally obscure, and absurd, was paragraph 104a which stipulated that the government must decide whether it allows the complaint to go forward under 103. Merkel copped much opportunistic criticism, mostly from spectacularly ill-informed media writerlings and pollies, for her considered decision to let the suit go ahead, arguing correctly that it was not her job to decide whether Boehmermann had run afoul of paragraph 103 StGB.

I predicted then – confidently, because clearly the poem was meant to illustrate what you were *not* allowed to say — that Erdogan did not stand a chance. And sure enough he never did.

It must have been quite the lesson for Erdowahn. Be it only for the additional wave of ridicule it generated.

As of January 1, 2018, that silly paragraph in the criminal code (StGB), is gone for good. A pity really because teachable moments for wanna-be dictators are few and far between.

Lessons to be learned: First, in a functioning democracy, satire can be used to speak truth to power even if that power feels perpetually offended. Second, a bit of knowledge of what laws say carries a long way. Spectacularly ill-informed opinions about what ought to be done, not so much. Third, a bit of sound game-theoretic reasoning carries a long way. Almost always.

Some spammers hit the feed on my post yesterday. This is just a post to see if it happens again.

In today’s Age, Ross Gittins argues the economic case for less immigration based on the impact on the environment and aggregate demand. But he commits a surprising sin: he fails to consider what the best way to manage aggregate demand and the environment would be as opposed to pointing out what immigration does to them. Indeed, he claims that immigration accounts for half of our population growth. But it is population growth that is the bigger issue. And the obvious solution is to curtail the other half of population growth — the so-called natural half. Let me edit his article accordingly:

immigration birth adds more to the demand for labour than to its supply.

That’s because migrant families with children add to demand, but only the individuals who work add to supply.

Migrant families with children need food, clothing, shelter and other necessities. They also add to the need for social and economic infrastructure: roads, schools, health care and all the rest.

Another factor is that their addition to demand comes earlier than their addition to labour supply. The rate of unemployment among recent immigrants babies is significantly higher than for the labour force generally.

Of course, I have to spot there because the rest is about skilled migration and let’s face it, babies ain’t skilled. So the case here is for reduced natural population growth as opposed to immigration.

Indeed, that case becomes stronger. Here is Gittin’s argument on the environment:

It’s obvious that one of the quickest and easiest ways to reduce the growth in our emissions — and make our efforts to cut emissions more effective overall — would be to reduce immigration.

It is not obvious at all. It is simply wrong. If people cause emissions and emissions are a global problem, then at first glance moving people from one country to another neither helps nor harms the environment.