Comment on Regulating the Internet-BECKER

The internet is one of the most remarkable and important innovation of modern times. Although initially encouraged by the American government, it has mainly grown worldwide in an unregulated, unsubsidized, and decentralized fashion. Its impact has been huge on communication and information, and to a much lesser extent as yet, on sales, and its development during the next couple of decades is likely to be just as important. The present and future revolutionary impact of the internet, and my skepticism toward government regulation and involvement, colors my attitude to informal or formal regulation of blogging and spam, and extends to taxation of internet transactions. I agree with Posner that additional regulation of blogging and other internet postings is undesirable and unnecessary. Robert Merton, the late outstanding sociologist of science, demonstrated that the main way plagiarism and dishonesty are �policed� in research is through the incentives provided other researchers to discover and expose such malfeasance. These incentives are even more powerful in blogging and other internet activities, where many thousands of individuals seek to discover serious errors committed by bloggers, business leaders, and politicians. I have been impressed by the extent of the information revealed in comments on our blog, far more than in the responses per column from readers during the almost 20 years I wrote for Business Week magazine. The case for taxation of internet transaction is to level the playing field with conventional retail and other outlets. A couple of years ago over 100 economists signed a petition to Congress to allow taxation of internet transactions for precisely this reason. Evidence by my colleague Austin Goolsbee does indicate that internet purchases are higher in states with bigger sales taxes. Although this argument about equal treatment of different type of sales has merit, it is not enough in my opinion to overcome the case against internet taxation. I oppose taxation of the internet not because it is an �infant industry� that needs artificial stimulation to grow, nor because sales taxes of a few per cent alone would destroy this industry. Rather, my reluctance to interfere with the dynamics of the growth of the internet largely explains my opposition to taxation of transactions and other activities on the internet. I fear that the additional regulation of the internet that would inevitably accompany efforts to enforce taxation of transactions by either American states or the federal government would have a negative effect on internet growth in the United States. Any significant sales tax on internet transactions would induce sellers and buyers to find ways to evade paying the tax. That includes setting up offices outside the United States, perhaps while shipping from places within the country, false invoicing, and still other methods from creative minds intent on evasion. All taxes induce avoidance and evasive actions, but internet transactions are particularly difficult to police, as seen, for example, from the proliferation of internet pornography. Hence attempts to collect taxes is likely to lead to substantial regulations that would slow down the so-far remarkable rate of innovation on the internet. There are a few good other arguments against taxation of internet transactions. But the most important, I now believe, is its effects on further regulation of this dynamic media. Spam does create real problems since it wastes time of recipients, and discourages use of email and other parts of the internet. As Posner indicates, spam has grown rapidly, and is commanding a larger share of all emails sent and received. The main factor behind its rapid growth is the low cost of sending spam in large volumes. A report by students in the Graduate School of Business of the University of Chicago collects very useful information about the spamming industry. Their study clearly shows how much cheaper spam is to send than either junk mail or telemarketing. About 150 spam operators appear to control the industry, and they collect many millions of names by scanning the internet. They then sell lists of names for tiny amounts per name. The vast majority of spam is unwanted by recipients, but spam is costly either to block, designate as spam on recipient email accounts, or read and then send to trash. In other words, spam creates what economists call negative externalities or harm to recipients, which sometimes calls for regulation or taxation to discourage the activity producing the harm. However, Guity Nashat (my wife) has indicated to me that the negative effect of spam is mitigated to the extent it substitutes for more costly intrusions on the time of recipients, such as telemarketing and junk mail. The total harm caused by spam is net of this reduction in other intrusions by sellers on recipients� time. The harm from spam is probably still positive, but less than when evaluated in isolation. To the extent that the net effect of spam is a serious problem, there would be a case for simple and effective methods to reduce spam. By simple I refer to my concern expressed above over inducing additional regulations of the internet, in this case to control efforts to avoid anti-spamming approaches. A 2004 Federal Act requires an opt-out notice with a valid return email address, and places restrictions on unsolicited commercial email. Europe instead has a presumably more effective opt-in provision, but apparently does not provide any opportunity for companies or consumers to sue for damages. The effectiveness of either of these laws appears to be very limited, partly because many spamming companies have moved their operations to countries like Taiwan and China that do not yet regulate spam. Other proposed solutions to the spam problem include Bayesian filters, challenge-response systems, blacklists, and digital signatures. Perhaps some combination of these systems will prove effective against spam without overly regulating legitimate email. As yet this has not been the case. So while it could be advisable to experiment with various approaches, it would be a mistake for governments to move aggressively against spam until more evidence is available on which anti-spamming devices are effective without imposing major costs on legitimate uses of the internet system. Otherwise, the attempt to regulate spam is likely to end up causing more harm to the internet and to society at large than any benefits that accrue from reduced spamming.

Comments

[Franois]

"Robert Merton, the late outstanding sociologist of science, demonstrated that the main way plagiarism and dishonesty are �policed� in research is through the incentives provided other researchers to discover and expose such malfeasance."

Excuse my ignorance, could you please precise where he did so? I would be interested in reading the actual argument in Merton's words, but I don't know where to look for them.

[Joe Merchant]

Spam presents a problem that might be typical in a society without government - you may ask a spammer to please opt you out - but that merely informs him that you have read his mail, and thus, are an active mark - likely better than 95% of addresses on his e-mail list. Thus, he can now sell you as a "certified active" address to 100 other spammers.

There are no effective spam police, so you must deal with the problem yourself. I use two options: one, I avoid revealing my "private" e-mail address in public forums, and two, the address I do reveal in public is actively spam-filtered for me by yahoo - they are not perfect, and I likely lose the occasional non-spam message in that account, but such is life.

As long as the basic mechanisms of sending e-mail (SMTP) do not require strong identity of the sender, you will continue to have the spam problem.

I would welcome a revision to SMTP which allows recipients to "opt out" of receiving essentially anonymous e-mail - unfortunately, BetaMax and VHS are slugging it out again in this arena, and the final winner is far from clear.

[Gabriel Mihalache]

I for one dislike arguments based on externalities because of the inability to objectively measure certain effects, and therefore the potential for misuse (consider for example Mises's argument against quantitative methods in Economics, which I don't fully endorse, but which illustrates the point) I'm sure this object is raised often, but in this particular case, that of spam, it seems strangely true.

For example, if the negative externality caused by spam is a function of time, then various people value their time differently. A 13 hours-workday executive will value his hour more than a senior retiree.

It might be unfashionable of me to say this, but involving the State's regulatory-coercive power in wealth distribution (via externality compensation in this case) is a Pandora's box, especially if the State is the one both measuring the cloth and doing the cutting.

[TheWinfieldEffect]

Listen, some people dislike spam, but whatever the fraction is (e.g., 1/1000) of people LIKE spam. Deleting "grow your penis larger" or "time shares in the Everglades" e-mails annoys me, but there is someone out there who perks up and says to himself, "Boy, I'd love to grow my penis! Add me to the list!" and he has a girlfriend who implores him to stop working so much at the office and take a trip to the Everglades where they've a cyber-procured time-share.

Let's call this guy Roland and his girlfriend Rolanda. And let's say that everyone else who is contacted by these e-mails is feels annoyed, but the annoyance is ephemeral and the opportunity cost of deleting the annoying e-mail is has an average value in the cents. By contrast, the penis-lengthening pills and the time-share in the Everglades are priced to go at millions of dollars. Not only that, but Roland and Rolanda value the time-share and the penis pills in the billions. It seems pretty clear in this situation that there is no problem with spam: because the benefits clearly outweigh the costs. Becker does not even deal with an scenario similar to that above. Instead he makes a non-sequitur:

BECKER: "[M]y reluctance to interfere with the dynamics of the growth of the internet largely explains my opposition to taxation of transactions and other activities on the internet. I fear that the additional regulation of the internet that would inevitably accompany efforts to enforce taxation of transactions by either American states or the federal government would have a negative effect on internet growth in the United States."

By internet growth, I presume Becker means an increase in the number of users of the internet, not an increase in the gains from trade in internet sales. The reason I called this a non-sequitur is that such a concern has nothing to do with taxing the internet or the negative externalities hypothetically caused by spam: if one is interested in growing the number of internet users, one would make a positive case for subsidizing the internet, providing free broadband access, regulating the telecommunications industry to upgrade its technology (or wipe out its oligopolistic nature), or providing cash-prizes for innovation (paid out by the government).

I think it's a rather basic argument to make that it's easier to subsidize a group of people to do the right thing than to tax a group of people for doing the wrong thing, because people will line up for free money, but will run like the Dickens away from the tax collector.

[Matt]

Bill Gates has proposed creating a stamp-system for e-mail similar to snail mail. A typical e-mail would cost a penny to send, for example. This might reduce spam, but I'm not sure anyone (myself included) would like the idea of having to pay for each e-mail. At the same time, if e-mail stamps substantially eliminated the amount of spam we receive, it might be an attractive option.

That said, the biggest problem an unregulated internet presents as I see it is not taxation issues or even spam, but rather a social world that provides a convenient meeting place for deviant behavior.

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