Zuckerberg, Facebook, and Congress

Magicians will tell you that magic works because they get you to focus on the wrong thing.

And there’s a branch of the public choice subfield of economics named after Peltzman’s research on regulation.

The big news this week is Mark Zuckerberg, the founder and CEO of Facebook, testifying before Congress for two days about how information users divulged on Facebook might be used by others.

Alex Tabarrok has a piece on Marginal Revolution this week pointing out that these hearings are not what they seem to be. Think about magic. You’re probably focused on the wrong thing, and in this case the Peltzman model can tell you what you should focus on. It’s good enough to just quote in full:

If you want understand the Facebook hearings it’s useful to think not about privacy or  technology but about what politicians want. In the Peltzman model of regulation, politicians use regulation to tradeoff profits (wanted by firms) and lower prices (wanted by constituents) to maximize what politicians want, reelection. The key is that there are diminishing returns to politicians in both profits and lower prices. Consider a competitive industry. A competitive industry doesn’t do much for politicians so they might want to regulate the industry to raise prices and increase firm profits. The now-profitable firms will reward the hand that feeds them with campaign funds and by diverting some of the industry’s profits to subsidize a politician’s most important constituents. Consumers will be upset by the higher price but if the price isn’t raised too much above competitive levels the net gain to the politician will be positive.

Now consider an unregulated monopoly. A profit-maximized monopolist doesn’t do much for politicians. Politicians will regulate the monopolist to lower prices and to encourage the monopolist to divert some of its profits to subsidize a politician’s most important constituents. Monopolists will be upset by the lower price but if the price isn’t lowered too much below monopoly levels the net gain to the politician will be positive. (Moreover, a monopolist won’t object too much to reducing prices a little since they can do that without a big loss–the top of the profit hill is flat).

With that as background, the Facebook hearings are easily understood. Facebook is a very profitable monopoly that doesn’t benefit politicians very much. Although consumers aren’t upset by high prices (since Facebook is free), they can be made to be upset about loss of privacy or other such scandal. That’s enough to threaten regulation. The regulatory outcome will be that Facebook diverts some of its profits to campaign funds and to subsidize important political constituents.

Who will be subsidized? Be sure to watch the key players as there is plenty to go around and the money has only begun to flow but aside from campaign funds look for rules, especially in the political sphere, that will raise the costs of advertising to challengers relative to incumbents. Incumbents love incumbency advantage. Also watch out for a deal where the government limits profit regulation in return for greater government access to Facebook data including by the NSA, ICE, local and even foreign police. Keep in mind that politicians don’t really want privacy–remember that in 2016 Congress also held hearings on privacy and technology. Only those hearings were about how technology companies kept their user data too private.

Understanding macroeconomic policies can be problematic because elected officials are often not doing what they seem to be doing. In this case, that’s worrying about your privacy.

On the other hand, unelected officials are often more straightforward to understand. In this case, Facebook’s problem is not really with Congress (which wants a deal) but with Margrethe Vestager who wants more sweeping changes.

Or in the case of something like U.S. trade policy, worry less about Trump, and more about his advisors.