Issue 94

Musk's Starlink, China's tech crackdown, Summers on the stimulus, Yglesias on S230

Delivered on 04 January 2021 by Justin Pyvis. About a 7 min read.

Announced in the run-up to the 2007 election with an estimated taxpayer contribution of $A4.7 billion, Australia's still-incomplete National Broadband Network (NBN) has so far cost taxpayers more than $A51 billion. The Parliamentary Budget Office now estimates its fair value is just $A8.7 billion (as of June 2019).

I expect that's an optimistic estimate, given that competition is going to intensify in the next decade. 5G is rapidly rolling out and then there are wild cards such as Elon Musk's internet satellite project, Starlink (itself a recipient of nearly $US900 million in US government subsidies), already reporting speeds of more than 200 megabits per second:

Musk plans to take Starlink to other places in the world, including Europe, in 2021... In total, SpaceX plans to fly as many as 42,000 Starlink satellites into orbit. The goal is to provide high-speed internet to nearly any location on Earth, and generate $US30 billion to $US50 billion in annual revenue.

Compare that to the NBN, where 70% of homes and businesses are on a maximum of just 50 megabits per second. Australia still ranks well behind most of its OECD peers in terms of speed and take-up (but it performs quite well in mobile broadband, a sector in which the government has largely avoided 'investing').

The only way the NBN becomes remotely viable from here is if the government grants it a monopoly over not just fixed line services but also wireless and satellite broadband. Doing so would condemn Australians to sub-par internet for another few decades so let's hope common sense prevails and the NBN is allowed to simply fade into the annals of history as yet another failed government 'investment'.

In China, never forget who's the boss

Alibaba co-founder Jack Ma (who is currently missing) is perhaps China's most well-known billionaire but he might have drawn a bit too much attention from the Communist Party, which on Sunday "ordered Ant to reexamine its fintech businesses -- spanning from wealth management to consumer credit lending and insurance -- and return to its roots as a payments service".

That comes just over a month after Chinese regulators forced Ant to cancel its long-awaited IPO, which was set to be the world's largest ever. In its 'nightmare' scenario, Bloomberg theorises that:

China’s leaders have grown frustrated with the swagger of tech billionaires and want to teach them a lesson by killing off their businesses -- even if it means short-term pain for the economy and markets.

China’s private sector has maintained a delicate relationship with the Communist Party for decades, and has only recently been recognized as central to the nation’s future. Many commentators have attributed the recent crackdown on fintech companies to remarks Ma made at a conference in October, when he decried attempts to rein in the burgeoning field as short-sighted and outmoded.

Between them, Alibaba, Ant and Tencent commanded a combined market capitalization of nearly $2 trillion in November, surpassing state-owned behemoths such as Industrial & Commercial Bank of China Ltd. as the country’s most valuable companies.

In China, the Communist Party is the boss. If a sector, company or individual is becoming too influential it will come down on them hard, regardless of the consequences. Where will China's next Jack Ma immigrate before growing their new trillion-dollar business? The United States (Texas or Miami rather than California, of course)? Singapore? The now EU-free United Kingdom? I would say Australia but its politicians are anti-tech and I don't think the broadband is up to scratch.

Larry Summers on those stimulus cheques

There's a lot I don't agree with when it comes to Larry Summers but he's right to be alert to the risks of the latest stimulus payments, which are equivalent to throwing gasoline on the COVID fire:

The data are striking. Total employee compensation is now running only about $30 billion per month behind the pre-Covid baseline. Measures in the congressional stimulus bill to strengthen unemployment insurance and to support business will add about $150 billion a month to household income in order to replace all this loss.

The question is whether there is a rationale for further tax rebate of more than $200 billion a month over the next quarter. This would represent additional support equal to an additional seven times the loss of household wage and salary income over the next quarter.
But the existing stimulus bill is sufficient to elevate household income relative to the economy’s potential to abnormally high levels — unheard of during an economic downturn. With President Donald Trump’s add-on, we are in completely uncharted territory, with household incomes more than 15% above their normal level relative to economic potential. We frankly have no confident basis for judging how much and how fast this excess, and the pre-existing backlog of saving from the Cares Act, will be spent. There is the possibility of some overheating, particularly if the economy’s potential supply remains constrained by Covid protection measures.

As I've written before, governments seem to have responded to the COVID recession, which has so far been mostly a supply shock, by:

...trying to stimulate demand. That has caused asset prices to go ballistic, in large part because much of the stimulus is finding its way to relatively affluent people working from home, consuming less (i.e. saving more) and able to borrow significantly more.

People are cashed up, they just can't or won't spend it due to pandemic-related restrictions or uncertainty. What they can spend it on are assets (look at property prices, Bitcoin and the Nasdaq Composite for examples), but as soon as they can, expect some of it to start trickling into consumer goods prices. Risk has been mispriced and resources are being misallocated, but by the time the central bankers and politicians realise their error the greedy capitalists' error, it'll be too late.

Yglesias goes off the deep end

Former Vox economics/politics writer Matthew Yglesias had a few choice tweets on Section 230, essentially agreeing with Donald Trump who has long lambasted the protections it provides to social media platforms.

For someone who purports to write about economics those are extremely naïve comments. Essentially, Yglesias is arguing that:

  • the government should concern itself with advertising revenue flows, despite no evidence of monopoly (i.e. become extremely interventionist in picking winners and losers); and
  • Facebook - with a market capitalisation of $775 billion and annual revenue over $70 billion - generates "essentially none" of the societal value created by Silicon Valley and the IT industry.

I personally don't like Facebook but unlike Yglesias I'm wise enough to know that it creates enormous value for millions of people around the world, evidenced by the fact they use it more than the many alternatives available to them, including print media. Destroying Facebook and the value it creates would therefore ipso facto be bad for the country.

But it gets worse. If Yglesias gets his way and cripples Facebook, it will not accomplish his goal of redirecting revenue flows to journalism companies or individuals such as himself. Most of the advertisers on Facebook are small businesses - there are more than 8 million of them - with less than 20% of Facebook's advertising revenue coming from its top 100 clients. If Facebook can no longer offer targeted, localised adverts, how likely is it that your local baker, jewellery maker or coffee shop will simply "redirect" their Facebook advertising spend to journalism companies such as Vox or the New York Times? Facebook's top 100 clients, certainly, but not the remaining 7,999,900, who would all be harmed by no longer having Facebook adverts as an option.

Crippling Facebook by removing Section 230 is bad policy, not because Yglesias' stated goal of of wanting to support journalism companies is bad but because it's an ineffective, socially and economically destructive way to achieve that goal.

AstraZeneca COVID-19 vaccine approved

For all of its mishaps in its handling of the pandemic, the UK is at least leading the way in terms of ending the crisis (how long until the EU bureaucrats get moving?):

AstraZeneca Plc and the University of Oxford’s Covid-19 vaccine won U.K. clearance, marking the first approval worldwide.

The shot can be deployed swiftly because it’s easier to transport and store than the Pfizer-BioNTech one, requiring only refrigerator temperatures rather than deep freezing.

A first dose of the AstraZeneca-Oxford vaccine will be given to as many people as possible, followed by a second dose four to 12 weeks later. A government advisory group said the priority should be to vaccinate large numbers as quickly as possible rather than completing a two-dose regimen right away.

👏👏👏 The AstraZeneca vaccine, if effective, is important as it's a key part of many countries' vaccination plans (see the dark blue bars in the image below, courtesy of the FT).

Of course, none of that matters if the vaccine cannot be properly administered. Israel is the clear leader in that regard, with 10% of its population already vaccinated. By contrast, the US has vaccinated just .95% of its population with the UK at about 1.4%.

Issue 94: Musk's Starlink, China's tech crackdown, Summers on the stimulus, Yglesias on S230 was compiled by Justin Pyvis and delivered on 04 January 2021.