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Enriching the Narrative Economics of Public Options


Frank Pasquale (@FrankPasquale) is Professor of Law at Brooklyn Law School, and author of New Laws of Robotics (2020) and The Black Box Society (2015).

This week we’re featuring two discussions of Anne Alstott & Ganesh Sitaraman’s The Public Option. Here is the other post.

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While promises of a “universal basic income” generate a lot of excitement, we should also also consider the benefits of “universal basic services.” As we do so, Sitaraman and Alstott’s The Public Option: How to Expand Freedom, Increase Opportunity, and Promote Equality will be a vital resource. The book combines a crisply written history of government service provision with compelling policy arguments for establishing or extending it in numerous areas. These areas include:

CommunicationFinanceEducationBasic Needs
Broad accessCredit Reporting
Public Libraries
Child Care
Primary/Secondary Education
Higher Education
Health Care

As they address each sector, Sitaraman and Alstott offer a clear accounting of the values at stake. They domesticate progressive policy as an adjunct to (and not a replacement of) markets: public options serve as benchmarks for private services, rather than substitutes for them. They develop a competition-focused narrative about the need for public options: namely, that markets often fail consumers. However, another narrative—of cooperation—may be just as important to securing political support for their goals. Economic rhetoric has consequences, and a more balanced narrative of public options, as enhancing both competition and cooperation, may help ensure they transcend the consumerist bias that has marred so many projects of economic reform over the past few decades.

One of many memorable vignettes in The Public Option is the story of Chattanooga, Tennessee, whose Electric Power Board (EPB) “decided in 2007 to build a fiber network within a decade in order to provide the community with 1 Gbps internet.” The EPB’s public option has been a great success, providing residents with “the fastest internet in the world for less than $70 per month.” Their initiative has sparked “a tech boom in the city, with new jobs and businesses.” It is hard to understand why this program has not taken root nationwide, except for the aggressive lobbying of incumbent internet service providers. Indeed, this lobbying has even hobbled the Chattanooga model in Tennessee itself. The state legislature recently voted to pay AT&T to provide a service to rural areas likely to be “1,000 times slower than what Chattanooga could provide without subsidies.”

As Deirdre McCloskey observed in 1990, “economics is saturated with narration.” Sitaraman and Alstott are skilled storytellers. They argue that contemporary finance and internet services are, all too often, vastly overpriced, thanks to clearly identifiable bad actors who need to be controlled by law. They also describe heroes poised to liberate the U.S. from slow download speeds and high prices.

These stories are based on facts that are hard to dispute. The shameful state of broadband access in America was recently lamented by Thomas Philippon in his book The Great Reversal: How America Gave Up on Free Markets. “In the US, the monthly price of broadband is $68 per month. The average price in France is $31. It’s less than half. In Germany, 35; Japan, 35; Korea is 33; you name it. They’re all in the same ballpark, around 30, 35 dollars,” he’s noted. This extra cost for consumers pads executive compensation, lobby shops, and investor returns—all of which empower the wealthiest to invest in further political action to entrench their privilege.

But in at least some cases, this margin also helps pay for the higher wages, pension funds, and other benefits that come with good union jobs. And it’s around such questions of production and distribution that the story of the public option needs to become richer and deeper—to include characters beyond the consumer. We should take into account the relative incomes and benefits of employees behind Chattanooga’s plan, and those at similar, unionized shops at AT&T. Perhaps the public workers are treated better. But to leave workers out of the picture gives the reader a partial account of the value of public options, tilted toward a purely consumerist vision of the economy. The Communications Workers of America union has argued that “Congress should require that any group who receives public assistance to build out broadband infrastructure must [p]ay prevailing wages and benefits [and ] respect existing collective bargaining agreements and related telecommunication work jurisdiction.” The voice of labor needs to be at the table as we concretize public option proposals.

These questions may be less urgent in finance, where unionization is less common. Many bank tellers would welcome the wages, hours, and benefits package of, say, postal workers (to use a comparator suggested in Mehrsa Baradaran’s important proposal for postal banking). Moreover, those at the top of finance have become expert at upward distribution of returns. As The Public Option suggests, a smaller and more public finance sector, with much less in the way of executive compensation and investor returns, could almost certainly deliver basic banking services (and investment returns) more efficiently than the private sector does at present.

But public options in finance still do raise some critical substantive issues. Should retirement account managers simply aim to maximize net returns for investors? Or should they satisfice (at, say, a 5% expected return), and then pursue urgent social and political objectives (such as investment in green technology)? Sitaraman and Alstott pose the following as a cautionary tale about fees, but it suggests some troubling trade-offs in other realms as well:

A little math shows how money management fees can add up. A twenty-five-year-old worker who contributes $5,000 per year to her 401(k) plan will have about $475,000 by age sixty-five if she pays an investment fee of, say, 1 percent per year. She will have just $377,000 if she pays a typical higher fee of 2 percent per year. That extra 1 percent fee translates into nearly $100,000 in lost savings [assuming a 5% rate of return before fees].

On standard finance theory, the 2% fee is a scandal because money managers, on average, add so little value compared to straight up index investing, which commands fees less than 0.2% at some Vanguard and Fidelity funds. (Indeed, I’ve made a similar point in my Black Box Society.)

However, now imagine a hypothetical “green” or “ethical” or “corporate social responsibility” fund that tends to offer a 4% rate of return. Should that be on offer as part of the public option? Should it even be a default, designed to crowd out plain vanilla index funds’ rogues’ gallery of fossil fuel barons, tobacco tycoons, and tech monopolists? If we tell an individualistic story of competition about the nature and goal of finance, the answer is probably no. We’re all just looking for the highest returns for ourselves. But it is all too easy to overdose on competition, as Maurice Stucke and Ariel Ezrachi argue. Too many business models are based on unsustainable carbon footprints, public health threats, dark patterns, or surveillance capitalism. We need to work together to stop that ruinous competition, and finance can be a tool for doing so.

Thanks to the reflexivity of finance, a more green and sustainable default option may even end up creating no net loss at all: its rate of return may rise simply because more private investors seek out its firms’ debt and equity, as they are assured there will be some lasting demand for these investments from a large pool of funds managed by government. A compelling story about lasting social commitment to a Green New Deal could become as, or more, powerful than narratives of “bond vigilantes” or “high inflation from public spending.” It could be, in effect, a new “free lunch,” helping to square the circle of capitalist focus on returns, with the necessarily broader aims of a polity.

This is an application of a broader theme I introduced in my 2015 article, Law’s Acceleration of Finance: Redefining the Problem of High Frequency Trading. My argument there was that finance regulation must be more than procedural and disclosure-oriented. Rather, it must also address substantive questions of what ought to be invested in. As the arguments of visionaries like Mariana Mazzucato, Saule Omarova, and Robert Hockett are embraced by more policy thinkers and politicians, it is gratifying to see a substantive vision of finance gaining traction in larger policy discussions about the role of the sector.

Conventional economists might object that this model of finance is too dirigiste, top-down instead of bottom-up. But we need leaders bold enough to craft new stories about our economic destiny. The social world does not exist “out there,” to be grasped either well or poorly by use of words, numbers, and code. Rather, all these symbols (and especially language) have the capacity to make and remake the social world. Beyond nuts and bolts differences in the policies they represent, the phrases “carbon tax,” “Green New Deal,” and “geoengineering” disclose entirely distinct resonances, conceptions of the environment and role of government, and beliefs about what we owe to one another. If we fail to work the story of, say, a Green New Deal into finance, other narrators will displace it with less desirable visions of progress.

The rise of narrative thinking in economics has already been embraced on the right. Indeed, one of its foremost advocates is the classical liberal Deirdre McCloskey, and Russ Roberts of the Hoover Institute has written a novel, a fable, and a romance. Technocratic center-left economists like to distinguish themselves from McCloskey and Roberts by touting their mathematical rigor (which McCloskey, in turn, has deconstructed in works like If You’re So Smart: The Narrative of Economic Expertise). Whatever the merits of the models of a Paul Krugman, those in law & political economy also need to develop sophisticated accounts of narratives (and accessible versions of them) to succeed in the marketplace of ideas. This is not necessarily a compromise of truth or validity. As Jack Balkin has argued:

Narrative memory structures are particularly useful for remembering what kinds of things are dangerous or advantageous, making complicated causal judgments about the future, determining what courses of action are helpful, recalling how to do things in a particular order, and learning and following social conventions that require sequential or script­like behavior.

Thinking deeply about how people make “complicated causal judgments” is a foundation of anticipatory social research, which intends not only to discern patterns from the past, but to shape the future.

Narratives about the future are drivers of the economy, and not simply post hoc efforts to understand what has already happened. This insight, going back to Keynes, has recently been recapitulated in Robert Shiller’s book Narrative Economics. There is no physics of markets; economics is a human science, all the way down, and will be unpredictable as long as humans have free will. As Dennis Snower, president of the Kiel Institute for the World Economy, has observed, “The standard statistical analyses are no longer valid. They assume that we know the probabilities with which everything will occur. In reality, we are almost never in that position.” As the trappings of objectivity fall away from standard, laissez-faire-promoting economics, there is more room for other ways of understanding commercial life to take root and thrive.

It is time to tell new stories about the nature and purpose of economic institutions. Infrastructure should not exist merely to get us or our data from Point A to Point B at the lowest price; it should also be a source of fairly compensated, secure work. Our investments should not simply be a way to accumulate money for retirement; they must also be put to work to ensure there is a world we can retire into. I hope that future work on public options builds on Sitaraman and Alstott’s excellent foundation, to further explore the full range of economic narratives that public options can advance.