The Internet often operates (in many users’ minds, anyway) as though supply is unlimited. Unlike other utilities such as electricity and water, the typical user pays a monthly fee for as much Internet as he or she can consume. But as with any resource, demand will eventually run up against the limits of supply; one possible culprit could be the flood of connected devices that Internet of Things (IoT) proponents expect to arrive soon. When that happens, will an Internet tax be the necessary response?
Price Controls Create Shortages
Almost invariably, calls for taxation to limit demand for a dwindling supply indicate that some other kind of top-down government meddling created the problem in the first place. One possible cause is price controls. Let’s look briefly at a quintessential case: gas prices during a disaster. When the unexpected strikes—say, a hurricane or other destructive event—gas stations in the area will generally raise prices. That price rise, which politicians often attribute to greediness in the form of “price gouging,” is in response to such conditions as potential supply-chain breaks and rising demand. People will often think to stock up on supplies (including gasoline) whether they really need them or not. That rush, combined with potential delays in delivering new inventory, creates a shortage. To prevent a run on the supply, prices therefore rise.
But when politicians decry this basic market dynamic and impose price controls (“anti-gouging” laws), the supply can quickly dry up, leaving nothing for those who truly need it (e.g., emergency vehicles in the case of gasoline). Hence, the shortage.
What happens when the shortage is more widespread and the price controls less obvious? The response might be to increase taxes. Clearly, a higher price will reduce demand by discouraging consumption, but if the market isn’t raising prices (for instance, because it isn’t legally allowed to do so), the government must. It’s these cases of prior government meddling that lead to calls for taxation to prevent a shortage of some resource. Another hideous illustration is the health-care industry, which is a layered mess of price controls, regulations and taxation.
Closer to home, what about Internet bandwidth? Could the inevitable limit create a shortage in which government action becomes necessary?
Net Neutrality as Internet Price Control
Net neutrality was often billed as a way to prevent Internet service providers (ISPs) from creating “fast lanes” whereby customers could pay more for a higher service tier. Instead, the FCC regulations will apparently ensure “no toll roads on the information superhighway,” to use the words of U.S. President Barack Obama. But as one economist noted, “This means traffic jams in peak hours.” In other words, when the market reaches the bandwidth limit, the ability of ISPs (for instance) to help balance the supply and the demand through higher prices will be limited. Net neutrality presumably enforces a single price for everyone; and as good democrats (note the small ‘d’), that price must be low enough for everyone to have access. Such a strategy loudly screams “shortage.” And since government meddling was admitted as legitimate in creating the problem, it will be admitted as legitimate in supposedly solving it—through taxation. According to FCC Chairman Tom Wheeler, net neutrality won’t result in new Internet taxes. Right.
The counterargument might be that we can’t let ISPs charge whatever they want because they have a monopoly. But that monopoly, insofar as it exists and isn’t simply an artifact of the huge capital costs that necessarily limit the number of competitors in the market, is a government creation. Again, therefore, taxation of the Internet in response to a shortage would be prompted by previous government interference.
Power as the Real Ceiling?
Citing a book that discusses the potential effects of a supply shortage and the possible remedy of taxation, Peter Clarke at EE Times notes the concern that power may be a bigger problem than bandwidth for the expected IoT rollout. Clarke said the book “makes the point that—without several orders of magnitude reduction in power consumption in electronics—the projected roll outs of mobile data and the IoT could cause a global energy crisis as soon as 2020. That’s just over four years away.” But with even Intel admitting it has (at least temporarily) failed to keep up with Moore’s Law, the prospects for a huge decline in power consumption are dwindling. Although semiconductor technology can still progress even if it falls short of the pace that Moore’s Law sets, the gains will be longer in coming.
Clarke asks a critical question—and one that a free market has a simple answer to. “It’s not just the billions of end-point ‘leaf nodes’ that will be consuming power...but the exabytes of data being generated and sent to and from data centers. According to [the above-mentioned] book that data processing is rising at a compound annual growth rate of 61 percent at present, and is simply not sustainable. But if it is not sustainable, what is going to give way?” Just as in the case of gasoline during a disaster, what should give way is the low prices. If demand is too high for a scarce resource, the price of that resource must rise to the point where supply and demand are balanced. That might indeed mean that cities must refrain from implementing tens of thousands of streetlight spies to monitor citizens, or that companies can’t afford to stick a processor in every last throwaway product they sell.
But part of the problem is that power utilities, like ISPs, are quasi-monopolies subject to price controls (they must generally get permission from some governing authority before they can increase prices; no doubt other restrictions on their ability to set pricing tiers also exist). Again, however, price controls lead to shortages. “Fixing” them with taxation may solve the problem in some sense, but it creates perverse incentives in which politicians (who produce nothing) get the money that should go to the producer, which is stuck under the imposed price structure. (Perhaps that money, which goes toward political boondoggles, could have instead been spent on increasing the supply?)
Jevons Paradox Strikes Back
Clarke concluded by saying, “All that said electronics engineers have a clear opportunity and a responsibility to develop energy-efficient solutions for the benefit of future generations.” But as laudable as such a goal may be, it may still fail to avert the problem of the Jevons paradox: namely, the observation that increasing efficiency can lead to rising demand and consumption. Were this paradox to emerge in the case of electronics and power efficiency, the concerns that Clarke cites would be compounded rather than eased. The likely outcome would be an even greater push for taxation or some other artificial means of reducing demand.
To find the cause of potential resource shortages related to the Internet, one need look no further than government manipulation of the market through artificial monopolies and price controls. Net neutrality is one such factor, owing to its limitations on how ISPs can charge for their services. Exactly when a shortage will arrive is unclear, but all tangible resources have some limit. As with the case of gasoline during a disaster, the easiest way to avoid a shortage is to let the market set prices accordingly. If some providers set the prices too high, others will compete by offering lower prices; even during tight times, competition for business will prevail. Unfortunately, the likelihood is that the same people who clamored for government imposition of price controls will also clamor for higher taxes when the shortages that their policies created bite them in the collective behind.