How Elimination of ‘Junk’ Cable Fees Can Reduce Consumer Choice

https://www.cato.org/blog/how-elimination-junk-cable-fees-can-reduce-consumer-choice

Ryan Bourne and Sophia Bagley

The Biden administration’s crusade against “junk fees” continues. Federal Communications Commission (FCC) Chair Jessica Rosenworcel recently announced a proposal to eliminate early termination fees (ETFs), or “junk fee billing practices” as she describes them, for cable and satellite TV providers. The proposal is slated for a vote on December 13 and will likely pass given the Democrat majority at the FCC.

Eliminating ETFs would alter the way cable and satellite TV services are priced. At the moment, ETFs are levied if a consumer enters a long‐​term service contract for cable or satellite TV service and cancels their contract before it’s finished. The fees typically start at a high rate and are then reduced each month that a consumer stays in their contract.

The Biden administration (and many consumer groups) see ETFs as unfair charges simply designed to lock in consumers by deterring them from shifting to another service. As such, they deem their use inherently anti‐​competitive. As with other so‐​called “junk fees” the administration bemoans, however, characterizing ETFs as some sort of standalone exploitative charge, rather than a fee that forms a part of an overall pricing model, leads to sloppy economic thinking.

Early Termination Fees can serve several economic purposes for cable and satellite TV companies. There are one‐​off costs to acquiring new customers, as well as for setting up new accounts and providing and installing equipment. These must be recovered, whether the customer sticks around for the length of the contract or not.

The fees also help provide more revenue certainty for businesses, which grants the companies the confidence to make bigger long‐​term investments in service infrastructure, particularly in more remote regions or where expensive overhauls of technology are required.

Banning ETFs obviously has some theoretical economic benefits, such as removing financial barriers to customers changing services when a novel product better suits their needs or when they move residence to somewhere not covered by their current TV provider.

Yet enforcing a ban is no free lunch. These are profit‐​seeking businesses that will seek to protect their revenue base. So the primary effect of banning ETFs would mean some combination of higher up‐​front monthly prices for all customers to reflect greater turnover risk, fewer promotional rates, higher installation charges, or a shift to a more “pay‐​as‐​you‐​go” model for channels or shows. There’s no a priori reason to think these pricing structures are better for consumers overall.

cable tv

In fact, given that the market for television is increasingly competitive, with multiple different streaming platforms already offering “no contract” subscriptions, it seems a bizarre time to ban a whole model of pricing. Customers can already opt for many platforms where they can sign up for a streaming service and cancel at their leisure. But these have incredibly high churn rates for subscribers, which alters the incentives for what type of TV programs are offered.

Cable and satellite services typically offer a more comprehensive package of channels, usually comprising live events, like sports, alongside entertainment, news, and weather channels. But if the companies have no lock‐​in mechanisms to ensure steady cross‐​subsidies are available to provide more niche channels, and they find they can’t charge higher monthly prices without losing customers to streaming services, then we’d expect cable companies to start prioritizing trendier output.

In other words, the packages and channels they offer will increasingly look more like streaming platforms, with fewer niche channels, more customizable packages, and maybe even an increased focus on on‐​demand services, which are less reliant on retaining long‐​term customers to provide cost‐​effectively. In that sense, eliminating these “junk fees” could reduce choice for consumers in how certain TV packages are bundled. It would incentivize less in the way of output consumers watch rarely but value being available.

This proposal is another example of what I call politicians’ “war on prices.” Behind most unusual pricing structures are important economic considerations that are sometimes not immediately clear to regulators or consumers. The fact that cable companies have adopted ETFs suggests that banning them will be costly to the current model of TV provision. It may be that competitive pressure from streaming platforms would have made the ETF pricing strategy unviable anyway, in time, but this should be decided by sovereign consumers, not regulators.

Occupational Licensing Harms Workers in Similar Roles

https://www.cato.org/blog/occupational-licensing-harms-workers-similar-roles

Ryan Bourne

In Empowering the New American Worker, Chris Edwards summarized what economists have learned about occupational licensing laws. These state‐​imposed barriers to work reduce employment in affected occupations, raise pay for workers who keep their jobs, raise prices for consumers, and tend to reduce job‐​to‐​job mobility across state lines.

These studies typically zoom in on occupations directly hit by licensing laws. But what about those who might have joined these licensed fields if not for these strict regulations? What happens to their employment and earnings prospects as licensure expands?

That’s the topic of a new paper by Samuel Dodini in the Journal of Public Economics. Using sophisticated statistical techniques, he groups occupations based on shared skill requirements. He then develops a measure of how much an occupation in a particular state is exposed to licensing among other jobs requiring similar skills. By examining how this exposure differs across state borders, Dodini sheds light on the impact of occupational licensing on employment and earnings in fields with skills comparable to those that are licensed.

Mirroring the findings of previous research, Dodini’s study verifies that, on average, occupations in states with licensing enjoy an earnings premium of about 8 percent compared to states without such requirements.

However, the more intriguing discovery is this: in states with higher licensing demands, workers in other jobs that require similar skills earn less.

For every 10 percentage point rise in licensing among workers in other occupations with similar skills, average earnings in a given occupation drop by 1.6% to 2.3%. This negative impact is amplified for women, Black Americans, and foreign‐​born Hispanic workers.

Overall, Dodini estimates that for every additional dollar gained from an occupational licensing earnings boost, $2.23 is lost due to these ripple effects across other occupations.

licensing

What causes these lower earnings in other occupations? Our initial assumption might be that licensing reduces employment in the licensed occupation, releasing workers with those skills to go into other occupations, so increasing their labor supply and pushing down wages. Yet this effect doesn’t show up in his results. He finds employment levels are lower in occupations more highly exposed to licensing in similarly skilled jobs.

Dodini’s preliminary findings point to two alternative factors. Firstly, occupational licensing might dampen overall industry demand for certain types of workers. Companies might avoid states with complicated licensing requirements or opt to hire fewer individuals in roles that complement the licensed positions. Both of these scenarios would lead to a decreased demand for workers with similar skill sets, consequently driving down their earnings.

Another reason suggested is that when more jobs demand licenses, it might grant companies in similarly skilled fields greater market power. This happens because obtaining licenses for various professions can be costly and time‐​consuming for employees, making it harder for them to switch careers or find new jobs. Additionally, if fewer companies opt to establish themselves in states with stringent licensing laws, workers have fewer alternative employment options.

More research will be required to get to the bottom of these effects. What this clever research suggests, however, is that the costs of occupational licensing spill over to other workers in similarly skilled occupations. Given that more than a fifth of American jobs are now licensed, the impact of occupational licensing is widely experienced.

A New, Depressing Survey on Inflation

https://www.cato.org/blog/new-depressing-survey-inflation

Ryan Bourne

Extensive media coverage of the idea of “greedflation” seems to be affecting public opinion. A new YouGov polling survey undertaken in June 2023 finds that more Americans blame inflation on “large corporations seeking maximum profits” than any other option they are given. 

A massive 61 percent of U.S. adults think profit‐​hunting corporations deserve “a lot” of blame for inflation, up from 52 percent in 2022 (see chart below). For context: this exceeds the number who blame spending by the federal government, the price of foreign oil, the war in Ukraine, or the level of consumer demand. Independents saw the biggest swing towards this profits‐​led inflation explanation, which surely reflects the disproportionate broadcast and print media coverage of a “heterodox” theory that academic economists regard as kooky.

When the last version of this YouGov survey was undertaken in October 2022, I was harshly critical of it. The questions seem almost designed to confuse the public about what inflation is. Ask most mainstream economists and they will say that, to a first approximation, inflation is a macroeconomic phenomenon driven by too much money chasing too few goods. These days they might talk in terms of aggregate demand and aggregate supply instead, to be more general. And yet, when offering up a menu of boogeymen to blame, YouGov doesn’t even list “the Federal Reserve” for censure. This, despite the Fed’s inflation mandate and the fact that macroeconomists see the Fed as the key institution affecting aggregate demand.

Effectively omitting low interest rates, quantitative easing, or an increased money supply as explanations for inflation, all that’s really left is government spending, supply‐​shocks from overseas, and various quack theories or partisan flexes. Little surprise then that when asked what government policies they believe would reduce inflation, the public’s modal choices include “increasing domestic oil production,” “investing in strengthening the supply chain [sic],” “having the government enforce limits on price increases,” and “fining companies for price gouging.” 

The increase in the perceived effectiveness of price controls is the most striking and worrying. Fifty‐​one percent of respondents now think that “having the government enforce limits on price increases would “probably or definitely decrease inflation” compared to 44 percent from those surveyed last October. This, despite the long, inglorious history of price controls as a failed means of controlling inflation.

inflation remedies

The greedflation story, as popularized by Senator Elizabeth Warren, clearly makes little sense. Companies didn’t suddenly get more greedy in 2021 and 2022, and then less so of late. There’s no reason to think there were massive changes in market power that led firms to suddenly be able to increase the level of prices either. And the idea that inflation allowed firms across different industries to suddenly tacitly collude to all raise prices simultaneously far beyond their cost uplifts ignores an inconvenient fact: consumers still need to be willing and able to pay the higher prices. This is only possible in a world where there’s more money for them to demand the products, begging the question: was too much aggregate demand the ultimate driving factor? 

Overall, this polling is profoundly depressing. Inflation isn’t seen by the public as a macroeconomic phenomenon that requires different macroeconomic policies to avoid or mitigate. Looking at the answers in the round, it’s clear that the public instead interprets “inflation” as synonymous with “the cost of living.” Hence any policy that those surveyed think will reduce their living costs—whether holding down certain prices, cutting interest rates, making more oil available, or cutting taxes—is seen by more people as likely to reduce inflation rather than increase it.