DJ Blog

The Folly of IRS Privatization

Washington politicians love handing out public money to big corporate contractors, especially the ones giving fat donations to their reelection committees.  Replacing civil service employees with private employees working for those campaign contributors is an easy way to reward donor friends.  And it promotes the fiction that private firms do the job better than government workers—even though studies repeatedly have shown that privatization consistently leads to higher costs for taxpayers.

Unfortunately, this mania for privatization has reached the Internal Revenue Service and taxpayers should be worried that tax investigations might become a political prize handed out to campaign donors.  The occasional fraud and shoddy work we see with many government contractors is one thing; but the abuses that profit-oriented companies engage in controlling tax investigations instills a whole different level of fear.

Privatization Proposals Highlight Dangers of Crony Contracting

Two proposals this year highlight this danger of the IRS becoming a focus for campaign donor spoils.

First, tucked into the proposed Senate highway bill this year was a provision to allow private firms to collect tax debts owed to the IRS, a program that failed miserably in pilot projects in the past. The Republican Senate majority pushed this privatization program, but they were joined by Sen. Chuck Schumer of New York, who frankly admitted his support for the provision was strengthened by the fact that two of the four companies likely to get a chance to bid on the debt collection contracts were based in New York.   This would generate jobs for his constituents and no doubt donations to his reelection campaign.

In a more unprecedented and potentially illegal move, the Obama administration in May of this year gave a $2.2 million contract to the legal firm Quinn Emanuel to assist directly in investigations of a corporate target of the IRS.  Unlike the debt collection program, which involves the more mundane – if often unsavory – task of collecting debts where the IRS has already determined taxpayer liability, Quinn Emanuel will be involved in what many argue is the more core governmental function of determining whether a firm being audited followed the law, including taking testimony from witnesses.   When the administration was criticized for this move, they hastily issued new regulations to allow the IRS to make such contracts, but the new regulations are being challenged in court.

Critics have noted not just the expense of substituting high-paid private lawyers for IRS staff attorneys, but that Quinn Emanuel is not even known in legal circles for tax expertise. What they are notable for, however, are being heavy donors to the Obama reelection campaign.  As data  from the Center for Responsive Politics details, Quinn Emanuel employees donated over $300,000 to the Obama campaign and the Democratic national Committee in the 2012 campaign, over half of the total political contributions by the firm employees in that cycle.

Avoiding Costly Privatization Mistakes

While campaign donors may benefit from such contracts, the clearest problem with privatizing the IRS is that there is a documented history of such outsourcing failing to deliver the savings promised and in fact costing more than allowing civil service employees to do the job.  As the Project on Government Oversight (POGO) detailed in a comprehensive report, the government routinely pays twice the compensation paid to government employees when using contractors without any evidence of savings to justify those increased costs.  

The organization attributes the massive increase in contracting over recent decades to the political posturing to “reduce the size of government,” so both Democratic and Republican politicians have expanded the “shadow government” of contractors while restricting the number of civil service employees to the point that there are now four times as many government contractor employees as there are direct federal employees.

In the particular case of the IRS, there is an even clearer history of privatization disasters.  A one year pilot project to use private debt collectors under the Clinton administration in 1996 actually cost the IRS $17 million, according to the Center for Effective Government, even as the firms hired repeatedly violated the Fair Debt Collection Practices law in pursuing delinquent taxpayers.  In a longer recent pilot project from 2006 to 2009 under the Bush administration, a similar debt collection program that was supposed to raise a $1 billion once again lost money.  Worse, the money wasted on the program meant that there were fewer funds for IRS employees to pursue tax deadbeats—and notably the IRS’s own unit for collecting tax debts recovers $20 for every $1 spent.

Longtime IRS National Taxpayer Advocate Nina Olson, who actually helped develop the debt collection program in 2006-2009, told Congress that the program “undermined effective tax administration, jeopardized taxpayer rights protections, and did not accomplish its intended objective of raising revenue.” Yet the Senate went forward this year with a similar program in the Transportation bill.

And then you have the contract by the Obama administration for Quinn Emanuel, which could be a precedent for privatizing a far larger swath of the IRS’s day-to-day investigation work.  As the following from the Statement of Work document highlights, the hourly rates paid to Quinn Emanuel employees are suitably outrageous for a top law firm.

As an analysis of the contract by the non-partisan Tax Analysts detailed, the ridiculous amounts paid per hour to top partners is not even the most obvious problem.  Notably, the IRS would be billed $300 per hour for a non-lawyer paralegal.  As Tax Analysts notes, the actual lawyers at the IRS are considered top notch, yet perform the work for a fraction of the cost Quinn Emanuel is billing the government.  First year lawyers at the IRS cost the government $60 per hour, including benefits, while the highest paid top ranked IRS lawyers still cost the taxpayer only $150 per hour.  So the IRS could be hiring five entry-level or two- top-level litigators for the price of just one Quinn Emanuel paralegal.  And they could be hiring something like eighteen entry-level staff lawyers or seven top-level IRS lawyers for the same price they are paying for work by the top partners at Quinn Emanuel.

This is a ludicrous windfall for Quinn Emanuel and a complete rip-off of taxpayers.

IRS Privatization Undermines Government Accountability and Taxpayer Rights

Beyond the financial costs of privatization, such outsourcing of core government functions threatens basic democratic accountability and the protections of citizens built into our tax laws.  While the supporters of current privatization efforts have been bipartisan, so have the criticisms from liberal and conservative individuals and groups who fear private firms violating the law in pursuit of profit.

Reacting to a district court ruling questioning the legality of the Quinn Emanuel contract, Illinois Republican Peter Roskam, who heads the House Oversight Subcommittee at Ways and Means, argued, “It is inappropriate for the IRS to use private law firms to perform audits and administer tax law. Federal law does not allow for contracting out these inherently governmental activities, not least of all because it threatens taxpayer privacy and confidentiality.”

In 2014, when the Senate first began discussing reviving the program to allow private firms to pursue delinquent tax debts, a coalition of consumer groups, including Consumers Union and the NAACP, wrote that IRS contractors would expose taxpayers “to potential abuses that are unfortunately common with that industry. It will also disproportionately impact low-income taxpayers…Common problems include aggressive and abusive collection tactics, and failure to accurately inform borrowers of their rights”  Another progressive critic of the program cited to the 2006-2009 experience of abuses, including the example of debt collectors placing 150 phone calls to the elderly parents of an adult child who hadn’t paid his taxes on time.

With the Quinn Emanuel contract, the IRS is moving into the very dangerous territory of private entities being involved in determining policy on what is and is not illegal under the law.  Criticizing a similar move by the City of Anaheim to contract out local tax investigations, the conservative-leaning Tax Foundation cited to IRS experience with its private debt collection program, where IRS oversight was “impressive” yet still couldn’t prevent private firms’ self-interest from distorting what should be government neutrality in application of the law.

Critics of the Quinn Emanuel contract, which is specifically investigating Microsoft, have highlighted the potential problem in giving the law firm access to highly confidential information, even as Quinn Emanuel is representing business rivals of Microsoft such as Google.  IRS investigators are tasked with protecting the privacy of those they audit, which civil service employees have little incentive to sacrifice, but private lawyers hired by the IRS would have tremendous self-interested reasons in breaching that confidentiality.

We Shouldn’t be Reviving Modern-Day Tax Farming

In the New Testament, “tax collectors” were a particular target of derision, but that reflected not just some general disdain for paying taxes but the fact that in Roman times, tax collection was outsourced in many cases to “tax farmers” who collected the maximum amount they could, while keeping any excess beyond the official levy for themselves as profit. 

Tax farming survived for centuries in various forms in many countries and it was a triumph of modern government to regularize tax collection under the supervision of neutral government employees protected from most political interference or self-interest by civil service protections. 

The last thing we need is to allow the outsourcing of core IRS functions, either the Senate proposal for privatized debt collection or contracts like the Quinn Emanuel that hand over core investigative functions of IRS staff to outside firms.  Hopefully, both political reality and court decisions halt the current rounds of proposed privatization, but what’s needed is a broader recognition of past failures of privatization and a return to the understanding that led to the founding of the civil service in the first place: that government functions are best performed by workers directly accountable to tax payers, not to profit-seeking firms that often use campaign donations to land those contracts.

We don’t need a return to modern day form of tax farming.  

ContentIssues

Politics/Governance

How Big Data Slashed Raises for Most Employees

The guaranteed annual raise is increasingly a thing of the past—one reason wages have stagnated overall in recent decades.  For the decades before 2000, salaries went up about 4.1 percent a year, according to data by Aon Hewitt.  But in the last four years, even as companies have recovered from the financial crisis, annual raises have averaged only about 2.8 percent. 

Instead of permanent raises, the best many employees can hope for are bonuses and other cash awards that are increasingly replacing permanent increases in employees’ base pay.   And the kicker is that companies are increasingly using “big data” analysis to dole those bonuses out selectively only to the employees most likely to leave the firm, while slashing additional compensation to the rest of their workforce.

A whole host of companies now scour employee’s personal data, social media and every other source of information on individuals to create comprehensive profiles of each worker.  “[Data] has helped us determine, with ever-greater accuracy, an employee’s probability of quitting,” related Will Wold, Credit Suisse’ Global Head of Talent Acquisition & Development, in an interview. Or as Google’s President of People Operations told the Harvard Business Review, big data lets them “get inside people’s heads even before they know they might leave.”

Knowing what employees are likely to leave is critical in helping companies deploy efforts to retain them, but knowing which employees are NOT likely to leave is just as important, since it lets companies save money by slashing the annual salary bumps for that latter group.   If employees are too timid or too in debt to risk a job switch, companies can use that information to reduce or even eliminate annual raises for them.

McKinsey and Company lays out the logic in a report, Retaining Employees in a Times of Change, where they advocate that companies not waste pay increases and bonuses on employees “who would have stayed put anyway.”  They detail how different companies use data analysis to identify the employees at risk of leaving the company in order to offer them a “mix of financial and nonfinancial incentives tailored to their aspirations and concerns.”   In McKinsey’s analysis, such incentives need only be offered to 5 to 10 percent of the workforce; the rest can either be allowed to leave or those employees are unlikely to depart even if offered no raise. 

McKinsey argues that good use of data analysis will allow companies to avoid hefty pay hikes even for the employees they want to make sure stay.  By getting inside employees’ heads, they can offer training and other incentives promising longer term prospects of career advancement in lieu of immediate pay hikes.  Some of these employees may indeed end up with higher pay down the line to make up for the deferred pay raises but since not everyone can advance to higher positions, many or even most of the targeted employees may end up deferring pay for empty promises of longer-term payoffs.

McKinsey offers this bottom-line projection of savings using the case study of a European industrial company that found when they applied such an approach, they were able to slash their annual budget for compensation increases by 75 percent compared to their previous cash-based approach.

McKinsey is not alone in promoting this new gospel of selective raises.   Consulting firm Deloitte argued in The Dataficiation of HR that, similarly to McKinsey, most employees will stay put in a firm with much lower raises than traditional industry standards, so compensation packages should be focused mostly on the smaller set of high performers most likely to move to another firm.  Ironically, the biggest obstacle for the consulting firm in implementing their recommendations were top managers who resisted eliminating across-the-board pay increases. But, over “many months…over time they realized that data could make them smarter in their decisions about who to hire and promote.”

Datafication of the Human Resources department means that employers know not just who are the most valuable workers in their employ but which employees know their value.  For employees that know their value and are most likely to leave, companies can up incentives to keep them, although psychological profiling can ideally substitute cheaper non-financial incentives for cash in many cases. 

For the larger group of employees who don’t know their value or are too timid to demand compensation in line with that value, datafication has allowed companies to slash compensation and made the automatic annual salary increase a distant memory of a past era while deepening the wage stagnation so many families have experienced.

ContentIssues

Work

Delivery: The New Front in Corporate Surveillance and Monopoly Power

That friendly delivery guy at the door?  He’s the new face of corporate surveillance as tech titans launch a new war to control data on what and how you buy things.

Google announced this past week that it will build on its existing Google Express delivery service, which partners with multiple companies like Target, Costco and other specialty stores, to add fresh food delivery, primarily through a partnership with Whole Foods, starting in San Francisco.

Amazon, which already does fresh food delivery through its Amazon Fresh service, is adding restaurant delivery as well, starting in Seattle and moving on to other cities presumably.

They are both competing with other delivery services such as Instacart’s grocery delivery service, which operates in 17 U.S. cities, as well as meal delivery services from PostMates, Seamless and other companies (see this CBinsights chart).

For Amazon, expanding delivery gives it a chance to expand the lure of its Prime service and sell more and more stuff.   Why Google is involved in delivery is a harder question, since it’s selling other peoples’ stuff and being a middleman is hardly a high-profit spot in the marketplace – and most evidence is that Google is losing significant money on these delivery ventures.

However, what Google – and other tech firms – get from delivery is not just short-term profits on individual sales but precise data on what people are buying.  If your business is advertising, knowing what people buy is golden data, since it helps other advertisers more precisely target ads to the demographic groups most likely to buy their goods and services.

Google knows tremendous amounts about what people want to buy, since they get to precisely track hundreds of millions of consumers as they search the web for information on potential purchases.  For them, the holy grail has been for years to better connect that data with information on what those consumers actually end up buying in the end.  For years, they’ve tried to promote payment systems they control such as multiple iterations of their Google Wallet system – and just last week launched a successor system Android Pay – to help deliver better data on consumer transactions. 

But payment systems are tricky since they require multiple agreements by vendors, financial companies and consumers to put in place.  Taking on delivery is an expensive but more direct way for Google to put itself right smack in the middle of consumers purchases of a range of goods. 

The payoff is that Google will be able to observe the full lifecycle of consumer purchases, from noodling around the Internet doing research to finding their final choice to getting the product or service delivered.  Every click and every delivery will create new invaluable data for the company, data worth far more than any small profit margins (or even probably small losses) on the costs of delivery itself. Combined with all the other data a company like Google has on a consumer, this will give advertising campaigns a chance to target consumers at every point of potential influence on their decision-making.  And it will only reinforce Google’s monopoly dominance of online advertising.

This highlights a problem in the business press which tends to treat new ventures by tech companies as “competition” in some new sector rather than part of a strategic extension of power in existing markets.   Just as Microsoft entered web browsers way back in the 90s not to make money on Internet browsing but as a way to reinforce its operating system and Office sales, the entry of Google or other tech companies into odd new ventures like delivery should be evaluated at the start for their value in reinforcing a company’s core business operations.  

Google will never match Amazon in e-commerce sales, but it never intends to since that’s not its business model and Amazon is not its real competitor.   In fact, delivery will help Google further entrench its dominance of online advertising versus its real competitors, Microsoft in search advertising and Facebook in display advertising. 

Both the business press and the courts have increasingly outmoded models in discussing markets and competition in the new data-driven economy. As Google expands its delivery and other e-commerce ventures, it’s about time both do a better job of analyzing how such ventures reinforce monopoly power.

ContentIssues

Commerce

Will Uber and Driverless Cars Help Kill the Planet?

The fight over Uber can be reduced by the media in a place like New York City as a fight between hide-bound yellow cabs and high-tech Uber “innovators”—but that’s a frame that ignores the more than 95% of the population that don’t use any kind of cab at all.  And when you take a step back, the fight over Uber and its future likely use of driverless cars as enormous implications for whether our nation and the world can stop climate change from killing the planet.

When a deal was announced Wednesday for Uber to continue growing, but sharing its data with the city for a study on its effects on transit in the City, a key part of the deal was that not only would the City be studying how Uber impacts the traffic patterns, jobs and the effects on disabled drivers, it would be looking at how Uber will share revenue to strengthen mass transit for the rest of the City’s population.

Whither the Green Metropolis?

And the impact of Uber and ultimately driverless cars on mass transit is exactly what any study of Uber should be focusing on, both for the needs of the mass of consumers who depend on it and for how more cars on the roads in New York City could undermine the fight against climate change.

A core reality is that most New Yorkers do more to fight climate change just by living here than most of the crunchiest Green-oriented consumers living in the suburbs largely because they don’t drive cars.  This isn’t a small difference.  Studies show that New York City residents use only one-third of the energy per capita of the average American consumer.  To put it another way, every million people living in NYC is equivalent to shutting down 15 coal-powered power plants.

So the long-term question is how Uber and driverless car will impact mass transit and energy use in the mass transit system that now makes New York City the “green metropolis” of the nation?

The Debate on the Environmental Impact of Driverless Cars

Uber has made it clear that, for all their propaganda about creating jobs, their goal is to eliminate taxi drivers altogether in favor of driverless cars.  "The reason Uber could be expensive is because you're not just paying for the car — you're paying for the other dude in the car," CEO Travis Kalanick said at a conference last year. "When there's no other dude in the car, the cost of taking an Uber anywhere becomes cheaper than owning a vehicle.” In Pittsburgh, Uber has opened a driverless car research center to move this goal forward and has test vehicles out on the streets of that city already.

Now, if Tesla and Google deliver electric-driverless cars, won’t such Uber services be an environmental bonanza? Some researchers have argued this exact position, but they have to assume that current coal-driven and other polluting power plants delivering the electricity to power those cars will be far less polluting than they are today. In fact, many analysts have noted that today’s electric cars often contribute more carbon emissions to the environment than a typical gasoline-powered car, since not only do they often draw electricity from dirtier power sources than gasoline, there are additional energy costs in charging the batteries and, more significantly, in the complex manufacturing of the batteries themselves.  How polluting electric cars are is hotly debated, but they are no panacea at the moment.

Driverless cars create the additional environmental danger of increasing the number of car trips and miles cars drive.  A study at the University of Michigan this year argued that driverless cars will inevitably use more fuel than cars with drivers because they will encourage those extra trips.  For cars owned by individuals, it will be attractive for families to skip combining trips and instead have the car drop Dad off at work, come open empty to pick up Mom, and even potentially add separate trips for older kids.  

Translate a similar analysis to a place like New York City and you have the fear that large numbers of energy-efficient subway trips get replaced with polluting Uber taxi rides.  Data shows that Uber has already increased congestion in downtown Manhattan, so it’s hard to believe that the promise of “cheaper” driverless rides won’t explode that congestion in the future.

As importantly, the “convenience” of taxi trips will likely encourage more poorly designed transit corridors in New York City and across the country, encouraging new housing in expanded urban sprawl – the core source of climate change pollution.  The issue of Uber and expanded driverless cars is not just about how they might make driving today more convenient, but whether they are just a way to avoid the broader planning and infrastructure investments to fix long-term problems in our transit systems.

Mass Transit is the Real Innovator, Not Silicon Valley

Mass transit has been having a slow but steady revival in this country as the number of vehicle miles driven per person has been dropping significantly since 2005.   Uber, Tesla and Google are promising a driverless car “fix” for transit issues, a solution that is attractive for many politicians precisely because it demands few new public dollars or the hard decisions needed to change environmentally destructive (and racially segregated) housing and transportation development patterns in our nation.

That a taxi-hailing app is an important “disruptive innovation” is a distraction from the serious failure of the U.S. to invest significant dollars in transportation infrastructure, particularly new transit that is less polluting.  The World Economic Forum’s Global Competitiveness Report  ranks the U.S. 15th in quality of its rail system and 16th in quality of its roads—and public investment in infrastructure has continued to fall in the last few decades.

Compare this to China where the government has announced plans for major investments to unite a region of 130 million people in the Beijing region with new high-speed rail lines, new subway systems to replace dysfunctional highways,  and better connections between small and larger cities to make it possible to get across the region rapidly for all families.  Between 2008 and 2010, the government approved $654 billion in investments for mass transit as part of the country’s stimulus effort to fight the global financial crisis.   Probably not coincidentally, as China has seen that such investments can strengthen their economy and deliver climate change emission reductions, they have become far more willing to commit to global agreements to reduce climate change.

Relative to the kind of bold investments for the future that China is now making – something that the U.S. itself was once a leader in globally – the “innovations” of Silicon Valley like driverless cars seem somewhat pathetic.  They seem to be more an excuse by economic and policy elites to distract the public debate away from the investments needed– and taxes on that economic elite – that could deliver real improvements in transportation for the population as a whole and the reductions in climate change emissions needed to save the planet.

Uber and driverless cars may have some niche role in supplementing transit systems across the country, but as New York City studies their likely impact, we can hope that the City follows through on ensuring that they contribute significantly to expanding the mass transit systems that remain the all-time champion innovators in fighting climate change and delivering effective transportation for most of the population in the City.

ContentIssues

Politics/Governance Housing

Uber: When Big Data Threatens Local Democracy

Big data is threatening to crush local democracy across the country—and if it succeeds, it may distort local transit and infrastructure development for decades to come.

As Uber has sought to dominate the local taxi industry from Delhi to New York City, the company has deployed its multi-billion dollar venture capital war chest to fight politicians across the country and world, often ignoring local laws as it introduced its app and drivers into the heavily regulated taxi industry.  In New York City, a bill has been introduced to limit the growth of the company locally while the City Council studies the implications for the local taxi industry.

Yesterday, Uber added an attack ad against the City’s mayor Bill De Blasio on the front page of its hailing app, melding its attempt to control local taxi service with seeking control of local politics.  In doing so, it highlights the danger of letting multi-billion dollar global corporations control any part of local transit or other infrastructure, since it gives them a stake in distorting local politics as well.

Uber may be a young company but they have entered old-style politics with a vengeance, hiring David Plouffe, the former strategist for President Obama’s 2008 election campaign to help direct a team of 250 lobbyists operating in at least 50 cities and states around the country.  On top of vast financial resources for traditional lobbying, they control an equally important resource – data and communication with voters throughout local constituencies.  In local political fights, Uber has used email and its app real estate to launch multiple attacks on political opponents. 

An Opening Salvo in the Politics of Local Logistics

The fight over Uber is not about who runs local taxis, but really about who will control local transit and related infrastructure in the future.  Uber has made it clear its ambitions go far beyond taxis to encompass what Inc. magazine calls “the future of logistics.” 

The data Uber collects on users and local transportation can be converted into delivery services or, as writer Ken Roose explains, “like Amazon, it can become something akin to an all-purpose utility--it'll just be a way you get things and go places.” Uber has already launched a prototype “Uber Cargo” delivery business in Hong Kong and food delivery and courier services in other cities.

This ties into plans by companies like Google and Tesla to introduce driverless cars and a rush of tech companies to control the logistics and information related to local economies and commerce.   Driverless taxis are the obvious long-term next step for a company like Uber and could reshape urban transportation as fundamentally as the original introduction of the automobile.

The big data companies are already gearing up for the politics of controlling the next generation of urban infrastructure.  Google for example now spends more on lobbying that any other company, a large part of it ($18.2 million) on federal lobbying, but the company has also built a network of state lobbyists to help it on local fights like legalizing its driverless car project. 

Driverless cars combined with Uber data – and Google is a major investor in Uber – could remake urban transit, especially as local laws and infrastructure are changed to accommodate them.   Analysts are already discussing how the “‘transportation cloud’…will quickly become dominant form of transportation – displacing far more than just car ownership, it will take the majority of users away from public transportation as well.”

History of Global Corporations Distorting Local Transit Development

With so much at stake, the danger of letting big data money gut local democratic decision-making is obvious.  We only need look to the history of how the auto industry used its political muscle to literally pave the way for destroying local mass transit in multiple cities and pushing highways and suburbanization.  Some of that movement was going to happen naturally, but the auto companies sped the process along and deepened it with actions such as buying up local trolley systems and converting them to bus systems.

City streets, which had been a shared resource of cars, bikes and pedestrians, were converted to car-only use. Where car drivers were once held criminally liable for any pedestrian killed by their car, car companies launched major lobbying campaigns to create a new crime, “jaywalking” that put responsibility on pedestrians not to be in the cars’ way.  

Like Uber, the car companies used the communication infrastructure of the day, in that case wire services for reporters, to seize control of the public debate on use of streets.  The National Automobile Chamber of Commerce encouraged reporters to send basic details of traffic accidents to their service and would receive back a complete article to print the next day, with the articles shifting the blame for accidents to pedestrians.

The result of decades of car industry lobbying was the gutting of much of urban America. 

Fighting Monopoly as a Political Problem

With momentous political decisions facing local governments as big data, driverless cars and other technologies reshape local transit and logistics, we need to worry about big data monopolies not only distorting local industries at the economic level but also how their political power may distort political decision-making as well. 

Uber is backed by an array of economic players, from Google to Goldman Sachs and local politicians should recognize that legalizing Uber is not just adding an additional economic player to the local economy.  It will add a political player willing to spend billions of dollars with the goal of establishing a global logistics behemoth—and seemingly willing to waste any politicians who get in its way. 

If Uber is going to misuse its economic power to try to control local political institutions —including real estate on its apps as political attack ads – local governments should feel justified in restricting its growth until both the potential economic and political problems of an emerging taxi monopolist are addressed.  And it raises the broader issue of how big data’s political power needs to be restrained to ensure communities get to decide how best to use technology, rather than the technology companies deciding how best to use communities for their own economic interests.

ContentIssues

Politics/Governance Commerce

The Battle Over Your Car's Data

For many users, linking their iPhone to their car is a great way to listen to their music handsfree.  Apple's Carplay and Google's Android Auto are systems provided to the car companies to deliver in-car services to drivers -- but the battle brewing is who will harvest the driver data and profits from that.

With analysts projecting billions of dollars in revenue from using such data, the car companies are negotiating hard with Google and Apple to keep the data collected under their own control:

"The risk is, if you give up control and somebody else figures out that business model, then you lose the future revenue stream," said Friedmar Rumpel, vice president in AlixPartners' automotive practice.

The car companies in many cases are severely limiting which data Google and Apple have access to from the car operations or in the case of Ford and Audi, the companies are creating their own technology systems to completely replace Google and Apple's software.

The reason for this hard negotiations is that car data is not only incredibly valuable to the car companies themselves but also to third parties who the car companies look to share the data with for new revenue streams:

The vehicle's activity can reveal various information about the driver and their habits, including their most frequent destinations, where they do their shopping, what bars or restaurants they frequent, where they buy their gas, how fast they usually drive, and other such information. This data can be valuable to merchants, insurance companies and the like, and carmakers want to prevent Google and Apple from getting their hands on this information collected by in-car technology systems.

One key partner for that data are insurance companies to "allow insurers to base their rates on a driver's behavior behind the wheel." 

Notably absent from the articles on this battle is how drivers themselves are negotiating for their share in these massive revenues.  They may gain implicitly from some cheaper services but, like most of these corporate-to-corporate battles over data, the clear assumption is that most of the added value from the data services will accrue to the companies themselves and the key battle is over which company will profit most from consumers giving up their data largely for free.

ContentIssues

Commerce

The $heriff tool: detect price discrimination while you shop

Today I want to tell you about $heriff, an awesome new tool I learned about recently. It’s currently an add-on to the Firefox and IE browsers, but it will be compatible with Chrome soon. I mention this because I think you will want to use it, partly for the good of scientific discovery, but partly for your own good.

Because here’s what $heriff does for you. It allows you to see how prices for goods you’re interested in buying would change depending on where the request is coming from. And sometimes the answer is “a lot,” even on Staples.com or Amazon.com.

I talked to one of the creators, Nikolaos Laoutaris, who works as a computer science researcher in Barcelona. Nikos described how he came across the idea of creating $heriff. Namely, he and a friend were discussing their upcoming vacation to a town in Austria, and they were both looking into booking the same type of room at the same hotel (at the same time, since they were doing it over Skype) and they were seeing very different prices.

The way it actually works is that there’s a way to “check” prices when you come across one, and the results pop up in a separate window. Here’s a screenshot of what happened with Nikos showed me $heriff checking on the price of a fancy camera at digitalrev.com:

Screen Shot 2015-07-09 at 12.35.46 PM

The list corresponds to what price showed up when a bunch of servers at academic institutions were asked to send a price request that $heriff extracted from the local webpage. To be clear, your personal request for price, coming from your browser, might depend on location as well as your cookies and referral url, among other things, but these other prices correspond to “clean browsers,” with no browsing history, and no login history, making a request from a specific location. So those price variants correspond to location changes only.

There’s also a space below for “Results from local users,” and this is where you come in. If there’s a person with a $heriff add-on in your local area, the idea would be to use the information your browser collects to allow someone to compare their price with your price. In this way we would (slowly) also learn how prices change depending on browsing history. The more people who use $heriff and donate their data to the project (third party cookies, some browsing history, and prices), the faster we will learn about how prices vary.

Among other things, this could be a way of figuring out how to intentionally set your input data so that you get the best price for a given product.

A few notes:

  • Local sales tax and shipping costs are valid reasons for prices to depend on location of the buyer, but they are typically added later, after the prices are shown.
  • It’s possible that tariffs come into play, but they don’t seem consistent. Also, the prices vary too much to be accounted for by tariffs.
  • Nikolaos Laoutaris and his colleagues have also been doing great work looking into how people are tracked, and how such information is used to steer them into environments of “search discrimination,” which means that which products or offers they are shown changes, rather than the prices themselves.
  • Also, he’s part of a cool project called the Data Transparency Lab.

Get started with $heriff or learn more about Nikos’s work, by going here.

ContentIssues

Commerce

How Mobile Supports Google’s Online Adverting Dominance- And Why the EU Should Take Action

For Release: July 8, 2015
Contact:  Nathan@datajustice.org  (917) 854-0279 

 

Data Justice Policy Brief
 

How Mobile Supports Google’s
Online Adverting Dominance
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Why the European Union Competition Authority Should Take Action

 

When the European Commission announced antitrust proceedings against Google in mid-April, the most interesting part was not the complaint about the company’s sidelining of competitors in search results – an issue that the Commission had been discussing for years. The real news was the formal investigation into whether, in the words of the Commission, Google’s “conduct in relation to its Android mobile operating system as well as applications and services for smartphones and tablets has breached EU antitrust rules.

What the European Commission is acknowledging is that in a world where mobile is becoming the primary mode of access to the Internet for large numbers of people, controlling the dominant mobile operating system is crucial to Google’s business model and has an anticompetitive role in the Internet ecosystem as its search engine. 

As this policy brief outlines, Android should not be analyzed for its dominance of the mobile operating system sector, since no company is really seeking to make money in that sector alone.  Rather, each is using control of the operating system to strengthen its revenue in its core profit centers, whether Apple strengthening hardware sales, Amazon strengthening its ecommerce position, Microsoft its Office and other applications sales.   Google for its part makes essentially no revenue from users of either its Android operating system or its search engine, but each plays a role in giving Google dominance in Internet advertising, especially its Adwords keyword-based advertising -- often called search advertising, but which in fact delivers up ads to search engines, Gmail and a range of partner sites.

Control of Android not only places Google apps in prime real estate on user phones but also delivers the critical engine of Google’s strength in advertising, namely detailed information on users. Such personal data is prized by advertisers and, as discussed below, gives Google a premium price per click on those ads compared to any actual or potential competitor in the keyword-based advertising sector. Control of Android for Google is therefore more akin to Microsoft’s promotion of its free Internet Explorer browser and other middleware, which were designed not so much to dominate those particular software sectors but rather to reinforce its core operating system dominance at the time.

In examining how Android generates critical data about consumers for Google, regulators should recognize the consumer harm from allowing a company like Google to extract and create such comprehensive profiles of each user.  That harm, as discussed in the policy brief, includes not only any qualitative lost privacy, but the real economic harm of such a dominant player extracting such data at too little a price paid to users for that data and the economic harm that its advertisers can inflict on consumers through various forms of price discrimination that raise the costs of goods across the economy for consumers. 

Is the Happiness Industry Creating Algorithmic Selves?

In a recent podcast called “Thinking Allowed,” host Laurie Taylor covered two fascinating books: The Wellness Syndrome, and The Happiness Industry. One author discussed a hedge fund that’s now managing what it calls “biorisk” by correlating traders’ eating, drinking, and sleeping habits, and their earnings for the firm. Will Davies, author of The Happiness Industry, discussed less intrusive, but more pervasive, efforts to assure that workers are fitter, happier, and therefore more productive. As he argues in the book,

[M]ood-tracking technologies, sentiment analysis algorithms and stress-busting meditation techniques are put to work in the service of certain political and economic interests. They are not simply gifted to us for our own Aristotelian flourishing. Positive psychology, which repeats the mantra that happiness is a personal ‘choice’, is as a result largely unable to provide the exit from consumerism and egocentricity that its gurus sense many people are seeking.

But this is only one element in the critique to be developed here. One of the ways in which happiness science operates ideologically is to present itself as radically new, ushering in a fresh start, through which the pains, politics and contradictions of the past can be overcome. In the early twenty-first century, the vehicle for this promise is the brain. ‘In the past, we had no clue about what made people happy – but now we know’, is how the offer is made. A hard science of subjective affect is available to us, which we would be crazy not to put to work via management, medicine, self-help, marketing and behaviour change policies.

The happiness industry thrives in a culture premised on an algorithmic model of the self. People (or “econs“) are seen a bundle of inputs (data collection), algorithmic processes (data analysis), and outputs (data use). Since the demands of affect can only be extirpated in robots, the challenge for the happiness industry is to optimize some quantum of satisfaction for its human subjects, compatible with their maximum productivity. Objectively, the algorithmic self is no more (nor less) than the goods and services it uses and creates; subjectively, it strives to convert inputs of resources into outputs of joy, contentment–name your positive affect. As “human resources,” it is simply raw material to be deployed to its most profitable use.

Audit culture, quantification (e.g., the quantified self), commensuration, and cost-benefit analysis all reflect and reinforce algorithmic selfhood. Both the Templeton Foundation and the Social Brain Centre in Britain are developing some intriguingly countercultural alternatives to big data-driven behaviorism. As he highlights the need for such alternatives, Davies deserves great credit for exposing the political economy behind corporate appropriations of positive psychology.

 

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Germany vs. the U.S. on Digital Antitrust

When it surfaced a couple of months ago that the U.S. Federal Trade Commission had suppressed recommendations that the FTC pursue Google for antitrust violations, what was remarkable was how bipartisan the decision had been by the Commissioners to give a free pass to digital corporate concentration.  

Partly, this is due to what economist Robert Reich has noted is a general American abandonment of antitrust as a policy tool (see his Whatever Happened to Antitrust?).  Partly this is due to the particular political influence of Silicon Valley and Google on the Obama Administration (see my own FTC Dropped Google Antitrust Action Staff Wanted - But Why Should That be Surprising?).

But what is striking is how completely at odds the debate is in the U.S. versus Europe, where there is an active ongoing antitrust investigation into Google and more likely to be opened.  This focus on antitrust in Europe is not confined to just some of the EU countries but is in fact spearheaded by Germany, led by the conservative party headed by Angela Merkel who on other economic matters is the bête noire of progressives on the Continent.

Yet in the last year we had the German government helping to push forward the EU investigation into Google, with its Vice Chancellor and Economic Minister Sigmar Gabriel referring to big data platforms as engaged in “brutal information capitalism” and arguing that the company should be broken up if it has abused its dominant market positions. Earlier this month, Gabriel voiced worries that Google’s expansion of its Android operating system is undermining competition on the Internet.

The media in Germany has been filled with debates on what to do about economic concentration in digital markets, not just on whether to take action but getting down to specifics on what should be done.   The quite establishment German newspaper Frankfurter Rundschau recently outlined a number of options short of breakup for reining in Google’s market power.  As the paper argues (translation courtesy of Google):

A whole number of proposals under discussion. These include restrictions on the display of search results - Group-owned service about when shopping online should no longer be shown preference. It could also be a matter that the part forcibly using Google Mail for Android smartphones is prohibited. In addition, competition experts have campaigned hard to introduce permanent government supervision, as is customary with the major telecommunications companies in Europe.

The appointment of a permanent government commission to regulate search engines would be a quite important step in placing the importance of ongoing monitoring and regulation of the digital economy on par with other industries subject to regulatory oversight.

Within Germany, one of the voices urging restraint on antitrust action is a government-sponsored think tank of experts dubbed the Monopolies Commission. Yet even they in a recent report advocated regulatory action considered radical within the U.S. policy debate.   The Commission noted in their report that use of data by Internet companies is not always for the benefit of their users and “the increased collection of data can result in negative welfare effects”:

This can be to the detriment particularly of consumers that are insufficiently informed of the use and application of their data and who are not aware, for example, of the possibility of price differentiation on the internet based on observable characteristics or habits.

Even if governments do not pursue a breakup of Google or other digital companies, the Commission noted the importance of taking steps to “strengthen the position of consumers. In order to enable users to exercise more effective control with regard to the use of their data, legislation could require mandatory user consent in cases of collection and commercialization of user data (opt in).” 

Note the last word “opt in” is the flash point for outrage among anti-regulatory forces in the U.S., since it would mean that consumers could not blithely be given a boilerplate small print option to hold back their data, but would have to affirmatively agree on when and how their data can be sold off to the highest bidder.  Data companies know that most consumers would refuse such affirmative agreement to commercialization without much higher economic inducements than they are currently offered, so oppose opt-in privacy protections with every lobbying threat they can muster.

Some dismiss the German and European focus on digital antitrust as a product of “protectionism,” but then Germany actually has a higher-wage job market worth protecting.  Germany has a long tradition of fighting economic concentration in favor of an industrial landscape made up of smaller, often family-owned mid-size firms -- called collectively the Mittlestand -- that are extremely competitive in international trade. 

Google’s Eric Schmidt has been touring Europe on a “charm offensive” but the company’s ultimate goal to achieve global economic concentration was clear in his statement in one interview that:

“There’s an old way and a new way; the new way is global and digital, the old way is local and proud, and there’s nothing wrong with it, but the old will be displaced.”

Given an explicit threat to destroy “local and proud” industries in Germany, it’s hardly surprising that antitrust authorities are taking action.  It might be time for communities and industries outside Silicon Valley to rise up and demand U.S. policymakers take action as well to protect local jobs and fight economic concentration.

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