For the past several years, economists and government leaders have regularly sounded alarms about the dangers of big tech monopolies. On her 2020 campaign website, for example, Senator Elizabeth Warren said “big tech companies have too much power, too much power over our economy, our society, our democracy." In the months since the election, politicians on both the left and right have expressed concerns over how to encourage competition and innovation among the big tech leaders, and even how to hold onto democratic ideals in the face of digital misinformation and conspiracy theories. 

The challenge with a company like Facebook is that its business model actively encourages tribalism and anger, which is not the way markets usually work, says Paul Romer, an economics professor at New York University who previously served as the chief economist of The World Bank and was the co-recipient of the 2018 Nobel Prize in Economics Sciences. “When economists defend the market, we have this very simple idea in mind, where I as a buyer give something and get some good back,” he says. “None of those features are characteristic of this new market for digital services, where advertising is like the hidden method of capturing compensation for these firms.”

 Users, he says, “are being manipulated in ways that they don't fully understand.”

Regulators won’t work because big tech firms are too powerful, Romer maintains, while traditional antitrust laws are not well-suited to deal with this problem. However, he says that a progressive tax on digital advertising revenue, passed by state legislatures, could create a unique incentive for companies such as Google and Facebook to split up their businesses and discourage growth by acquisition.

Such a progressive tax model, however, needs to be aggressive: “The kind of tax that I think would create a big incentive to change, at say Google and Facebook, the two biggest firms in this market, has to be a tax where the average tax rate they pay right now, given their size, is 35% of their revenue.”

Show notes and links:

·     Paul Romer, Taxing Digital Advertising, May 1, 2021

·     Maryland Breaks Ground with Digital Advertising Tax, National Law Review, March 17, 2021

·     Once Tech’s Favorite Economist, Now a Thorn in Its Side, Steve Lohr, New York Times, May 20, 2021