Monday, September 27, 2010

A Hidden Cost of Wiretapping

There were several interesting bits of economics in this fascinating article on wiretapping the Internet. According to the article, law enforcement officials are having an increasingly more difficult time investigating crimes because criminals are communicating over the Internet, rather than phones. Law enforcement officials are struggling with this switch because Internet communications providers are not required to have message interception capabilities (unlike phone providers).

Although any communication provider has to comply with a legal surveillance request, there are plenty of technologies on the Internet that do not lend themselves well to government surveillance. The article reports that law enforcement officials are seeking a policy with three requirements on communications service providers:

¶ Communications services that encrypt messages must have a way to unscramble them.

¶ Foreign-based providers that do business inside the United States must install a domestic office capable of performing intercepts.

¶ Developers of software that enables peer-to-peer communication must redesign their service to allow interception.

These requirements could be costly, and as we would expect, the service providers are fighting the proposed regulations. After all, internet providers are expected to bear most of the new costs, many of which will be borne in compliance of the law:

Susan Landau, a Radcliffe Institute of Advanced Study fellow and former Sun Microsystems engineer, argued that the proposal would raise costly impediments to innovation by small startups.

“Every engineer who is developing the wiretap system is an engineer who is not building in greater security, more features, or getting the product out faster,” she said.

In other words, every hour an engineer spends on adapting the system for easier government surveillance is a cost, but it isn't the sort of cost that shows up in government calculations. This whole discussion reminds me of a wonderfully eloquent article by Frederic Bastiat, What Is Seen and What Is Not Seen:

In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

Bastiat wrote this in 1848, but it is a timeless classic.

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