This may be the best speech by a regulator that you will read in your entire life. Federal Communications Commission (FCC) Commissioner Robert McDowell delivered an address in Rome today entitled, “The Siren Call of “Please Regulate My Rival”: A Recipe for Regulatory Failure.” I highly recommend it (and not just because I’m cited in it!) It is infused with important insights about the ugly downsides of excessive regulation of technology markets.
McDowell is an astute student of regulatory history and he documents how, despite the best of intentions, economic regulation has often been turned into a tool that industry exploits for their own narrow interests. Sadly, examples of such “regulatory capture” are rampant, as I have documented here before. McDowell notes that many telecom and media companies “suffer from the ‘please regulate my rival’ malady of an industry that has been regulated too much and for too long. History is replete with such scenarios,” he says, “and the desire for more regulation for competitors always ends badly for the incumbent regulated industry in the form of unintended and harmful consequences.” That is exactly right.
I strongly encourage you to read the entire speech, but if you only have time to read one thing, make it the powerful and poetic closing paragraphs, which I have reprinted below:
Did Apple conspire with e-book publishers to raise e-book prices? That’s what DOJ argues in a lawsuit filed yesterday. But does that violate the antitrust laws? Not necessarily—and even if it does, perhaps it shouldn’t.
Antitrust’s sole goal is maximizing consumer welfare. While that generally means antitrust regulators should focus on lower prices, the situation is more complicated when we’re talking about markets for new products, where technologies for distribution and consumption are evolving rapidly along with business models. In short, the so-called Agency pricing model Apple and publishers adopted may mean (and may not mean) higher e-book prices in the short run, but it also means more variability in pricing, and it might well have facilitated Apple’s entry into the market, increasing e-book retail competition and promoting innovation among e-book readers, while increasing funding for e-book content creators.
The procompetitive story goes something like the following. (As always with antitrust, the question isn’t so much which model is better, but that no one really knows what the right model is—least of all antitrust regulators—and that, the more unclear the consumer welfare effects of a practice are, as in rapidly evolving markets, the more we should err on the side of restraint). Continue reading →
In the wake of last week’s big SOPA showdown, a lot of people are talking about the expanded presence and power of the Internet, online operators, and digital Netizens in Washington policy debates. I certainly don’t mean to diminish the importance of this particular episode. It certainly is historic, regardless of how you feel about the specifics of SOPA. What does concern me, however, is the way this episode is prompting questions about how much more “engagement” Internet companies need to consider inside the Beltway. For example, today’s Wall Street Journal features an article on “The Web’s Growing Muscle” and notes:
The Internet industry has found a rare sweet spot in Washington. With Google in the lead, the companies have begun building a strong traditional lobbying force in Washington. And, to complement that inside game, websites’ millions of users have become a powerful outside weight on Congress. What’s more, in a rare Washington double play, the concerns of Internet companies have found a sympathetic ear both in the Democratic White House and among Republican presidential candidates who otherwise can’t agree with Barack Obama on anything.
The piece concludes with a quote from an anonymous media executive saying “People are looking at what Google spent on lobbying and wondering, ‘Can we match that?’ It has to be a big spend.”
Over at TIME.com, [I consult public choice theory to glean](http://techland.time.com/2012/01/23/why-we-wont-see-many-protests-like-the-sopa-blackout/) the meaning of last week’s SOPA protest success:
>The SOPA blackout protest last week was an unprecedented event. Its massive success — with dozens of members of Congress switching their stance in one day under the withering intensity of thousands of phone calls — surprised even the activists who spurred the protest. So does this mean that we are entering the much-heralded era of Internet-powered citizen democracy?
Yesterday, President Barack Obama announced two nominations to the Federal Communications Commission: Jessica Rosenworcel, replacing Democratic Commissioner Michael Copps, and Ajit Pai, replacing Republican Commissioner Meredith Attwell Baker.
The FCC faces a unique challenge: Because it regulates the communications industry, essentially every rule it issues implicates the free speech values at the heart of our Constitutional heritage. The First Amendment was intended to be a shield against government meddling, not a sword for regulatory activism, however well-intentioned. Moreover, the FCC regulates an industry being transformed by the Digital Revolution.
We at TechFreedom look forward to working with these new Commissioners to ensure that FCC regulations serve consumers by advancing competition and innovation while respecting free speech rights. The Commission should ask, and explicitly answer, the following questions whenever considering the need for new, or existing, regulations:
What free speech rights are at stake?
How substantial is the government’s interest? Has the market failed?
Can regulation, always slow to start and slower to adapt, really address the problem better than technological change?
Will the regulation’s benefits outweigh its costs, considering its likely unintended consequences?
Are there less-restrictive and more speech-protective ways government can achieve its interest, such as enforcing existing antitrust and consumer protection laws, supporting consumer education, empowering users to make their own decisions, or compelling disclosure to consumers?
Over a week ago the Washington Post published an interview with Google’s Eric Schmidt to which I’ve been meaning to draw your attention. He’s reflecting on the relationship between Silicon Valle and D.C. days after his Senate testimony, and it’s incredibly candid, perhaps because as the Post noted, “He had just come from the dentist. And had a toothache.” Here are some choice quotes:
On getting told to testify:
So we get hauled in front of the Congress for developing a product that’s free, that serves a billion people. Okay? I mean, I don’t know how to say it any clearer. I mean, it’s fine. It’s their job. But it’s not like we raised prices. We could lower prices from free to…lower than free? You see what I’m saying?
And one of the consequences of regulation is regulation prohibits real innovation, because the regulation essentially defines a path to follow—which by definition has a bias to the current outcome, because it’s a path for the current outcome.
On the D.C. shakedown:
And privately the politicians will say, ‘Look, you need to participate in our system. You need to participate at a personal level, you need to participate at a corporate level.’ We, after some debate, set up a PAC, as other companies have.
On political startups:
Now there are startups in Washington. And these startups have the interesting property that they’re founded by people who were policymakers, let’s say in telecommunications. They’re very clever people, and they’ve figured out a way in regulation to discriminate, to find a new satellite spectrum or a new frequency or whatever. They immediately hired a whole bunch of lobbyists. They raised some money to do that. And they’re trying to innovate through the regulation. So that’s what passes for innovation in Washington.
There’s a real sense of exasperation that is almost absurd–that is, an exhausting attempt to find rationality in political decision making. Of course, there is rational decision making, it’s just on a different margin. Here is Schmidt on expanding H-1B visas:
I’m so tired of this argument. I’m tired of making it. I’ve been making it for twenty years. In the current cast of characters, the Republicans are on our side, our local Democrats support us because our arguments are obvious, and the other Democrats don’t—because they don’t get it. The president understands the argument and would like to support us, he says, but there are various political issues. That’s roughly the situation. That’s been true for twenty years, through different presidents and different leaders. It’s stupid.
Today my colleague [Tate Watkins](http://shortsentences.org/) and I are releasing [a new working paper on cybersecurity policy](http://mercatus.org/publication/loving-cyber-bomb-dangers-threat-inflation-cybersecurity-policy). Please excuse my patently sleep-deprived mug while I describe it here:
Over the past few years there has been a steady drumbeat of alarmist rhetoric coming out of Washington about potential catastrophic cybersecurity threats. For example, at a Senate Armed Services Committee hearing last year, Chairman Carl Levin said that “cyberweapons and cyberattacks potentially can be devastating, approaching weapons of mass destruction in their effects.” Proposed responses include increased federal spending on cybersecurity and the regulation of private network security practices.
The rhetoric of “[cyber doom](http://mercatus.org/publication/beyond-cyber-doom)” employed by proponents of increased federal intervention, however, lacks clear evidence of a serious threat that can be verified by the public. As a result, the United States may be witnessing a bout of threat inflation.
Threat inflation, [according to Thrall and Cramer](http://books.google.com/books?id=EzUtuTOIfTEC&lpg=PP1&ots=3AQmVD2Slb&dq=AMERICAN%20FOREIGN%20POLICY%20AND%20THE%20POLITICS%20OF%20FEAR&pg=PP1#v=onepage&q&f=false), is a concept in political science that refers to “the attempt by elites to create concern for a threat that goes beyond the scope and urgency that a disinterested analysis would justify.” Different actors—including members of Congress, defense contractors, journalists, policy experts, academics, and civilian, military, and intelligence officials—will each have their own motives for contributing to threat inflation. When a threat is inflated, the marketplace of ideas on which a democracy relies to make sound judgments—in particular, the media and popular debate—can become overwhelmed by fallacious information. The result can be unwarranted public support for misguided policies.
The run-up to the Iraq War illustrates the dynamic of threat inflation. After 9/11, the Bush Administration decided to invade Iraq to oust Saddam Hussein. Lacking any clear casus belli, the administration sought popular and congressional support for war by promoting several rationales that ultimately proved baseless. Continue reading →
This week, my colleague Jerry Brito asked me to guest lecture to his George Mason University law school class on regulatory process. He asked me to talk about one of my favorite topics: the sad, sordid history of regulatory capture. Regular readers will recall the compendium I posted here a few months ago [and that I continue to update] of selected passages from books and papers penned by various economists and political scientists who have studied this issue.
Again, it doesn’t make for pretty reading, but the lesson that history teaches is vital: No matter how noble the “public interest” goals of regulatory advocates or their specific proposals, the only thing that really counts is what regulation means in practice. Regrettably, all too often, regulation is “captured” by various interests and used to their advantage, or at least to the disadvantage of potential competitors, new entrants, and innovation.
While I was gathering some materials for the case study portion of my lecture — which incorporates the history of telecommunications monopolization, broadcast industry regulatory shenanigans, and transportation / airlines fiascos — I figured I had to post a passage from one of my favorite books on regulation of all-time: Thomas K. McCraw’s brilliant Pulitzer Prize-winning 1984 book, Prophets of Regulation. In his chapter on the late great Alfred Kahn, the father of airline deregulation, McCraw recounts the history of the Civil Aeronautics Board (CAB) from its creation in the 1940s up until the time of Kahn’s ascendency to CAB chairman in the Carter Administration (and then the CAB’s eventual deregulation and abolition). Here’s the key passage from that history: Continue reading →
there even was a feeling that, in refusing to play the Washington game, Microsoft was being downright unpatriotic. Look, buddy, there is an American way of doing things, and that American way includes hiring lobbyists, paying lawyers vast sums by the hour, throwing lavish parties for politicians, aides, journalists and so on. So get with the program.
But after doing exactly that, Kinsley notes, the company got blasted for for being too aggressive in D.C.!
So that’s what Microsoft did. It moved its “government affairs” office out of distant Chevy Chase and into the downtown K Street corridor. It bulked up on lawyers and hired the best-connected lobbyists. Soon, Microsoft was coming under criticism for being heavy-handed in its attempts to buy influence.
“But the sad thing is that it seems to have worked. Microsoft is no longer Public Enemy No. 1,” Kinsley notes, and he continues on to reiterate a point I made in my last two essays: Google is the Great Satan now! Continue reading →
The New York Times reports that, “Facebook is hoping to do something better and faster than any other technology start-up-turned-Internet superpower. Befriend Washington. Facebook has layered its executive, legal, policy and communications ranks with high-powered politicos from both parties, beefing up its firepower for future battles in Washington and beyond.” The article goes on to cite a variety of recent hires by Facebook, its new DC office, and its increased political giving.
This isn’t at all surprising and, in one sense, it’s almost impossible to argue with the logic of Facebook deciding to beef up its lobbying presence inside the Beltway. In fact, later in the Times story we hear the same two traditional arguments trotted out for why Facebook must do so: (1) Because everyone’s doing it! and (2) You don’t want be Microsoft, do you? But I’m not so sure whether “normalizing relations” with Washington is such a good idea for Facebook or other major tech companies, and I’m certainly not persuaded by the logic of those two common refrains regarding why every tech company must rush to Washington.