The future of emerging technology policy will be influenced increasingly by the interplay of three interrelated trends: “innovation arbitrage,” “technological civil disobedience,” and “spontaneous private deregulation.” Those terms can be briefly defined as follows:

• “Innovation arbitrage” refers to the idea that innovators can, and will with increasingly regularity, move to those jurisdictions that provide a legal and regulatory environment more hospitable to entrepreneurial activity. Just as capital now fluidly moves around the globe seeking out more friendly regulatory treatment, the same is increasingly true for innovations. And this will also play out domestically as innovators seek to play state and local governments off each other in search of some sort of competitive advantage.
• “Technological civil disobedience” represents the refusal of innovators (individuals, groups, or even corporations) or consumers to obey technology-specific laws or regulations because they find them offensive, confusing, time-consuming, expensive, or perhaps just annoying and irrelevant. New technological devices and platforms are making it easier than ever for the public to openly defy (or perhaps just ignore) rules that limit their freedom to create or use modern technologies.
• “Spontaneous private deregulation” can be thought of as de facto rather than the de jure elimination of traditional laws and regulations owing to a combination of rapid technological change as well the potential threat of innovation arbitrage and technological civil disobedience. In other words, many laws and regulations aren’t being formally removed from the books, but they are being made largely irrelevant by some combination of those factors. “Benign or otherwise, spontaneous deregulation is happening increasingly rapidly and in ever more industries,” noted Benjamin Edelman and Damien Geradin in a Harvard Business Review article on the phenomenon.[1]

I have previously documented examples of these trends in action for technology sectors as varied as drones, driverless cars, genetic testing, Bitcoin, and the sharing economy. (For example, on the theme of global innovation arbitrage, see all these various essays. And on the growth of technological civil disobedience, see, “DOT’s Driverless Cars Guidance: Will ‘Agency Threats’ Rule the Future?” and “Quick Thoughts on FAA’s Proposed Drone Registration System.” I also discuss some of these issues in the second edition of my Permissionless Innovation book.)

In this essay, I want to briefly highlight how, over the course of just the past month, a single company has offered us a powerful example of how both global innovation arbitrage and technological civil disobedience— or at least the threat thereof—might become a more prevalent feature of discussions about the governance of emerging technologies. And, in the process, that could lead to at least the partial spontaneous deregulation of certain sectors or technologies. Finally, I will discuss how this might affect technological governance more generally and accelerate the movement toward so-called “soft law” governance mechanisms as an alternative to traditional regulatory approaches.

Comma.ai Case Study, Part 1: The Innovation Arbitrage Threat

The company I want to highlight is Comma.ai, a start-up that had hoped to sell a $999 after-market kit for vehicles called the “Comma One,” which “would give average, everyday cars autonomous functionality.”[2] Created by famed hacker George Hotz, who as a teenager gained notoriety for being the first person to unlock an iPhone in 2007, the Comma One represents an attempt to create autonomous vehicle tech “on the cheap” by using off-the-shelf cameras and GPS technology combined with a healthy dose of artificial intelligence technology.

But regulators at the National Highway Traffic Safety Administration (NHTSA), the federal agency responsible for road safety and automobile regulation, were none too happy to hear about Hotz’s plan to unleash his technology into the wild without first getting their blessing. On October 27, the agency fired off a nastygram to Hotz saying: “We are concerned that your product would put the safety of your customers and other road users at risk. We strongly encourage you to delay selling or deploying your product on the public roadways unless and until you can ensure it is safe.”

Hotz responded on Twitter promptly and angrily. After posting the full NHTSA letter, he said, “First time I hear from them and they open with threats. No attempt at a dialog.” In a follow-up tweet, he said, “Would much rather spend my life building amazing tech than dealing with regulators and lawyers. It isn’t worth it.” And then he announced that, “The comma one is cancelled. comma.ai will be exploring other products and markets. Hello from Shenzhen, China.” A flood of news articles followed about Hotz’s threat to engage in this sort of global innovation arbitrage by bolting US shores.[3]

Incidentally, what Hotz and Comma.ai were proposing to do with Comma One—i.e., deploy autonomous vehicle tech into the wild without prior regulatory approval—was recently done by Otto, a developer of autonomous trucking technology. As Mark Harris reported on Backchannel:

When Otto performed its test drive — the one shown in the May video — it did so despite a clear warning from Nevada’s Department of Motor Vehicles (DMV) that it would be violating the state’s autonomous vehicle regulations. When the DMV realized that Otto had gone ahead anyway, one official called the drive “illegal” and even threatened to shut down the agency’s autonomous vehicle program.”[4]

While Nevada regulators were busy firing off angry letters, Otto was busy doing even more testing in others states (like Ohio), which are eager to make their jurisdictions a testbed for autonomous vehicle innovation.[5] In fact, just recently, Ohio Gov. John Kasich announced the creation of the “Smart Mobility Corridor,” which, according to the Dayton Daily News, will be “a 35-mile stretch of U.S. 33 in central Ohio that runs through Logan County. Officials say that section of U.S. 33 will become a corridor where technologies can be safely tested in real-life traffic, aided by a fiber-optic cable network and sensor systems slated for installation next year.”[6]

This is an example of innovation arbitrage will increasingly take root here domestically as well as abroad, and some states (or countries) will use inducements in an effort to lure innovators to their jurisdictions.

Anyway, let’s get back to the Comma One case study. I don’t want to get too sidetracked regarding the merits of the concerns raised by NHTSA in its letter to Hotz and the implications of the agency’s threats for innovation in this space. But EFF board member Brad Templeton did a nice job addressing that issue in an essay about NHTSA’s letter that threatened Comma. As Templeton observed:

I will presume the regulators will say, “We only want to scare away dangerous innovation” but the hard truth is that is a very difficult thing to judge. All innovation in this space is going to be a bit dangerous. It’s all there trying to take the car — the 2nd most dangerous legal consumer product — and make it safer, but it starts from a place of danger. We are not going to get to safety without taking risks along the way.[7]

This gets to the very real trade-offs in play in the debate over driverless car technology and its regulation. In fact, my Mercatus Center colleague Caleb Watney and I recently filed comments [8] with NHTSA addressing the agency’s recently proposed “Federal Automated Vehicles Policy.”[9] We stressed the potentially deleterious implications of prior regulatory restraints on autonomous vehicle innovation by stressing the horrific real-world baseline we live with today, in which over 35,000 people dying on US roadways in 2015 (roughly 96 people per day) and 94 percent of all those crashes being attributable to human error.

Caleb and I noted that, by imposing new preemptive constraints on the coding of superior autonomous driving technology, “NHTSA’s proposed policy for automated vehicles may inadvertently increase the number of total automobile fatalities by delaying the rapid development and diffusion of this life-saving technology.” Needless to say, if that comes to pass, it would be a disaster because “automation on the roads could be the great public-health achievement of the 21st century.”[10]

In our filing, Caleb and I estimated that, “If NHTSA’s proposed premarket approval process slows the deployment of HAVs by 5 percent, we project an additional 15,500 fatalities over the course of the next 31 years. At 10 percent regulatory delay, we project an additional 34,600 fatalities over 33 years. And at 25 percent regulatory delay, we project an additional 112,400 fatalities over 40 years.[11]

So, needless to say, this is a very big deal.

But let’s ignore all those potential foregone benefits for the moment and just stick with the question of whether Hotz’s threat to engage in a bit of global innovation arbitrage (by moving to China or somewhere else) could work, or at least affect policy in some fashion. I think it absolutely could be an effective threat both because (a) policymakers really do want to do everything they can to achieve greater road safety, and (b) the auto sector remains a hugely important industry for the United States, and one that policymakers will want to do everything in their power to retain on our shores.

Moreover, as Templeton observes that “Comma is not the only company trying to build a system with pure neural networks doing the actual steering decisions.” Even if NHTSA succeeds in bringing Comma to heel, there will be others who will follow in its footsteps. It might be a firm like Otto, but there are many other players in this space today, including big dogs like Tesla and Google. If ever there was a truly global technology industry, it the automotive sector. Autonomous vehicle innovation could take root and blossom in almost any country in the world, and many countries will be waiting with open arms if America screws up its regulatory process.

As Templeton concludes:

The USA and California led the way in robocars in part because it was unregulated. In the USA, everything is permitted unless it was explicitly forbidden and nobody thought to write “no robots” in the laws. Progress in other countries where everything is forbidden unless it is permitted was much slower. The USA is moving in the wrong direction.[12]

Comma.ai Case Study, Part 2: The Technological Civil Disobedience Threat

But an interesting thing happened on the way to Comma’s threatened exodus. On November 30, the firm announced that it would now be open sourcing the code for its autonomous vehicle technology. Reporters at The Verge noted that, during a press conference:

Hotz said that Comma.ai decided to go open source in an effort to sidestep NHTSA as well as the California DMV, the latter of which he said showed up to his house on three separate occasions. “NHTSA only regulates physical products that are sold,” Hotz said. “They do not regulate open source software, which is a whole lot more like speech.” He went on to say that “if the US government doesn’t like this [project], I’m sure there are plenty of countries that will.”[13]

So here we see Hotz combining the threat of still potentially taking the project offshore (i.e., global innovation arbitrage) with the suggestion that by open-sourcing the code for Comma One he might be able to get around the law altogether. We might consider that an indirect form of technological civil disobedience.

Incidentally, Hotz may not be aware of the fact that NHTSA is in the process of making a power-play to become a driverless car code cop. While Hotz is technically correct that, under current law, NHTSA officials “do not regulate open source software, which is a whole lot more like speech,” NHTSA’s recent Federal Automated Vehicles Policy claimed that the agency “has authority to regulate the safety of software changes provided by manufacturers after a vehicle’s first sale to a consumer” while also suggesting that the agency “may need to develop additional regulatory tools and rules to regulate the certification and compliance verification of such post-sale software updates.”^[14]

Needless to say, this proposal has important ramifications for not only Comma, but all other firms in this sector. Consider the implications for Tesla’s “autopilot” mode, which is really little more than a string of constantly-evolving code it pushes out to offer greater and greater autonomous driving functionality.  How would that iterative process work if every time Tesla wanted to make a little tweak to its code it had to run to Washington and file paperwork with NHTSA petitioning for permission to experiment and improve their systems? And then think about all the smaller innovators out there who want to be the next Elon Musk or George Hotz but do not yet have the resources or political connections in Washington to even go through this complex and costly process.

In any event, I have no idea if Hotz or Comma.ai will follow through with any of these threats or be successful in doing so. It may be the case that he is just blowing off smoke and that he and his firm will end up staying in the U.S. and perhaps even later reversing course on the decision to open source the Comma code. But to the extent that innovators like Hotz even hint that they might split the country or open source their code to avoid burdensome regulatory regimes, it can have an influence on future policy decisions. Or at least it should.

New Tech Realities & Their Policy Implications

Indeed, the increasing prevalence of global innovation arbitrage and technological civil disobedience raise some interesting issues for the governance of emerging technologies going forward. The traditional regulatory stance toward many existing sectors and technologies will be challenged by these realities. That’s because most of those traditional regulatory systems are highly precautionary, preemptive, and prophylactic in character. They generally opt for policy solutions that are top-down, overly rigid, and bureaucratic.

Of course, in the past, many innovators (especially smaller scale entrepreneurs) really couldn’t do much to avoid similar regulatory systems where they existed. You either fell into line, or else! It wasn’t always clear what “or else!” would entail, but it could range from being denied a permit/license to operate, waiting months or years for rules to emerge, dealing with fines or other penalties, or some combination of all those things. Or perhaps you would just give up on your innovative idea altogether and exit the market.

But the world has changed in some important ways in recent years. Many of the underlying drivers of the digital revolution—massive increases in processing power, exploding storage capacity, steady miniaturization of computing, ubiquitous communications and networking capabilities, the digitization of all data, and more—are beginning to have a profound impact beyond the confines of cyberspace.^[15] As venture capitalist Marc Andreessen explained in a widely read 2011 essay about how “software is eating the world”:

More and more major businesses and industries are being run on software and delivered as online services—from movies to agriculture to national defense. Many of the winners are Silicon Valley-style entrepreneurial technology companies that are invading and overturning established industry structures. Over the next 10 years, I expect many more industries to be disrupted by software, with new world-beating Silicon Valley companies doing the disruption in more cases than not. Why is this happening now? Six decades into the computer revolution, four decades since the invention of the microprocessor, and two decades into the rise of the modern Internet, all of the technology required to transform industries through software finally works and can be widely delivered at global scale.^[16]

We can add to this list of a new realities the more general problem of technology accelerating at an unprecedented pace. This is what philosophers of technology call the “pacing problem.”  In his new book,  A Dangerous Master: How to Keep Technology from Slipping beyond Our Control, Wendell Wallach concisely defined the pacing problem as “the gap between the introduction of a new technology and the establishment of laws, regulations, and oversight mechanisms for shaping its safe development.” “There has always been a pacing problem,” Wallach correctly observed, but like other philosophers, he believes that modern technological innovation is accelerating much faster than it was in the past.[17]

What are the ramifications of all this for policy? As technology lawyer and consultant Larry Downes has noted, lawmaking in the information age is now inexorably governed by the “law of disruption” or the fact that “technology changes exponentially, but social, economic, and legal systems change incrementally.”[18] This law is “a simple but unavoidable principle of modern life,” he said, and it will have profound implications for the way businesses, government, and culture evolve. “As the gap between the old world and the new gets wider,” he argues, “conflicts between social, economic, political, and legal systems” will intensify and “nothing can stop the chaos that will follow.”[19]

The end result of the “law or disruption” and a world relentlessly governed by the ever-accelerating “pacing problem” is that it will be harder than ever to effectively control emerging technologies using traditional legal and regulatory systems and mechanisms. And this makes it even more likely that the related threats of global innovation arbitrage and various forms of technological civil disobedience will become more regular fixtures in debates about many emerging technologies.

New Governance Models

How one reacts to these new realities will depend upon their philosophical disposition toward innovative activities more generally.

Consider first those adhering to a more “precautionary principle” mindset, which I have defined in my recent book as those who believe “that new innovations should be curtailed or disallowed until their developers can prove that they will not cause any harm to individuals, groups, specific entities, cultural norms, or various existing laws, norms, or traditions.”[20]

Needless to say, the precautionary principle crowd with be dismayed by these new trends and perhaps even decry them as “lawlessness.” Some of these folks seem to be in denial about these new realities and pretend that nothing much has changed. Yet, I have found that most precautionary principle-oriented advocates, and even many regulatory agencies themselves, tend to acknowledge these new realities. But they remain very uncertain about how best to respond to them, often just suggesting that we’ll all need to just try harder to impose new and better regulations on a more expedited or streamlined basis.

Of course, those of us who generally embrace the alternative policy vision for technological governance—“permissionless innovation”—are going to be more accepting of the new technological realities I have described, and we will perhaps even work to defend and encourage them. But while I count myself among this crowd, we cannot ignore the fact that many serious challenges will arise when innovation outpaces law or can easily evade it.

There is some middle ground here, although it is very messy middle ground.

The era of technocratic, top-down, one-size-fits-all regulatory regimes is fading, or at least being severely strained. We will instead need to craft flexible and adaptive policies going forward that are bottom-up, flexible, and evolutionary in character.

What that means in practice is that a lot more “soft law” and informal governance mechanisms will become the new norm. I wrote about this new policy environment in my recent essay, “DOT’s Driverless Cars Guidance: Will ‘Agency Threats’ Rule the Future?” as well as this lengthy review of Wendell Wallach’s latest book about technology ethics.  Along with Gary Marchant of the Arizona State University law school, Wallach recently published an excellent book chapter on “Governing the Governance of Emerging Technologies,” which discussed these soft law mechanisms, which include: “codes of conduct, statements of principles, partnership programs, voluntary programs and standards, certifications programs and private industry initiatives.”[21]

Their chapter appears in an important collection of essays that Gary Marchant edited with Kenneth W. Abbott and Braden Allenby entitled, Innovative Governance Models for Emerging Technologies.

What is interesting about the chapters in that book is that seemingly widespread consensus now exists among experts in this field that some combination of these soft law mechanisms are likely to become the primary mode of technological governance for the indefinite future.  This is because, as Marc A. Saner points out in a different chapter of that book, “the control paradigm is too limited to address all the issues that arise in the context of emerging technologies.”[22] By the control paradigm, he generally means traditional administrative regulatory agencies and processes. He and other contributors in the book all seem to agree that the control problem paradigm “has its limits when diffusion, pacing and ethical issues associated with emerging technologies become significant, as is often the case.”[23]

And so the traditional command-and-control ways will gradually give way to a new paradigm for emerging technology governance. In fact, as I noted in my recent essay on driverless cars, we see this happening quite a bit already. “Multistakeholder processes” are already all the rage in the world of emerging technologies and their governance. In recent years, we have seen the White House and various agencies (such as the FTC, NTIA, FDA, and others) craft multistakeholder agreements or best practice guidance documents for technologies as far ranging as:

• Drones & privacy
• Sharing economy
• Internet of Things
• Driverless cars
• Big data
• Artificial intelligence
• Cross-device tracking
• Native advertising
• Online data collection
• Mobile app transparency and security
• Mobile apps for kids
• Mobile medical apps
• Online health advertising
• 3D printing
• Facial recognition

And that list is not comprehensive. I know I am missing other multistakeholder efforts, best practices, or industry guidance documents that have been crafted in recent years.

Of course, many challenging issues need to be sorted out here, most notably: how transparent and accountable will these soft law systems be in practice? How will they be enforced? And what will happen to all those existing laws, regs, and agencies that will continue to exist? More generally, it is worth asking whether we can more closely study these various multistakeholder arrangements and soft law governance mechanisms and determine if there are certain principles or strategies that could be applicable across a wide class of technologies and sectors. In other words, can we a do a better job of “formalizing the informal,” without falling right back into the trap of trying to impose rules in a rigid, top-down, one-size-fits-all fashion?

Conclusion

Those are just a few of the hard questions we will need to consider going forward. For now, however, I think it is safe to conclude that we will no longer see much “law” being made for emerging technologies, at least not in the traditional sense of the term. Thanks to the new technological realities I have described here—and the relentless reality of the “pacing problem” more generally—I believe we are witnessing a wide-ranging and quite profound transformation in how technology is governed in our modern world. And I believe this movement away from traditional “hard law” and toward “soft law” governance mechanisms is likely to accelerate due to the increasing prevalence of innovation arbitrage, technological civil disobedience, and spontaneous private deregulation.

The ramifications of this transformation will be studied by philosophers, legal theorists, and political scientists for many decades to come. But we are still in the early years of this momentous transformation in technological governance and we will continue to struggle to figure out how to make it all work, as messy as it all may be.

[ Note: This essay is condensed from a manuscript I have been working on about The Rise of Technological Civil Disobedience. I’m not sure I will ever get around to finishing it, however, so I thought I would at least post this piece for now. In a subsequent essay, which is also part of that draft manuscript, I hope to discuss how this process might play out for technologies that are “born free” versus those that are “born in captivity.” That is, how likely is it that the trends I discuss here will take hold for technologies that have no pre-existing laws or agencies, while other technologies that are born into a regulatory environment are potentially doomed to be pigeonholed into those old regulatory regimes? What are the chances that the latter technologies can escape captivity and gain the freedom the other technologies already enjoy? How might technology-enabled “spontaneous private deregulation” be accelerated for those sectors? Is that always desirable? Again, I will leave these questions for another day. Scholars and students who are interested in these topics can feel free to contact me if they are interested in discussing them as well as potential paper ideas. Regardless of how you feel about these trends, these issues are ripe for intellectual exploration.]

[1]     Benjamin Edelman and Damien Geradin, “Spontaneous Deregulation,” Harvard Business Review, April 2016, https://hbr.org/2016/04/spontaneous-deregulation.

[2]     Megan Geuss, “After mothballing Comma One, George Hotz releases free autonomous car software,” Ars Technica, November 30, 2016, http://arstechnica.com/cars/2016/11/after-mothballing-comma-one-george-hotz-releases-free-autonomous-car-software.

[3]     See: “NHTSA Scared This Self-Driving Entrepreneur Off the Road,” Bloomberg Technology, October 28, 2016, https://www.bloomberg.com/news/articles/2016-10-28/nhtsa-scared-this-self-driving-entrepreneur-off-the-road; Sean O’Kane, “George Hotz cancels his self-driving car project after NHTSA expresses concern,” The Verge, October 28, 2016, http://www.theverge.com/2016/10/28/13453344/comma-ai-self-driving-car-comma-one-kit-canceled; Brad Templeton, “Comma.ai cancels comma-one add-on box after threats from NHTSA,” Robohub, October 31, 2016, http://robohub.org/comma-ai-cancels-comma-one-add-on-box-after-threats-from-nhtsa.

[4]     Mark Harris, “How Otto Defied Nevada and Scored a $680 Million Payout from Uber,” Backchannel, November 28, 2016,  https://backchannel.com/how-otto-defied-nevada-and-scored-a-680-million-payout-from-uber-496aa07f5ba2#.9rmtb29bl

[5]     Larry E. Hall, “Otto Self-Driving Truck Tests in Ohio; Violated Nevada Regulations,” Hybrid Cars, November 29, 2016, http://www.hybridcars.com/otto-self-driving-truck-tests-in-ohio-violated-nevada-regulations.

[6]     Kara Driscoll, “Ohio to create ‘smart’ road for driverless trucks,” Dayton Daily News, November 30, 2016, http://www.daytondailynews.com/business/ohio-create-smart-road-for-driverless-trucks/25qC7uYjz9rE96q6YFVUUK.

[7]     Brad Templeton, “Comma.ai cancels comma-one add-on box after threats from NHTSA,” Robohub, October 31, 2016, http://robohub.org/comma-ai-cancels-comma-one-add-on-box-after-threats-from-nhtsa/

[8]     Adam Thierer and Caleb Watney, “Comment on the Federal Automated Vehicles Policy,” November 22, 2016, https://www.researchgate.net/publication/311065194_Comment_on_the_Federal_Automated_Vehicles_Policy.

[9]     National Highway Traffic Safety Administration (NHTSA), Federal Automated Vehicles Policy, September 2016.

[10]   Adrienne LaFrance, “Self-Driving Cars Could Save 300,000 Lives per Decade in America,” Atlantic, September 29, 2015

[11]   Adam Thierer and Caleb Watney, “Comment on the Federal Automated Vehicles Policy,” November 22, 2016, https://www.researchgate.net/publication/311065194_Comment_on_the_Federal_Automated_Vehicles_Policy.

[12]   Templeton.

[13]   Sean O’Kane and Lauren Goode, “George Hotz is giving away the code behind his self-driving car project,” The Verge, November 30, 2016, http://www.theverge.com/2016/11/30/13779336/comma-ai-autopilot-canceled-autonomous-car-software-free.

^[14]   NHTSA, Federal Automated Vehicles Policy, 76.

[15]   Adam Thierer, Jerry Brito, and Eli Dourado, “Technology Policy: A Look Ahead,” Technology Liberation Front, May 12, 2014, http://techliberation.com/2014/05/12/technology-policy-a-look-ahead.

[16]   Marc Andreessen, “Why Software Is Eating the World,” Wall Street Journal, August 20, 2011, http://www.wsj.com/articles/SB10001424053111903480904576512250915629460.

[17]   Wendell Wallach, A Dangerous Master: How to Keep Technology from Slipping beyond Our Control (New York: Basic Books, 2015), 60.

[18]   Larry Downes, The Laws of Disruption: Harnessing the New Forces That Govern Life and Business in the Digital Age 2 (2009).

[19]   Id.

[20]   Thierer, Permissionless Innovation, at 1.

[21]   Gary E. Marchant and Wendell Wallach, “Governing the Governance of Emerging Technologies,” in Gary E. Marchant, Kenneth W. Abbott & Braden Allenby (eds.), Innovative Governance Models for Emerging Technologies (Cheltenham, UK: Edward Elgar, 2013), 136.

[22]   Marc A. Saner,  “The Role of Adaptation in the Governance of Emerging Technologies,” in Gary E. Marchant, Kenneth W. Abbott & Braden Allenby (eds.), Innovative Governance Models for Emerging Technologies (Cheltenham, UK: Edward Elgar, 2013), 106.

[23]   Ibid., at 94.

Last week, the House held a hearing about the so-called IP Transition. The IP Transition refers to the telephone industry practice of carrying all wire-based consumer services–voice, Internet, and television–via faster, better fiber networks and not on the traditional copper wires that had fewer capabilities. Most consumers have not and will not notice the change. The completed IP Transition, however, has enormous implications for how the FCC regulates. As one telecom watcher said, “What’s at stake? Everything in telecom policy.”

For 100 years or so, phone service has had a special place in regulatory law given its importance in connecting the public. Phone service was almost exclusively over copper wires, a service affectionately called “plain old telephone service” (POTS). AT&T became the government-approved POTS national monopolist in 1913 (which ended with the AT&T antitrust breakup in the 1980s). The deal was: AT&T got to be a protected monopolist while the government got to require AT&T provide various public benefits. The most significant of these is universal service–AT&T had to serve virtually every US household and charge reasonable rates even to remote (that is, expensive) customers.

To create more phone competitors to the Baby Bells–the phone companies spun off from the AT&T break-up in the 1980s–the Congress passed the 1996 Telecom Act and the FCC put burdens on the Baby Bells to allow new phone companies to lease the Baby Bells’ AT&T-created copper wires at regulated rates. The market changed in ways never envisioned in the 1990s however. Today, phone companies face competition–not from the new phone companies leasing the old monopoly infrastructure but from entirely different technologies. You can receive voice service from your cable company (“digital voice”), your “phone” company (POTS), your wireless company, and even Internet-based providers like Vonage and Skype. Increasingly, households are leaving POTS behind in favor of voice service from cable or wireless providers. Yet POTS providers–like Verizon and AT&T (which also offer wireless service)–must abide by monopoly-era regulations that their cable and wireless competitors–Comcast, Sprint, and others–don’t have to abide by.

Understanding the significance of the IP Transition requires (unfortunately) knowing a little bit about Title I and Title II of the Communications Act. “Telecommunications services,” which are the phone companies with copper networks, are heavily regulated by the FCC under Title II. On the other hand, “information services,” which includes Internet service, are lightly regulated under Title I. This division made some sense in the 1990s. It is increasingly under stress now because burdened “telecommunications” companies like AT&T and Verizon are offering “information services” like Internet via DSL, FiOS, and U-Verse. Conversely, lightly-regulated “information services” companies like Comcast, Charter, and Time-Warner Cable are entering the regulated telephone market but face few of the regulatory burdens.

Which brings us to the IP Transition. As Title II phone companies replace their copper wires with fiber and deploy broadband networks to compete with cable companies, their customers’ phone service is being carried via IP packets. Functionally, these new networks act like a heavily-regulated Title II service since they carry voice, but they also act like the Title I broadband networks that cable providers built. So should these new fiber networks be burdened like Title II services or deregulated like Title I services? Or is it possible to achieve some middle ground using existing law? Those are the questions before the FCC and policymakers. Billions of dollars of investment will be accelerated or slowed and many firms will live or die depending on how the FCC and Congress act. Stay tuned.

The Mercatus Center at George Mason University has just released a new paper by Brent Skorup and me entitled, “A History of Cronyism and Capture in the Information Technology Sector.” In this 73-page working paper, which we hope to place in a law review or political science journal shortly, we document the evolution of government-granted privileges, or “cronyism,” in the information and communications technology marketplace and in the media-producing sectors. Specifically, we offer detailed histories of rent-seeking and regulatory capture in: the early history of the telephony and spectrum licensing in the United States; local cable TV franchising; the universal service system; the digital TV transition in the 1990s; and modern video marketplace regulation (i.e., must-carry and retransmission consent rules, among others.

Our paper also shows how cronyism is slowly creeping into new high-technology sectors.We document how Internet companies and other high-tech giants are among the fastest-growing lobbying shops in Washington these days. According to the Center for Responsive Politics, lobbying spending by information technology sectors has almost doubled since the turn of the century, from roughly $200 million in 2000 to $390 million in 2012.  The computing and Internet sector has been responsible for most of that growth in recent years. Worse yet, we document how many of these high-tech firms are increasingly seeking and receiving government favors, mostly in the form of targeted tax breaks or incentives.

We argue that the creeping cronyism could have two major negative ramifications. First, it could dull entrepreneurialism and competition in this highly innovative sector since time and resources spent on influencing politicians and capturing regulators cannot be spent competing and innovating in the marketplace. Cronyism will also negatively impact consumer welfare by denying consumers more and better products and services. Additionally, consumers might end up paying higher prices or higher taxes due to government privileges for industry.

Second, cronyism also raises the specter of greater government control of the Internet and of the digital economy. When policymakers dispense favors, they usually expect something in return. They also become accustomed to having greater informal powers over the sector receiving favors, and contribute to DC’s infamous “revolving door” problem.

High-tech America’s recent embrace of Washington could take it down the familiar path followed by the agriculture, telecommunications, and automotive sectors (among many others), with government becoming both protector and punisher of industry. Today’s dynamic tech industries will increasingly come under the “Mother, may I?” permission-based regulatory regime that encumbered the older information technology sectors.

Finally, this paper offers strategies for stalling and diminishing the cronyism already taking root in the high-tech sector. We suggest several targeted reforms to limit or undo cronyism. Generally speaking, however, we note that, as economist David R. Henderson argued in an earlier Mercatus Center report, “There is only one way to end, or at least to reduce, the amount of cronyism, and that is to reduce government power.”

The paper can be downloaded from the Mercatus website, SSRN, or Scribd. The Scribd version is embedded down below. (Also, here’s some coverage of the paper over at the Washington Post’s “Wonkblog” from our old colleague Tim Lee. Here’s more coverage from Bloomberg Businessweek and the San Francisco Chronicle. And here’s a U.S. News oped that Brent and I wrote condensing our paper into just 600 words. Finally, a short 3-minute video of me discussing the problem of tech cronyism is also embedded below.)

A History of Cronyism and Capture in the Information Technology Sector [Thierer and Skorup – July 2013] by Adam Thierer

In an important essay this week entitled “Silicon Valley’s ‘Suicide Impulse’,” Wall Street Journal columnist L. Gordon Crovitz warns that “Silicon Valley has long prided itself on avoiding the lumbering relationship between big government and most industries, but somehow it has become one of the top lobbyists in Washington.” Crovitz is worried that Internet and technology companies are falling prey to what Milton Friedman labeled “The Business Community’s Suicidal Impulse”: the persistent propensity to persecute one’s competitors using regulation or the threat thereof. “Rather than lobby government to go after one another,” Crovitz argues, “Silicon Valley lobbyists should unite to go after overreaching government. Instead of the ‘suicide impulse’ of lobbying for more regulation, Silicon Valley should seek deregulation and a long-overdue freedom to return to its entrepreneurial roots.”

Crovitz’s essay touches upon a dangerous trend I have written about here and elsewhere in the past: the increasing politicization of the Internet and information technology sectors and the gradual rise of rent-seeking (i.e., favor-seeking) over time. I’ve written about this problem in essays like:

• “The Sad State of Cyber-Politics” (Cato, 2010)
• “The Troubling Growth of High-Tech Regulation, Lobbying, and Rent-Seeking” (Dec. 2, 2012)
• “On Facebook ‘Normalizing Relations’ with Washington” (March 29, 2011)
• “DC’s LivingSocial Cronyism Experiment Already Going off the Rails” (Nov. 29, 2012)

These essays have documented how tech companies are increasingly vying for the attention of legislators and regulators in Washington, statehouses, and international capitals across the globe.

Why should we care about the increasing politicization of the information technology sector? In a forthcoming Mercatus Center working paper entitled, “A History of Cronyism & Capture in the Information Technology Sector,” Brent Skorup and I explain how “time and resources spent focusing on influencing politicians and capturing regulators represent time and resources that could better be spent competing and innovating in the marketplace. This can negatively impact consumer welfare in two ways: Not only are consumers denied more and better products and services, but they also may pay higher prices or higher taxes extracted by the corporate-government agreement.”

We document how rent-seeking and cronyism have had a corrupting influence on older information sectors and technologies, especially broadcasting and communications. We develop lengthy case studies from each sector to illustrate the costs that rent-seeking imposes on consumers, competitors, and ongoing innovation.

It’s a miserable history but one that is essential to recount if we hope to avoid it for newer sectors and technologies. That’s why Brent and I devote the closing section of our paper to a list of “Strategies to Limit Cronyism” in the Internet world before things get as bad as they have in the communications and media sectors. We argue that it is essential that we use a combination of institutional safeguards and market/social norms if we hope to head-off incessant rent-seeking and avoid the ‘suicidal impulse’ problem that Milton Friedman and Gordon Crovtiz identified.

Generally speaking, we must begin by acknowledging that, as economist David Henderson correctly notes, “There is only one way to end, or at least to reduce, the amount of cronyism, and that is to reduce government power.” Special interest rent-seeking and the chronic cronyism problems of modern America are fundamentally tied up with the constantly expanding horizons of government power. As Mancur Olson taught us in his 1965 book, The Logic of Collective Action, when benefits are concentrated and costs are dispersed (across all taxpayers or ratepayers, for example), we can expect groups to form to take advantage of those benefits. Those groups have a powerful motivation to create, preserve, and perpetuate government programs that favor their narrow interests at the expense of others, while those bearing the true costs of those policies or programs do not have the same incentive (or resources) to lobby government to reduce or end those burdens.

This leads to what economist Gordon Tullock called the “transitional gains trap”: once a policy or program is put in place to favor a certain interest, most of their gains come upfront and are factored into future earnings. Those benefiting from the policies would face large transitional losses if reform is undertaken, even if these policies impose large deadweight costs on society as a whole. This “trap” can frustrate beneficial reform efforts because the interest benefiting from the cronyist policies and programs will fight to the death to preserve them, no matter how costly or inefficient they may be for society as a whole.

There are several steps we can take if we hope to overcome the collective action problem in the tech sector and avoid Tullock’s transitional gains trap.

First, we must limit the scope of technology regulation whenever possible, and where existing rules open the door to cronyism, streamline or eliminate as many of them as possible. When policymakers deregulated other sectors in past—airlines, railroads, trucking, etc.—it helped eliminate the legal levers that industry could capture or influence. Consequently, deregulation forced companies to spend more time satisfying consumers as opposed to lawmakers and regulators.

Second, whenever possible we should rely on auctions and property rights to ensure that resources are being allocated according to market demand instead of political influence. The ugly history of spectrum cronyism is rooted in the misguided reliance upon the so-called “public interest” theory of regulation, which claimed that supposedly enlightened and benevolent regulators would steer resources and markets in more pro-consumer directions. The reality was just the opposite: the “public interest” became synonymous with the private interest of regulated entities, who largely “gamed” the system for their own ends. It was only when policymakers finally embraced the logic of auctions to allocate spectrum that America began to see cronyism dissipate in this sector. Auctions ensured faster allocation and more efficient distribution and development of this important resource. While full-blown spectrum property rights have not yet taken hold, the gradual movement in that direction helps minimize cronyism opportunities.

Third, the use of vouchers can help limit corporate gaming of social programs that are deemed essential. For example, America’s universal service program, which subsidizes phone and now broadband service, is a permanent fixture of communications policy. Unfortunately, cronyism is a permanent fixture of the system as well. Because the universal service system delivers assistance to end-users indirectly through favored local providers, it limits the potential for new entry and undermines competition. A means-tested voucher could have targeted assistance to those who needed it without creating an inefficient, unsustainable hidden tax or undermining competition.

Fourth, sunsetting provisions for new and existing laws and regulations can greatly limit cronyism opportunities. All new technology proposals should include a provision sunsetting the law or regulation within a few years of enactment and existing technology laws and regulations should be reopened and reassessed on a regular timetable as well to ensure they are not being abused. (Here’s a Forbes column I wrote last year with details about how to do so.)

Fifth, we need serious limits on congressional delegations of power to regulatory bodies and executive branch agencies. Too often, lawmakers “pass the buck” on to agencies and expect them to figure out how to interpret and administer arcane technology policy statutes. The result is abuse both by over-zealous regulators and interests looking to game the system. Congress should be more accountable and, at a minimum, must make their regulatory intent and standards clearer before delegating authority.

Finally, we need to encourage better norms inside the tech industry itself and encourage them to hold themselves to a higher standard. We should ask them to promise not to exploit government power that would discourage innovation or crush competition. Better yet, we should ask them to consider “strategic disengagement” with Washington and politics in general. Yes, I understand that sounds like a pipe dream since where power exists interests will likely look to exploit it. And, again, that’s the best reason for serious deregulation and strong limits on government power to begin with. But social pressure and market norms can also help in the absence of more sweeping reforms. Some firms already adopt the right approach. For example, Apple and Sony have largely shunned political engagement and instead focused on satisfying their customers in the marketplace. While their hands aren’t entirely clean, we should encourage more tech innovators to follow their general lead of not sending small armies of lobbyists to Washington and state capitals.

In the end, there is no silver-bullet solution that can forever cure cronyism. It would be foolish to pretend that we’ll be able to significantly curtail the scope of government powers in the short-term. Nonetheless, there are many sensible institutional reforms and marketplace norms that can help us keep cronyism in check before it begins running rampant in this important sector of our economy.

(Brent and I have just sent our paper on this topic off for peer review from some academic experts in this field, but we welcome thoughts from others about strategies to limit and reduce cronyism in this arena. We hope to publish this paper in a law review or poly sci journal later this Summer or Fall.)

Yesterday it was my privilege to speak at a Free State Foundation (FSF) event on “Ideas for Communications Law and Policy Reform in 2013.” It was moderated by my friend and former colleague Randy May, who is president of FSF, and the event featured opening remarks from the always-excellent FCC Commissioner Robert McDowell.

During the panel discussing that followed, I offered my thoughts about the problem America continues to face in cleaning up communications and media law and proposed a few ideas to get reform done right once and for all. I don’t have time to formally write-up my remarks, but I thought I would just post the speech notes that I used yesterday and include links to the relevant supporting materials. (I’ve been using a canned version of this same speech at countless events over the past 15 years. Hopefully lawmakers will take up some of these reforms some time soon so I’m not using this same set of remarks in 2027!)

I) The fundamental problem we face in the world of communications and media policy today is easy and diagnose and, at least in theory, easy to remedy.

The Problem= asymmetrical regulation / “unlevel playing field”

• Policymakers are imposing different regulatory policies on different layers of the modern information ecosystem. (This is sometimes referred to as the “regulatory silos” problem.)
• Regulatory silos and unlevel playing fields create 3 additional problems. They:

1. are unfair to those players who suffer under more onerous rules;
2. threaten to roll the old onerous rules on newer and less regulated speech and communications platforms and technologies; and,
3. create uncertainty and threatens investment and innovations.

The Solution (again, simple in theory but not in political reality) = level the playing field by deregulating down to achieve parity instead of regulating up

II) Let’s get more concrete about how to accomplish that sort of liberalization and level the playing field. Three simple reform ideas can help:

1. “MFN clause for communications and media policy”: To the extent Congress continues to place ground rules on the information sector at all, it should consider borrowing a page from trade law by adopting the equivalent of a “Most Favored Nation” (MFN) clause for communications and media policy. In a nutshell, this policy would state that: “Any operator seeking to offer a new service or entering a new line of business, should be regulated no more stringently than its least regulated competitor.” Such a MFN for communications would ensure that regulatory parity exists within this arena as the lines between existing technologies and industry sectors continue to blur. Placing everyone on the same deregulated level playing field should be at the heart of telecommunications policy to ensure non-discriminatory regulatory treatment of competing providers and technologies at all levels of government. In other words, to level the proverbial playing field properly, we should “deregulate down” instead of regulating up to place everyone on equal footing.
2. “Moore’s Law” for information technology laws and regulations: With information markets evolving at the speed of Moore’s Law, public policy must as well. Toward that end, every new technology proposal should include a provision sunsetting the law or regulation 18 months to 2 years after enactment. And this principle should apply retroactively so that old rules are sunset on a rapid timetable. If Congress deems them vital, they can always be reauthorized. [See my Forbes column on this proposal.]
3. Comprehensive FCC reform, downsizing & defunding: You can’t truly deregulate communications and media markets if the primary regulator (the FCC  in this case) remains large and is constantly growing its budget and responsibilities. Regulators exist to regulate! Only by downsizing and defunding them can we truly deregulate these markets. (Alfred Kahn and the Democrats taught us that in the late 1970s when the comprehensively deregulated airline and transportation markets and then moved to abolish the agencies that oversaw those sectors as well. They understood that the very existence of those agencies was a major contributing factor to economic inefficiency and crony capitalism.)

III) If wasn’t that long ago that this sort of an approach was considered the model for how to move forward

Following the lead of the Democrats who deregulated airlines and transportation sectors in the late 1970s, a number of scholars in the 1990s and 2000s devised comprehensive reform proposals for communications and media markets. (Two old PFF projects built on this):

• “The Telecom Revolution”: May 1995 proposal from @ a dozen different free-market think tank analysts to replace the FCC with a much smaller agency.
• “Digital Age Communications Act” project (“DACA”): a 2005-06 set of proposals from over 50 non partisan academics to make the FCC behave more like the FTC. [See this paper by Ray Gifford for a concise summary of the project and all the proposals).

Generally speaking, both projects focused on same 5 reform objectives:

1. Replacing the amorphous “public interest” standard with a consumer welfare standard, which is more well-established in field of antitrust law
2. Eliminate regulatory silos and level the playing field through deregulation
3. Comprehensively reform spectrum not just through more auctioning but through clear property rights
4. Reform universal service by either voucherizing it or devolving it to the States and let them run their own telecom welfare programs
5. Significantly reforming & downsizing the scope of the FCC’s power of the modern information economy

• If we can get those 5 things done, we will have accomplished true deregulation of America’s information marketplace.  What we don’t want is another fiasco like the Telecommunications Act of 1996, which represented an effort at managed competition. That law intentionally avoided providing clear deregulatory guidance and instead delegated broad and remarkably ambiguous authority to the FCC. This left the most important deregulatory decisions to the FCC and, not surprisingly, the agency did a very poor job of following through with a serious liberalization agenda.
• Again, regulators generally don’t deregulate themselves! It is against their self-interest. Congress must impose restraint on the agency and limit (or, better yet, end) its powers.

IV) Some will say communications & media markets are too important to deregulate. But the exact opposite is true.

• America’s Founders thought media was important enough that they made sure that the First Amendment clearly stated that “Congress shall make no law” as it pertains to freedom of speech and the press. They got it exactly right.
• We need to return to that Constitutional prime directive for information markets and start removing the layers of unjust and unnecessary regulation that have encumbered these markets for the past 100 years. America’s communications and media policy should once again be the First Amendment, not the Communications Act of 1934 or the Telecom Act of 1996.
• What we need, to borrow the title of Richard Epstein’s book of the same title, is “simple rules for a complex world.”  Those simple rules include: the law of contract, torts and common law, anti-fraud statutes, etc.
• Such simple rules can govern our complex information ecosystem the same way they govern every other sector of our capitalist economy. We don’t need a sector-specific regulator or body of regulation for communications, media, and the Internet.

[Video clip of my remarks from the FSF panel follows.]

It is unlikely there has ever been a more important figure in the history of regulatory policy than Alfred Kahn. As I noted in this appreciation upon his passing in December 2010, his achievements as both an academic and a policymaker in this arena where monumental. His life was the very embodiment of the phrase “ideas have consequences.” His ideas changed the world profoundly and all consumers owe him a massive debt of gratitude for reversing the anti-consumer regulatory policies that stifled competition, choice, and innovation. It was also my profound pleasure to get to know Fred personally over the last two decades of his life and to enjoy his spectacular wit and unparalleled charm. He was the most gracious and entertaining intellectual I have ever interacted with and I miss him dearly.

As I noted in my earlier appreciation, Fred was a self-described “good liberal Democrat” who was appointed by President Jimmy Carter to serve as Chairman of the Civil Aeronautics Board in the mid-1970s and promptly set to work with other liberals, such as Sen. Ted Kennedy, Stephen Breyer, and Ralph Nader, to dismantle anti-consumer airline cartels that had been sustained by government regulation. These men achieved a veritable public policy revolution in just a few short years. Not only did they comprehensively deregulate airline markets but they also got rid of the entire regulatory agency in the process. Folks, that is how you end crony capitalism once and for all!

Who could imagine such a thing happening today? It’s getting hard for me to believe it could. The cronyist cesspool of entrenched Washington special interests don’t want it. Neither do the regulators, of course. Nor do any Democrats or Republicans on the Hill. And all those self-anointed “consumer advocates” running around D.C. scream bloody murder at the very thought. All these people are happy with the regulatory status quo because it guarantees them power and influence–even if it screws consumers and stifles innovation in the process.

And so, when I reach my most pessimistic depths of despair like this, I go back and read Fred. I remember what one man accomplished through the power of ideas and I hope to myself that there’s another Fred out there ready to come to Beltway, shake things up, and start clearing out the morass of anti-consumer, anti-innovation regulations that pervade so many fields–but especially communications and technology.

I could cite endless wisdom from his 2-volume masterwork, The Economics of Regulation, but instead I will encourage you to pick that up if it’s not already on your shelf. It will forever change the way you think about economic regulation. Instead, I will leave you with a few things from Fred that you might not have seen before since they appeared in two obscure speeches delivered just a year apart to the American Bar Association. Just imagine being in the crowd when a sitting regulator delivered these remarks to a bunch of bureaucrats, regulatory lawyers, and industry fat cats. Oh my, how they must have all cringed!

Remarks before the American Bar Association, New York, August 8, 1978:

I believe that one substantive regulatory principle on which we can all agree is the principle of minimizing coercion: that when the government presumes to interfere with peoples’ freedom of action, it should bear a heavy burden of proof that the restriction is genuinely necessary…

Remarks before the American Bar Association, Dallas, TX, August 15, 1979:

I think it unquestionable that there is a basic difference between the regulatory mentality and the philosophical approach of relying on the competitive market to restrain people. The regulator has a very high propensity to meddle; the advocate of competition, to keep his hands off. The regulator prefers order; competition is disorderly. The regulator prefers predictability and reliability; competition has the virtue as well as the defect that its results are unpredictable. Indeed, it is precisely because of the inability of any individual, cartel or government agency to predict tomorrow’s technology or market opportunities that we have a general preference for leaving the outcome to the decentralized market process, in which the probing of these opportunities is left to diffused private profit-seeking. The regulator prefers instead to rely on selected chosen instruments, whom he offers protection from competition in exchange for the obligation to serve, as well as, often, transferring income from one group of customers to another — that is, using the sheltered, monopoly profits from the lucrative part of the business to subsidize the provision of service to other, worthy groups of customers. No matter that the social obligations are often ill-defined, and sometimes not defined or enforced at all; the protectionist bias of regulation is unmistakable.

I’m pleased to report that the Mercatus Center at George Mason University has just released a new white paper on video marketplace regulation and the ongoing  “retrans” wars by one of America’s leading media economists, Bruce M. Owen.  Owen’s new paper, “Consumer Welfare and TV Program Regulation,” examines the lamentable history of misguided federal interventions into America’s video marketplace. Owen also explores to possibility of deregulating this marketplace via the important new Scalise-DeMint bill, “The Next Generation Television Marketplace Act.” If you’re following these issues, Owen’s paper is must-reading. Here’s the abstract:

Getting rid of obsolete regulation of the broadcast and distribution of video programming is essential to the efficient operation of a market that has the potential to greatly increase the benefits to consumers. Services that increase video program distribution capacity have been delayed and suppressed for many years, and consumer benefits were lost as the Federal Communications Commission (FCC) pursued ill-defined and ephemeral “public interest” and “localism” objectives. It is past time to stop extending interventions originally intended for old technology to a range of new competitive media. No longer is there any rational public policy basis for a government agency to dictate how much or what content the viewing public can see, any more than there ever has been for printed media. There is no market failure to which the current regulatory framework is responding and no longer any reason for FCC bureaucrats to decide how much of the spectrum should be used for each of many existing and future commercial services. Spectrum reform, along with the repeal of other broadcast programming restrictions contained in the proposed Scalise-DeMint Next Generation Television Marketplace Act, provide a roadmap for the necessary reform. With an adequate supply of tradable rights in spectrum, we will find out how much additional competition is possible among traditional wired and wireless, analog and digital, and fixed and mobile delivery services.

Read the entire thing here [PDF], and you might also be interested in this Forbes column (“Toward a True Free Market in Television Programming“) and these two blog posts of mine (1, 2) on the retrans wars.

It was my pleasure this week to host a terrific panel discussion about the future of broadband policy and FCC reform featuring Raymond Gifford, a Partner at the law firm of Wilkinson Barker Knauer, LLP,  Jeffrey Eisenach, a Managing Director and Principal at Navigant Economics and an Adjunct Professor at George Mason University Law School, and Howard Shelanski, Professor of Law at Georgetown Law School who previously served as Chief Economist for the Federal Communications Commission and as a Senior Economist for the President’s Council of Economic Advisers at the White House. We discussed two new papers by Gifford and Eisenach on these issues.

Gifford discussed his new Mercatus Center Working Paper on “The Continuing Case for Serious Communications Law Reform.” Gifford’s paper outlines what substantive FCC reform would entail and considers what antitrust agencies and enforcement can teach us about the way the FCC should work going forward.  Eisenach discussed his important new paper on “Theories of Broadband Competition,” which similarly considers how competition oversight of broadband markets could be modeled after modern antitrust principles.  Shelanski offered his thoughts on both papers. It was an interesting discussion and I encourage you to watch the entire thing.

During the discussion period, we debated the likelihood that serious communications policy / FCC reform could occur in the current political environment.  I argued that the stars just don’t line up at this time to achieve such reforms. However, keep in mind that many deregulatory experiments in the past sometimes started slowly and then something sparked sudden action.  Scholars have noted (see McCraw’s “Prophets of Regulation”) sometimes just a couple of key players (such as Alfred Kahn in the airline context) were able to change the underlying dynamics of deregulation very rapidly to push through long-lasting reforms.

The key difference between then and now, of course, is that, back then, liberal Democrats in Congress and the Carter Admin came to understand how regulation was having a deleterious impact on marketplace competition and consumer welfare.  I simply cannot find a single Democrat who makes that same case today for the communications or media sectors.  And if telecom / media reform remains a highly politically charged, partisan issue, then the hopes for reform remain quite slim. But I haven’t given up all hope just yet!

Anyway, watch the event video for more discussion on this matter.

I was very sad to learn this morning of the death of Alfred Kahn, the brilliant economist known as “the father of airline deregulation.”  He was 93.  He was a brilliant, gracious and gregarious man who never failed to have a smile on his face and make those around him smile even more.  He will be missed.

Kahn has been an inspiration to an entire generation of regulatory analysts and economists. His 2-volume masterwork, The Economics of Regulation, has served as our bible and provided us with a framework to critically analyze the efficacy of government regulation. I have cited it in more of my papers and essays than any other book or article. The book was that big of a game-changer, as was Kahn’s time in government.  A self-described “good liberal Democrat,” Kahn was appointed by President Jimmy Carter to serve as Chairman of the Civil Aeronautics Board in the mid-1970s and promptly set to work with other liberals, such as Sen. Ted Kennedy, Stephen Breyer, and Ralph Nader, to dismantle anti-consumer cartels that had been sustained by government regulation. These men understood that consumer welfare was better served by innovative, competitive markets than by captured regulators, who talked a big game about serving “the public interest” but were typically busy stifling innovation and market entry.

His academic and policy achievements were significant, but what I will most remember about him is that, in a field not known for lively personalities or exciting discussions, Kahn was a consistent source of great wit and entertainment. He always managed to make even the most dreadfully boring of regulatory topics interesting and entertaining. Everyone would go away happy from a Fred Kahn talk.  Moreover, in a policy arena characterized by bitter intellectual bickering and endless bad-mouthing, Kahn always rose above the fray and held himself out to be a model of maturity and respectfulness. I have never heard a single person say a bad word about Alfred Kahn. Not one. That’s saying something in the field of regulatory policy!

One quick story about one of my interactions with Fred.  Back in 1994, someone in DC was hosting a lunch on telecom and regulatory policy and Kahn was the guest of honor. Knowing this in advance, I brought along my copy of The Economics of Regulation hoping for an inscription from Fred.  I handed it to him — I think my hands were shaking as if I were a teenage girl meeting the Jonas Brothers — and asked Fred for a simple autograph. He took a close look at my well-worn book, with scribblings in every margin, Post-It notes all over it, and every other page dog-eared for one reason or another.  The book was that important to me.  Seeing this, Fred flashed me one of his signature big grins and laughed as he wrote on the first page: “To a man of obviously excellent judgment!”  He handed it back to me and said, “I wish everyone cared enough about my book to deface it like that!”

We did, Fred. We did. Thank you for it, everything you taught us, and the example you set for all of us. You will not be forgotten.

Richard Bennett brought to my attention the release of the latest CTIA Semi-Annual Wireless Industry Survey. Lots of interesting facts worth examining.  I took two of the charts that appeared in the report and mashed them up to created this chart for the Mercatus Center depicting what has been happening with prices and investment in this sector.  Down below, I note why this is important.

Although it remains subject to some regulatory burdens and a variety of punishing taxes and fees, America’s wireless marketplace can be considered a great deregulatory success story. Over the past two decades, the cellular marketplace has generally been treated with a lighter regulatory touch than wireline communications and other sectors that the Federal Communications Commission regulates. The result of that light-touch approach speaks for itself.

Cumulative capital investment has grown from just $2.6 billion in 1988 to just under $300 billion in 2010. That is a stunning level of investment growth in capital-intensive sector. Meanwhile, prices plummeted throughout the 1990s and then plateaued over the past decade. While average local monthly bills stood close to $100 in 1988, today monthly service averages just $47. Importantly, however, the quality-adjusted price of service has improved markedly over the past decade. Consumers are getting much more for their money today than they did in the past. Internet access, texting, video, games, movies, and much more are all available over mobile handsets today. It’s not hyperbole to suggest that what we are carrying in our pockets and purses today is really more akin to a computer than a phone. Yet, competition and innovation keeps prices in check.

These statistics suggest that calls for more aggressive regulation of the wireless sector are unwarranted and would likely have a deleterious impact on consumer welfare.

The way Ben Kunz puts it in a new Business Week article, “Each device contains its own widening universe of services and applications, many delivered via the Internet. They are designed to keep you wedded to a particular company’s ecosystem and set of products.”

I like Ben’s article a lot because it recognizes that “walling off” and a “widening universe” are not mutually exclusive. If only policymakers and regulators acknowledged that. They must know it, but admitting it means acknowledging their limited relevance to consumer well-being and a need to step aside. So they feign ignorance.

Many claim to worry about the rise of proprietary services (I, as you can probably tell, often doubt their sincerity) but I’ve always regarded a “Splinternet” as a good thing that means more, not less, communications wealth. I first wrote about this in Forbes in 2000 when everyone was fighting over spam, privacy, content regulation, porn and marketing to kids.

Increasing wealth means a copy-and-paste world for content across networks, and it means businesses will benefit from presence across many of tomorrow’s networks, generating more value for future generations of consumers and investors. We won’t likely talk of an “Internet” with a capital-“I” and a reverent tremble the way we do now, because what matters is not the Internet as it happens to look right now, but underlying Internet technology that can just as easily erupt everywhere else, too.

Meanwhile, new application, device and content competition within and across networks disciplines the market process and “regulates” things far better than the FCC can. Yet the FCC’s very function is to administer or artificially direct proprietary business models, which it must continue to attempt to do (and as it pleads for assistance in doing in the net neutrality rulemaking) if it is going to remain relevant. I described the urgency of stopping the agency’s campaign recently in “Splinternets and cyberspaces vs. net neutrality,” and also in the January 2010 comments to the FCC on net neutrality.

Eventually the pro-business and pro-consumer cases for splintering and against artificial openness will prevail, because compulsion and deliberately ignoring free markets in infrastructure undermine communications wealth and content options despite the general view. The question is whether we recognize it now, or decades hence, long after other nations have embraced liberalized communications and bypassed us. Rather than a make-work “National Broadband Plan” like the one being presented to Congress this month, the FCC needs instead to act like Alfred Kahn at the old CAB, and present a case for turning out the lights and ratcheting down most functions over there, since airwave scarcity is increasingly disappearing (or created artificially by the agency itself) and since “public airwaves” don’t mean much in tomorrow’s world of limitless content access, customization and Everybody Tube broadcasting. The case for a ruthless, drastic purging of FCC’s involvement in and oversight of most things communications needs to be made rather than conspiracy in a make-believe, Emperor’s New Clothes broadband plan. The FCC is too much an impediment in too many important respects for the concrete plan in play to be one of adding rather than paring responsibilities. The FCC and a naive Congress are on a path toward turning America’s involvement in the Internet into the C&O Canal of Communications.

Capitalism is still too young historically for us to have had our John Locke for the digital age and its long and thin network (and intangible) properties. The short and fat stuff like houses and cars was far easier. Policymakers already destroyed the prospects of liberalization in the electricity industry by trying to mandate hyper-regulatory “retail wheeling” (same for all intents and purposes as net neutrality) in the name of “competition.” Forced neutrality has wrecked one industry. I hope we don’t do it again, but too many special interests gain from regulation. They don’t, for example, even seem to recognize the ways in which properly liberalized electricity grids would also have turbocharged communications liberalization.

Competition in access to content is only one part of the story; competition in the provision of infrastructure and devices drives communications wealth and free speech, too.

Howard Stern swore off free broadcast radio in 2004 in part because of federally mandated decency rules. The self-annointed “king of all media” may have stepped off the throne in doing so. Them’s the breaks in the competitive media marketplace, contorted as it is by government speech controls.

Some would argue that a new king of all media is seeking the mantle of power now that the Obama administration is ensconced and friendly majorities hold the House and Senate. The new pretender is the federal government.

And some would argue that the Free Press “Changing Media Summit” held yesterday here in Washington laid the groundwork for a new federal takeover of media and communications.

That person is not me. But I am concerned by the enthusiasm of many groups in Washington to “improve” media (by their reckoning) with government intervention.

Free Press issued a report yesterday entitled Dismantling Digital Deregulation. Even the title is a lot to swallow – Have communications and media been deregulated in any meaningful sense? (The title itself prioritizes alliteration over logic – evidence of what may come within.)

Opening the conference, Josh Silver, executive director of Free Press harkened to Thomas Jefferson – well and good – but public subsidies for printers and a government-run postal system model his hopes for U.S. government policies to come.

It’s helpful to note what policies found their way into Jefferson’s constitution as absolutes and what were merely permissive. The absolute is found in Amendment I: “Congress shall make no law . . . abridging the freedom of speech, or of the press . . . .”

Among the permissive is the Article I power “to establish Post Offices and post Roads.” There’s no mandate to do it and the scope and extent of any law is subject to Congress’ discretion, just like the power to create patents and copyrights which immediately follows.

I won’t label Free Press and all their efforts a collectivist plot and dismiss it as such – there are some issues on which we probably have common cause – but a crisper expression of “dismantling deregulation” is “re-regulation.”

It’s a very friendly environment for a government takeover of modern-day printing presses: Internet service providers, cable companies, phone companies, broadcasters, and so on.

One of the reasons that so many of us here take issue with proposals to expand regulation of communications, broadband, and media markets is because we have studied the horrendous inefficiencies of economic regulation in practice. We oppose regulatory proposals not because of a “blind faith” in free markets, but because we understand that even when markets stumble they correct themselves quicker and more efficiently than regulatory systems do. One can profess the supposed theoretical benefits of enlightened “public interest” regulation all they want, but the facts are the facts. And the facts do not support the proposition that government regulation generally enhances consumer welfare.

In that regard, Tim Lee’s new Net neutrality report for Cato does a nice job of surveying some of the past unintended consequences of regulation. Also, even though it is now 10 years old, I highly recommend “Economic Deregulation and Customer Choice” by Jerry Ellig and Robert Crandall. It’s an outstanding overview of why economic regulation of various industries failed consumers so miserably in the past.

But if you want even more shocking proof of how horrendously inefficient communications regulation can be in practice, then you must read my PFF colleague Barbara Esbin’s two essays this week on the Universal Service Fund (USF): “The High Cost of USF Support,” and “More FCC Support Fund Follies.” In these two essays, Esbin walks the reader through various grim reports and statistics that have been released recently documenting the failures of the USF.

Her first essay notes how a recent FCC Inspector General report found that the USF “High Cost” fund is spiraling out of control. According to a FCC press release, that report found that “a program is at risk if the erroneous payment rate exceeds 2.5% and the amount of erroneous payments is greater than $10 million. The estimated erroneous payment rate for the High Cost Program (“HCP”) was 23.3%. The previous estimate was 16.6%. Total estimated erroneous payments were $ 971.2 million as compared with the previous estimate of erroneous payments of $617.8 million. Accordingly, the FCC-OIG concluded that the High Cost Fund program is “at risk” under applicable [..] criteria.”

Esbin puts these shocking results in perspective:

“At risk” is a surely a euphemism for a program that loses in “erroneous payments” nearly one out of every four dollars collected from telephone subscribers. In 2007, pursuant to FCC rules, telephone consumers were effectively taxed over $4 billion for the high-cost portion of the USF. Thus, nearly $1 billion dollars of subscriber money went out the door in “erroneous payments.” As the report makes clear, erroneous payments include both over- and underpayments, and also instances where the agency is unable to discern whether a payment was proper as a result of “lack of documentation.” The report’s conclusions state that the “rate of improper overpayments is 22.8%, and the proportion of improper overpayments out of total improper payments is 98.2%.” To be considered “erroneous,” an payment “need not be the result of fraudulent misrepresentation, or a corrupt administrative process.” “Nor does it necessarily exclude those factors as potential causes of erroneous payments.” Significantly, nor are “the erroneous payments . . . necessarily recoverable from recipients by process of law.” Fabulous. Not only has nearly $1 billion in erroneous overpayments gone missing, but even if final audits indicate where it has gone, it may not be recoverable! Among the interesting results of this preliminary report are the identified causes of erroneous payments. According to Table 2 of the report, 50% of the causes of erroneous payments can be attributed nearly equally to two factors: either “Inadequate Documentation” (25.3%) or “Inadequate Auditee Processes and/or Policies and Procedures” (24.6%). Another 10% “Disregarded FCC Rules” and 12% had “Applicant/Auditee Weak Internal Controls.” That is, roughly 75% of the erroneous overpayments can be attributed to poor bookkeeping, inadequate internal controls and “disregard” of FCC rules. This is stunning information. No wonder it made its appearance the day before Thanksgiving.

But wait, things get worse. So much worse. In Esbin’s second essay, she notes that:

On Monday, the OIG released its Semi-Annual Report to Congress, discussing the full range of audit activities conducted from April 1, 2008 to September 30, 2008. Thus we learn that in addition to the loss of nearly $1 billion in erroneous overpayments to the High Cost program, another fund the FCC is ultimately responsible for, the “Telecommunications Relay Service” (TRS) Fund, which provides funds for a variety of telephone transmission services for those with hearing and speech disabilities, also appears to be at risk for substantial overpayments due to the lack of adequate controls. Since 1993, according to the FCC’s website, the Commission’s rules have required that each common carrier providing voice transmission services provide TRS throughout its service area. All providers of interstate telecommunications services contribute to the TRS Fund, and TRS providers recover the costs of providing interstate services from the Fund on a minutes-of-use basis. Intrastate TRS funding is generally administered by the states, although some intrastate TRS offerings are supported by the interstate TRS Fund. The current TRS Fund Administrator is the National Exchange Carrier Association (NECA). Although NECA directly manages the Fund, the FCC sets the Fund size and carrier contribution factor annually and is ultimately responsible for Fund oversight. When the TRS Fund started, it disbursed about $31 million, growing to over $38 million by 1999. Since 1999, the OIG report states that the TRS Fund has increased approximately 50-80% each year, to reach $637 million for the Fund’s fiscal year from July, 2007 to June, 2008. The size of the fund for the current fiscal year is $850 million, a 26% increase over the previous fiscal year. That is, in roughly ten years the TRS Fund has ballooned from $38 million to $850 million! What, if any, other communications service has seen 50-80% growth in costs per year?

Indeed, that is a shocking degree of waste and inefficiency by just about any standard. And Esbin goes on to document specific examples of this waste and inefficiency in action within the TRS Fund. It’s shocking stuff and doesn’t make for pleasant reading if you care about good government.

Barbara is actually much more tempered and tolerant than me when it comes to what to do about all this. She recommends a lot more reform and oversight. If you ask me, however, then entire USF program should be dismantled immediately and any future support deemed necessary should be distributed directly to consumers at the state level in the form of a welfare payment. After all, at root, that’s what universal service is: a communications industry welfare program, but one in which most of the support flows to companies instead of individuals. And that makes it one of the most insanely misguided and inefficient regulatory / subsidization systems known to man. 13 years ago, in one of the very first things that PFF ever published ( The Telecom Revolution: An American Opportunity) I was advocating exactly this sort of a plan along with a dozen other think tank colleagues. (And we also set forth another, less radical reform plan than the “voucher-ize & devolve” plan I favored).

But no one listened. Business as usual continued. And so the endless waste and inefficiencies continue. Somebody will have to remind me how any of this benefits consumer welfare. I can’t see how anyone could make such a case, and I would hope the USF follies serve as a cautionary tale for how the best of intentions are meaningless when it comes to what regulation actually means in practice. Because it sure ain’t pretty.

But hey, it’ll all be different going forward right? We just need to have faith in the media reformistas and the Net neutralitistas.  If we click our heels together enough time and just wish hard enough, all our dreams can come true.

Sure.

Geese are flying overhead. Leaves are orange. The election is over. A historic moment. And I will be optimistic, and hope that although the economics of the moment seems to be a return to things past… to the 1930s, it will turn out to be otherwise, for a good bit is known now that was not known then, whatever one’s ideology.

This column offering thoughts from Europe anticipates a wave of hostility to free markets. Well, that would perhaps not be that much of a change. I will venture far out on a doctrinal limb here, why not, and venture to ask where the free marketers went wrong? [Wait, you mean that they did something wrong? Can that be possible? Surely not]. (There is a good bit that went wrong, of course, that is not the fault of markets or their advocates… the fact that markets are not perfect, problems with rent-seeking, the fondness of the press for dwelling on the negative, and so on). But there have been consistent problems with our presentation, which I diagnose as follows:

-Use of nineteenth century models and rhetoric, and too much movement jargon, much of which is pointlessly disparaging and negative.

-Failure to empathize with people’s real concerns, such as concern about the environment or income disparity. There is the perennial addiction of wonks to Reason-and our awkwardness with emotion that leads us to dismiss it as irrelevant. Makes it look like we don’t care–a false impression, but a real factor none-the-less.

-Specializing in the defense of unpopular causes, whether it is free speech, the super-rich, or the large company of the day. Advocates tend to focus on these causes in the hope of getting attention as contrarians-but as a result the image of advocates for the market becomes identified with unpopular interests, and our energy gets expended in short run battles.

The solution? Well, I’ll save that for another day.

Meanwhile, how about this for a thought? In recognition of the nation’s leaning to the left, I’ll make a concession. Have some social programs. Have all the social programs you want. But there is one thing that I will insist on. Just one thing.

Y’all will have to be ruthlessly honest about how well the programs actually work. About the unintended consequences. About the rules that pile up costs with no benefits. About the forces and factors that lead institutions like public schools or regulatory agencies to fail.

If you can just manage a genuine curiousity about whether the plans that you dream up to help people will actually work, then we’ve got a deal. I promise that if the programs don’t work, we can try something else. Institutional re-design. Heck, maybe even a market.

But I don’t think anyone’s going to go for it.

Peter Ferrara, offering us a taste of the dismal science for the American Spectator in reviewing a recent book’s economic predictions for an Obama Presidency (but what about civil liberties?). Hey, maybe they’ll send out more economic stimulus checks! We used ours this year to pay down a tax bill. It’s like the circle of life. (Other references to the Lion King will be swiftly and severely dealt with).

I’m pleased to announce the publication of A Manifesto for Media Freedom, which I co-authored with Brian C. Anderson of the Manhattan Institute. Brian serves as editor of Manhattan Institute’s excellent City Journal and he is the author of best-selling books like South Park Conservatives and Democratic Capitalism and Its Discontents.

In this little manifesto, we highlight one of the central ironies of the Information Age.  Namely, that despite “the breathtaking abundance of new and old media outlets for obtaining news, information, and entertainment…”

many people hate this profusion, and never more than when it involves political speech. The current media market, they charge, doesn’t represent true diversity, or isn’t fair, or is subject to manipulation by a small and shrinking group of media barons. They want the government to regulate it into better shape, which just happens to be a shape that benefits them. Doing so… would be a disaster, a kind of soft or not-so-soft tyranny that would wipe out whole sectors of media, curtailing free speech and impoverishing our democracy.

In other words, instead of celebrating the unprecedented cornucopia of media choices at our collective disposal, many policymakers and media critics are calling for just as much media regulation as ever. We itemize these threats in our chapters and they include: efforts to revive the “Fairness Doctrine”, media ownership regulations, “localism” requirements, Net neutrality mandates, a la carte regulations, cable and satellite censorship, video game censorship, regulation of social networking sites, campaign finance-related speech restrictions, and so on.

In each case, we advance a pro-freedom paradigm to counter the advocates of media control. What do we mean by the “media freedom” that we advocate as the alternative to these new regulatory crusades? Here’s how we put it in the book:

For media consumers, it’s the freedom to consume whatever information or entertainment we want from whatever sources we choose, without government restricting our choices. For media creators and distributors, it’s the freedom to structure their business affairs as they wish in seeking to offer the public an expanding array of media options, for both news and entertainment. And for both consumers and creators,media freedom is being able to speak one’s mind without restraint and without the threat of FCC or FEC bureaucrats telling us what is “fair.”

It doesn’t seem like much to ask until you realize how many people in Washington and academia today are calling for these various flavors of media regulation.  Of course, it doesn’t help that media-bashing has always been a bipartisan sport.  Indeed, depsite the fact that most of these efforts are lead by the Left, our book highlights how some folks on the Right are still guilty of joining some of these misguided regulatory crusades.

Republican presidential candidate John McCain, for example, has sponsored “a la carte” mandates for cable and satellite operators and sponsored the draconian campaign finance law that will forever bear his name, McCain-Feingold. He has also proposed a follow-up law: McCain-Feingold II. Although it did not pass, McCain’s measure would have required broadcasters to run 12 hours of “candidate-centered and issue-centered programming” in the six weeks prior to primary and general elections — without giving broadcasters any control over those 12 hours (half of which would have had to run during prime time). The bill would have created a voucher system for the purchase of airtime for political advertisements, financed by an annual spectrum-use fee on all broadcast license holders. In sum, the legislation would have forced broadcast stations to pay a tax to the federal government that would in turn finance a pool of funds that politicians could turn around and spend to run ads on those very stations!

Others on the Right have favored the Fairness Doctrine in the past, and more recently, some have joined the Net neutrality effort. And many conservatives have long been in favor of various forms of media censorship.

That being said, the most serious threats to media freedom today arise from the Left and our book serves primarily as a response to the many Leftist efforts to regulate media today. As we argue in the introduction:

The left seems certain that a media problem ails our society; it just can’t decide what that problem is. Some contend that real media choices are as limited or biased as ever, while others argue that our democracy is imperiled by too many media choices, making it hard to share common thoughts or feelings. What unites these two types of critics is their elitist presumption that they know what’s best for the rest of us. They would love to rewrite regulations to tilt the media in the direction they prefer; and if they are allowed to do so, what is shaping up to be America’s Golden Age of media could come to a sudden end.

The Left’s obsession with reinstating the Fairness Doctrine is particularly telling in this regard. [You can read our history of the Fairness Doctrine here] But, as we go on to note:

Some liberals suggest that even a new Fairness Doctrine wouldn’t be enough to correct a “structural imbalance” in the media marketplace. They want tightened ownership regulations, mandates ensuring “greater local accountability” over radio and TV broadcasters, and a significant ramping up of subsidies for public radio and TV stations. One leading leftist proposal would even force private broadcasters to fund public broadcasters! These proposals expose the left’s true goal: to regulate private media outlets comprehensively and drive out those owners who dare to offer right-leaning alternatives.

This movement is being driven by a wide variety of Left-leaning think tanks and advocacy groups, especially Free Press, Media Access Project, and the New America Foundation. These organizations will likely have a strong voice in an Obama administration regarding media law and Internet policy issues. And we fear that means that new regulatory shackles will be placed on the media and free speech as a result. That’s why we penned this manifesto at this time. As we conclude in our book:

Motivated by the naked desire for political control, a reactionary fear of the new, or genuine if misguided views on equality and fairness in the media, [these liberal media activists] threaten to enact regulations that will strangle or at least cripple this social development before it can begin to reach its potential. Those on the right are not free from these impulses, either. But they, as the prime beneficiaries of media abundance — of all the conservative and libertarian talk shows and websites that would suffer in a media landscape remade by the Democratic Party and liberal activists — should embrace, defend, and expand the freedom that made it possible.

Anyway, if you care about free speech and media freedom, I do you hope you will consider giving the book a look. The main page for our book is here. And you can find it on Amazon here.