Why Not Regulation

Prompted by the good discussion over on my recent ‘Lack of Competition’ Meme post, I’ve just spent some time looking over other posts here on TLF for articulation of why we seem to be so intransigent about net neutrality regulation.

I think it’s the consensus among TLFers that regulation is a poor way of getting the best delivery of bits to end-users. There are some good posts, but I couldn’t find the one or two that clearly show why we so prefer competition to regulation for solving this problem.

So here’s a quick summary of my thinking about why not regulation:

First, agencies and bureaucrats turn regulatory processes to their advantage, growing the size of their budgets and the scope of their authority without regard to actual need. This is an insight put forth by Cato Chairman Bill Niskanen in his book Bureaucracy and Public Economics. If you’re not versed in public choice theory–the general idea that politicians are self-interested actors just like you and me–you have to start there. Niskanen extended public choice to bureaucracies in this book–first published in 1971. (When I went to check the date with him just now, he modestly noted three books that preceded his, but his is the one I read first and his is the one that lead to broad acceptance of applying public choice to bureaucracies.) This dynamic creates a general tendency toward overregulation. There is concomitant sclerosis in competition because regulation raises barriers to entry, with new entrants unable to pay off the regulators (politically, socially, and otherwise).

Meanwhile, the incumbents in the corporate sector join the fray to turn regulation to their advantage. Companies lobby in Congress for amendments, and in the agencies for interpretations, that protect their interests. Their interests include fending off competitive new technologies, business models, and such. The economic literature calls it rent-seeking – extracting better than you could get in the marketplace by turning law and regulation in your favor. Here’s a good Jonathan Adler article on regulatory rent-seeking.

For fun, let’s apply this thinking to running a grocery store–a commercial enterprise, yes, but watch how self-interest works when you use bureaucratic decision-making!

Let’s say you were the manager of a local grocery store, part of a national franchise. You were thinking of stocking a new kind of potato. Following the Administrative Procedure Act, you would issue a notice of proposed rulemaking about the new potato. It would invite public comment on the idea of stocking the new type of potato, and query where it should be located in the store, perhaps price points, etc. should you determine to stock the potato.

Who would you hear from? The suppliers of russets, red potatoes, and maybe the instant potato people would definitely have something to say. Your customers, busy people unaware of the benefits or drawbacks of this new potato, would rationally not participate. Because of the threat to their business, the existing potato suppliers might also buy you lunch–or invite you to speak at a conference in, say, Aspen, Colorado–just to make sure that you are still a friend of their lines of potatoes.

Now, it’s true that your entire organization might benefit from selling the new line of potatoes, but you manage one store; your well-being isn’t actually affected by the entire franchise’s bottom line.

The arguments you hear, and the perks that come your way from incumbent suppliers, generally steer you away from bringing the new type of potato into the store. When you decide against this new, untested potato, a small increment of competition is lost, and a small benefit to consumers with it – though they are almost completely unaware of it.

Now, it’s very complicated to show how the twin dynamics of public choice and rent-seeking would work in places like the FCC if Congress gave it authority to write net neutrality regulation. And parties before the agency would never declare their self-interest so directly as to announce, “The provision of this new service would reduce the profits of our firm!” They would say things like “That way of doing business would be bad for consumers.”

And they don’t do all their work formally either. Over lunches, at parties, and down at the Capitol Grille, lobbyists help create an insular little hothouse for regulators and politicians in Washington, D.C. In the world they create, regulation looks very good and many dimensions of competition and innovation look very bad.

So, I can’t speak for my TLF colleagues, but hopefully this presents a decent summary of why we’re skeptics of net neutrality regulation. You don’t get what you ask for when you ask regulators to make things right.

Speaking of competition, people across the net neutrality debate agree that the solution to the problem is competition–and the current quality of competition is worthy to discuss. But I note with some dismay that, as of this writing, there are NO comments on my recent post about reforming spectrum policy.

I’m a lousy writer?! OK OK. True. But here is a deregulatory, property- and market-oriented approach to spectrum policy that would spur remarkable new competition and innovation. It would grow the pie, helping deliver new and diverse wireless services to consumers, including wireless broadband. Shouldn’t we be on this, TLF readers?!

We’re burning too much energy on net neutrality regulation, which is all about dividing up the small pie we’ve got.

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