FCC Commish Ajit Pai on Protectionism & Cronyism in the Tech Sector

by on July 11, 2013 · 2 comments

Ajit Pai FCCAjit Pai, a Republican commissioner at the Federal Communications Commission (FCC), had an outstanding op-ed in the L.A. Times yesterday about state and local efforts to regulate private taxi or ride-sharing services such as Uber, Lyft, and Sidecar. “Ever since Uber came to California,” Pai notes, “regulators have seemed determined to send Uber and companies like it on a one-way ride out of the Golden State.” Regulators have thrown numerous impediments in their way in California as well as in other states and localities (including here in Washington, D.C.). Pai continues on to discuss how, sadly, “tech start-ups in other industries face similar burdens”:

For example, Square has created a credit card reader for mobile devices. Small businesses love Square because it reduces costs and is convenient for customers. But some states want a piece of the action. Illinois, for example, has ordered Square to stop doing business in the Land of Lincoln until it gets a money transmitter license, even though the money flows through existing payment networks when Square processes credit cards. If Square had to get licenses in the 47 states with such laws, it could cost nearly half a million dollars, an extraordinary expense for a fledgling company.

He also notes that “Obstacles to entrepreneurship aren’t limited to the tech world”:

Across the country, restaurant associations have tried to kick food trucks off the streets. Auto dealers have used franchise laws to prevent car company Tesla from cutting out the middleman and selling directly to customers. Professional boards, too, often fiercely defend the status quo, impeding telemedicine by requiring state-by-state licensing or in-person consultations and even restricting who can sell tooth-whitening services.

What’s going on here? It’s an old and lamentable tale of incumbent protectionism and outright cronyism, Pai notes:

These are just the latest chapters in an old economic story. Incumbents have long promoted regulation in the name of protecting consumers when their actual goal is to block new entrants and stifle competition. As Milton Friedman observed, “The pressure on the legislature to license an occupation rarely comes from the members of the public … the pressure invariably comes from members of the occupation itself.”

Indeed, this is exactly the sort of cronyist nightmare that Brent Skorup and I documented in our new Mercatus Center report, “A History of Cronyism and Capture in the Information Technology Sector.” Our 73-page working paper outlines the evolution of government-granted privileges in America’s information and communications technology marketplace and in the media-producing sectors. Sadly, there are all too many examples of special interests seeking to commandeer the levers of government power to distort market outcomes and head off disruptive forms of innovation or new competition.

“Consumer protection is important,” Pai notes, “and rules to ensure safety and to deter fraud are necessary. But many regulations aren’t about safeguarding consumers; they’re about entrenching incumbents (at consumers’ expense), and they’re typically created by the very agencies that are supposed to oversee those incumbents.” he correctly observes.

The costs of cronyism can be significant. In our paper, Skorup and I note that when companies seek and receive favors from government, it can 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. Every dollar spent trying to influence government is a dollar that could have been better spent trying to develop the next iPhone or other innovative gadget or service. Thus, cronyism can 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.

Worse yet, 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. Just ask the agriculture and transportation sectors how their experience with favor-seeking has worked out. Yes, they have often received the special favors and benefits they sought, but along with the goodies came a litany of demands from lawmakers and regulators about how to run their businesses.

At the end of the day, it all goes back to the consumer and how they get screwed in this process. As Pai eloquently puts it:

Heavy-handed regulations hurt the very consumers they’re supposed to help. Consumers fare best when the barriers to business entry are low, which helps ensure that the market — any market — becomes competitive and stays that way. …  Governments at all levels should guard against this tendency by prioritizing innovation and removing unnecessary regulations that burden risk-taking entrepreneurs.

Amen, brother! If only all government officials thought this way. I hope some of them at least take the time to read Commissioner Pai’s excellent essay.

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