Elizabeth_WarrenThe folks over at RegBlog are running a series of essays on “Rooting Out Regulatory Capture,” a problem that I’ve spent a fair amount of time discussing here and elsewhere in the past. (See, most notably, my compendium on, “Regulatory Capture: What the Experts Have Found.”) The first major contribution in the RegBlog series is from Sen. Elizabeth Warren (D-MA) and it is entitled, “Corporate Capture of the Rulemaking Process.”

Sen. Warren makes many interesting points about the dangers of regulatory capture, but the heart of her argument about how to deal with the problem can basically be summarized as ‘Let’s Build a Better Breed of Bureaucrat and Give Them More Money.’  In her own words, she says we should “limit opportunities for ‘cultural’ capture'” of government officials and also “give agencies the money that they need to do their jobs.”

It may sound good in theory, but I’m always a bit perplexed by that argument because the implicit claims here are that:

(a) the regulatory officials of the past were somehow less noble-minded and more open to corruption than some hypothetical better breed of bureaucrat that is out there waiting to be found and put into office; and

(b) that the regulatory agencies of the past were somehow starved for resources and lacked “the money that they need to do their jobs.”

Neither of these assumptions is true and yet those arguments seem to animate most of the reform proposals set forth by progressive politicians and scholars for how to deal with the problem of capture. Continue reading →

I recently finished Learning by Doing: The Real Connection between Innovation, Wages, and Wealth, by James Bessen of the Boston University Law School. It’s a good book to check out if you are worried about whether workers will be able to weather this latest wave of technological innovation. One of the key insights of Bessen’s book is that, as with previous periods of turbulent technological change, today’s workers and businesses will obviously need find ways to adapt to rapidly-changing marketplace realities brought on by the Information Revolution, robotics, and automated systems.

That sort of adaptation takes time, but for technological revolutions to take hold and have meaningful impact on economic growth and worker conditions, it requires that large numbers of ordinary workers acquire new knowledge and skills, Bessen notes. But, “that is a slow and difficult process, and history suggests that it often requires social changes supported by accommodating institutions and culture.” (p 223) That is not a reason to resist disruptive forms of technological change, however. To the contrary, Bessen says, it is crucial to allow ongoing trial-and-error experimentation and innovation to continue precisely because it represents a learning process which helps people (and workers in particular) adapt to changing circumstances and acquire new skills to deal with them. That, in a nutshell, is “learning by doing.” As he elaborates elsewhere in the book:

Major new technologies become ‘revolutionary’ only after a long process of learning by doing and incremental improvement. Having the breakthrough idea is not enough. But learning through experience and experimentation is expensive and slow. Experimentation involves a search for productive techniques: testing and eliminating bad techniques in order to find good ones. This means that workers and equipment typically operate for extended periods at low levels of productivity using poor techniques and are able to eliminate those poor practices only when they find something better. (p. 50)

Luckily, however, history also suggests that, time and time again, that process has happened and the standard of living for workers and average citizens alike improved at the same time. Continue reading →

The most pressing challenge in wireless telecommunications policy is transferring spectrum from inefficient legacy operators like federal agencies to the commercial sector for consumer use.

Reflecting high consumer demand for more wireless services, in early 2015 the FCC completed an auction for a small slice of prime spectrum–currently occupied by federal agencies and other non-federal incumbents–that grossed over $40 billion for the US Treasury. Increasing demand for mobile services such as Web browsing, streaming video, the Internet of Things, and gaming requires even more spectrum. Inaction means higher smartphone bills, more dropped calls, and stuttering downloads.

My latest research for the Mercatus Center, “Sweeten the Deal: Transfer of Federal Spectrum through Overlay Licenses,” was published recently and recommends the use of overlay licenses to transfer federal spectrum into commercial use. Purchasing an overlay license is like acquiring real property that contains a few tenants with unexpired leases. While those tenants have a superior possessory right to use the property, a high enough cash payment or trade will persuade them to vacate the property. The same dynamic applies for spectrum. Continue reading →

At the same time FilmOn, an Aereo look-alike, is seeking a compulsory license to broadcast TV content, free market advocates in Congress and officials at the Copyright Office are trying to remove this compulsory license. A compulsory license to copyrighted content gives parties like FilmOn the use of copyrighted material at a regulated rate without the consent of the copyright holder. There may be sensible objections to repealing the TV compulsory license, but transaction costs–the ostensible inability to acquire the numerous permissions to retransmit TV content–should not be one of them. Continue reading →

Yesterday, the White House Council of Economic Advisers released an important new report entitled, “Occupational Licensing: A Framework for Policymakers.” (PDF, 76 pgs.) The report highlighted the costs that outdated or unneeded licensing regulations can have on diverse portions of the citizenry. Specifically, the report concluded that:

the current licensing regime in the United States also creates substantial costs, and often the requirements for obtaining a license are not in sync with the skills needed for the job. There is evidence that licensing requirements raise the price of goods and services, restrict employment opportunities,  and make it more difficult for workers to take their skills across State lines. Too often, policymakers do not carefully weigh these costs and benefits when making decisions about whether or how to regulate a profession through licensing.

The report supported these conclusions with a wealth of evidence. In that regard, I was pleased to see that research from Mercatus Center-affiliated scholars was cited in the White House report (specifically on pg. 34). Mercatus Center scholars have repeatedly documented the costs of occupational licensing and offered suggestions for how to reform or eliminate unnecessary licensing practices. Most recently, my colleagues and I have explored the costs of licensing restrictions for new sharing economy platforms and innovators. The White House report cited, for example, the recently-released Mercatus paper on “How the Internet, the Sharing Economy, and Reputational Feedback Mechanisms Solve the ‘Lemons Problem,’” which I co-authored with Christopher Koopman, Anne Hobson, and Chris Kuiper. And it also cited a new essay by Tyler Cowen and Alex Tabarrok on “The End of Asymmetric Information.” Continue reading →

“Why hasn’t Europe fostered the kind of innovation that has spawned hugely successful technology companies?” asks James B. Stewart in an important new column for the New York Times (“A Fearless Culture Fuels U.S. Tech Giants“).

That’s a great question, and one that I have tried to answer in a series of recent essays. (See, for example, “Europe’s Choice on Innovation” and “Embracing a Culture of Permissionless Innovation.”) What I have suggested in those essays is that the starkly different outcomes on either side of the Atlantic in terms of recent economic growth and innovation can primarily be explained by cultural attitudes toward risk-taking and failure. “For innovation and growth to blossom, entrepreneurs need a clear green light from policymakers that signals a general acceptance of risk-taking—especially risk-taking that challenges existing business models and traditional ways of doing things,” I have argued. And the most powerful proof of this is to examine the amazing natural experiment that has played out on either side of the Atlantic over the past two decades with the Internet and the digital economy.

For example, an annual Booz & Company report on the world’s most innovative companies revealed that 9 of the top 10 most innovative companies are based in the U.S. and that most of them are involved in computing and digital technology. None of them are based in Europe, however. Another recent survey revealed that the world’s 15 most valuable Internet companies (based on market capitalizations) have a combined market value of nearly $2.5 trillion, but none of them are European while 11 of them are U.S. firms. Again, it is America’s tech innovators that dominate that list.

Many European officials and business leaders are waking up to this grim reality and are wondering how to reverse this situation. In his Times essay, Stewart quotes Danish economist Jacob Kirkegaard of the Peterson Institute for International Economics, who notes that Europeans “all want a Silicon Valley. . . . But none of them can match the scale and focus on the new and truly innovative technologies you have in the United States. Europe and the rest of the world are playing catch-up, to the great frustration of policy makers there.”

OK, but why is that? Continue reading →

The Federal Trade Commission (FTC) is taking a more active interest in state and local barriers to entry and innovation that could threaten the continued growth of the digital economy in general and the sharing economy in particular. The agency recently announced it would be hosting a June 9th workshop “to examine competition, consumer protection, and economic issues raised by the proliferation of online and mobile peer-to peer business platforms in certain sectors of the [sharing] economy.” Filings are due to the agency in this matter by May 26th. (Along with my Mercatus Center colleagues, I will be submitting comments and also releasing a big paper on reputational feedback mechanisms that same week. We have already released this paper on the general topic.)

Relatedly, just yesterday, the FTC sent a letter to Michigan policymakers about restricting entry by Tesla and other direct-to-consumer sellers of vehicles. Michigan passed a law in October 2014 prohibiting such direct sales. The FTC’s strongly-worded letter decries the state’s law as “protectionism for independent franchised dealers” noting that “current provisions operate as a special protection for dealers—a protection that is likely harming both competition and consumers.” The agency argues that:

consumers are the ones best situated to choose for themselves both the vehicles they want to buy and how they want to buy them. Automobile manufacturers have an economic incentive to respond to consumer preferences by choosing the most effective distribution method for their vehicle brands. Absent supportable public policy considerations, the law should permit automobile manufacturers to choose their distribution method to be responsive to the desires of motor vehicle buyers.

The agency cites the “well-developed body of research on these issues strongly suggests that government restrictions on distribution are rarely desirable for consumers” and the staff letter continues on to utterly demolish the bogus arguments set forth by defenders of the blatantly self-serving, cronyist law. (For more discussion of just how anti-competitive and anti-consumer these laws are in practice, see this January 2015 Mercatus Center study, “State Franchise Law Carjacks Auto Buyers,” by Jerry Ellig and Jesse Martinez.) Continue reading →

FAA sealRegular readers know that I can get a little feisty when it comes to the topic of “regulatory capture,” which occurs when special interests co-opt policymakers or political bodies (regulatory agencies, in particular) to further their own ends. As I noted in my big compendium, “Regulatory Capture: What the Experts Have Found“:

While capture theory cannot explain all regulatory policies or developments, it does provide an explanation for the actions of political actors with dismaying regularity.  Because regulatory capture theory conflicts mightily with romanticized notions of “independent” regulatory agencies or “scientific” bureaucracy, it often evokes a visceral reaction and a fair bit of denialism.

Indeed, the more I highlight the problem of regulatory capture and offer concrete examples of it in practice, the more push-back I get from true believers in the idea of “independent” agencies. Even if I can get them to admit that history offers countless examples of capture in action, and that a huge number of scholars of all persuasions have documented this problem, they will continue to persist that, WE CAN DO BETTER! and that it is just a matter of having THE RIGHT PEOPLE! who will TRY HARDER!

Well, maybe. But I am a realist and a believer in historical evidence. And the evidence shows, again and again, that when Congress (a) delegates broad, ambiguous authority to regulatory agencies, (b) exercises very limited oversight over that agency, and then, worse yet, (c) allows that agency’s budget to grow without any meaningful constraint, then the situation is ripe for abuse. Specifically, where unchecked power exists, interests will look to exploit it for their own ends.

In any event, all I can do is to continue to document the problem of regulatory capture in action and try to bring it to the attention of pundits and policymakers in the hope that we can start the push for real agency oversight and reform. Today’s case in point comes from a field I have been covering here a lot over the past year: commercial drone innovation. Continue reading →

President Obama recently announced his wish for the FCC to preempt state laws that make building public broadband networks harder. Per the White House, nineteen states “have held back broadband access . . . and economic opportunity” by having onerous restrictions on municipal broadband projects.

Much of the White House claims are PR nonsense. Most of these so-called state restrictions on public broadband are reasonable considering the substantial financial risk public networks pose to taxpayers. Minnesota and Colorado, for instance, require approval from local voters before spending money on a public network. Nevada’s “restriction” is essentially that public broadband is only permitted in the neediest, most rural parts of the state. Some states don’t allow utilities to provide broadband because utilities have a nasty habit of raising, say, everyone’s electricity bills because the money-losing utility broadband network fails to live up to revenue expectations. And so on. Continue reading →

Many readers will recall the telecom soap opera featuring the GPS industry and LightSquared and the subsequent bankruptcy of LightSquared. Economist Thomas W. Hazlett (who is now at Clemson, after a long tenure at the GMU School of Law) and I wrote an article published in the Duke Law & Technology Review titled Tragedy of the Regulatory Commons: Lightsquared and the Missing Spectrum Rights. The piece documents LightSquared’s ambitions and dramatic collapse. Contrary to popular reporting on this story, this was not a failure of technology. We make the case that, instead, the FCC’s method of rights assignment led to the demise of LightSquared and deprived American consumers of a new nationwide wireless network. Our analysis has important implications as the FCC and Congress seek to make wide swaths of spectrum available for unlicensed devices. Namely, our paper suggests that the top-down administrative planning model is increasingly harming consumers and delaying new technologies.

Read commentary from the GPS community about LightSquared and you’ll get the impression LightSquared is run by rapacious financiers (namely CEO Phil Falcone) who were willing to flaunt FCC rules and endanger thousands of American lives with their proposed LTE network. LightSquared filings, on the other hand, paint the GPS community as defense-backed dinosaurs who abused the political process to protect their deficient devices from an innovative entrant. As is often the case, it’s more complicated than these morality plays. We don’t find villains in this tale–simply destructive rent-seeking triggered by poor FCC spectrum policy.

We avoid assigning fault to either LightSquared or GPS, but we stipulate that there were serious interference problems between LightSquared’s network and GPS devices. Interference is not an intractable problem, however. Interference is resolved everyday in other circumstances. The problem here was intractable because GPS users are dispersed and unlicensed (including government users), and could not coordinate and bargain with LightSquared when problems arose. There is no feasible way for GPS companies to track down and compel users to use more efficient devices, for instance, if LightSquared compensated them for the hassle. Knowing that GPS mitigation was unfeasible, LightSquared’s only recourse after GPS users objected to the new LTE network was through the political and regulatory process, a fight LightSquared lost badly. The biggest losers, however, were consumers, who were deprived of another wireless broadband network because FCC spectrum assignment prevented win-win bargaining between licensees. Continue reading →