Inside the Beltway (Politics)

This week, my colleague Jerry Brito asked me to guest lecture to his George Mason University law school class on regulatory process. He asked me to talk about one of my favorite topics: the sad, sordid history of regulatory capture. Regular readers will recall the compendium I posted here a few months ago [and that I continue to update] of selected passages from books and papers penned by various economists and political scientists who have studied this issue.

Again, it doesn’t make for pretty reading, but the lesson that history teaches is vital: No matter how noble the “public interest” goals of regulatory advocates or their specific proposals, the only thing that really counts is what regulation means in practice.  Regrettably, all too often, regulation is “captured” by various interests and used to their advantage, or at least to the disadvantage of potential competitors, new entrants, and innovation.

While I was gathering some materials for the case study portion of my lecture — which incorporates the history of telecommunications monopolization, broadcast industry regulatory shenanigans, and transportation / airlines fiascos — I figured I had to post a passage from one of my favorite books on regulation of all-time: Thomas K. McCraw’s brilliant Pulitzer Prize-winning 1984 book, Prophets of Regulation. In his chapter on the late great Alfred Kahn, the father of airline deregulation, McCraw recounts the history of the Civil Aeronautics Board (CAB) from its creation in the 1940s up until the time of Kahn’s ascendency to CAB chairman in the Carter Administration (and then the CAB’s eventual deregulation and abolition). Here’s the key passage from that history: Continue reading →

Jack Shafer brought to my attention this terrific new Politico column by Michael Kinsley entitled, “How Microsoft Learned ABCs of D.C.”  In the editorial, Kinsley touches on some of the same themes I addressed in my recent piece here “On Facebook ‘Normalizing Relations’ with Washington” as well as in my Cato Institute essay from last year on”The Sad State of Cyber-Politics.”  Kinsley notes how Microsoft was originally bashed by many for not getting into the D.C. lobbying game early enough:

there even was a feeling that, in refusing to play the Washington game, Microsoft was being downright unpatriotic. Look, buddy, there is an American way of doing things, and that American way includes hiring lobbyists, paying lawyers vast sums by the hour, throwing lavish parties for politicians, aides, journalists and so on. So get with the program.

But after doing exactly that, Kinsley notes, the company got blasted for for being too aggressive in D.C.!
So that’s what Microsoft did. It moved its “government affairs” office out of distant Chevy Chase and into the downtown K Street corridor. It bulked up on lawyers and hired the best-connected lobbyists. Soon, Microsoft was coming under criticism for being heavy-handed in its attempts to buy influence.
“But the sad thing is that it seems to have worked. Microsoft is no longer Public Enemy No. 1,” Kinsley notes, and he continues on to reiterate a point I made in my last two essays: Google is the Great Satan now! Continue reading →

The New York Times reports that, “Facebook is hoping to do something better and faster than any other technology start-up-turned-Internet superpower. Befriend Washington. Facebook has layered its executive, legal, policy and communications ranks with high-powered politicos from both parties, beefing up its firepower for future battles in Washington and beyond.”  The article goes on to cite a variety of recent hires by Facebook, its new DC office, and its increased political giving.

This isn’t at all surprising and, in one sense, it’s almost impossible to argue with the logic of Facebook deciding to beef up its lobbying presence inside the Beltway. In fact, later in the Times story we hear the same two traditional arguments trotted out for why Facebook must do so: (1) Because everyone’s doing it! and (2) You don’t want be Microsoft, do you?   But I’m not so sure whether “normalizing relations” with Washington is such a good idea for Facebook or other major tech companies, and I’m certainly not persuaded by the logic of those two common refrains regarding why every tech company must rush to Washington.

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National Journal reports that the Department of Commerce (NTIA) will, at a Senate Commerce Committee hearing today, call for a “consumer privacy bill of rights”—a euphemism for sweeping privacy regulation:

“Having carefully reviewed all stakeholder comments to the Green Paper, the department has concluded that the U.S. consumer data privacy framework will benefit from legislation to establish a clearer set of rules for the road for businesses and consumers, while preserving the innovation and free flow of information that are hallmarks of the Internet,” [NTIA Administrator Larry] Strickling said in his prepared testimony obtained by Tech Daily Dose.

In other words: “We’ve taken the time to think this through very carefully and have reluctantly come to the conclusion that regulation is necessary.” Sorry, but I’m just not buying it—not just the wisdom of the recommendation but the process that produced it. Let’s consider the timeline here:

  • October 27, 2010 – NTIA Administrator Strickling announces Green Paper is coming but says nothing about timing and little about substance
  • December 16, 2010 – NTIA/Commerce releases its Privacy Green Paper
  • January 28, 2011 – deadline for public comments (28 non-holiday business days later)
  • ??? – Commerce decides regulation is necessary
  • March 16, 2011 – Commerce is ready to ask Congress for legislation (31 non-holiday business days later)

The Commerce Department gave the many, many interested parties the worst four weeks of the year—including  Christmas, New Year’s and Martin Luther King Day—to digest and comment on an 88 page, ~31,000 tome of a report on proposed regulation of how information flows in our… well, information economy. Oh, and did I mention that those same parties had already been given a deadline of January 31, 2011 to comment on the FTC’s 122 page, ~34,000 word privacy report back on December 1 (too bad for those celebrating Hanukkah)? In fairness, the FTC did, on January 21, extend its deadline to February 18—but that hardly excuses the Commerce Department’s rush to judgment. Continue reading →

I absolutely loved this quote about the dangers of regulatory capture from Holman Jenkins in today’s Wall Street Journal in a story (“Let’s Restart the Green Revolution“) about how misguided agricultural / environmental policies are hurting consumers:

When some hear the word “regulation,” they imagine government rushing to the defense of consumers. In the real world, government serves up regulation to those who ask for it, which usually means organized interests seeking to block a competitive threat. This insight, by the way, originated with the left, with historians who went back and reconstructed how railroads in the U.S. concocted federal regulation to protect themselves from price competition. We should also notice that an astonishingly large part of the world has experienced an astonishing degree of stagnation for an astonishingly long time for exactly such reasons.

I’ve just added it to my growing compendium of notable quotations about regulatory capture.  It’s essential that we not ignore how — despite the very best of intentions —  regulation often has unintended and profoundly anti-consumer / anti-innovation consequences.

Washington Post cartoonist Tom Toles is certainly no fan of free markets, but his contribution to today’s paper offers us this humorous take on the dangers of regulatory capture, a subject we’ve spent much time documenting here on the TLF.

Well, there really isn’t anything left to be said about Net Neutrality regulation that hasn’t already been said a million times before.  Yes, it is the most important technology policy battle of our time, but man, I am sick of it!  Anyway, I’ve summarized the “The 5-Part Case against Net Neutrality Regulation” here before, so consult that for details, as well as this paper by Berin Szoka and me, “Net Neutrality, Slippery Slopes & High-Tech Mutually Assured Destruction.”

But on this day when the Federal Communications Commission (FCC) is enshrining an audacious new regulatory regime for the Internet, I’m going to ignore the shoddy economics behind the effort, the unjustifiable legal basis for it, and the whole stinking undemocratic process leading up to it.  Instead, I just want to focus on the one element of the fight that continues to interest me most, and which, ironically, the one thing that almost all intellectual combatants agree upon: Regulation is prone to excessive special interest influence.  I cannot possibly articulate this concern more succinctly than professors David Farber and Gerald Faulhaber have in this Atlantic op-ed today, “Net Neutrality: No One Will Be Satisfied, Everyone Will Complain.” They note that:

“When the FCC asserts regulatory jurisdiction over an area of telecommunications, the dynamic of the industry changes. No longer are customer needs and desires at the forefront of firms’ competitive strategies; rather firms take their competitive battles to the FCC, hoping for a favorable ruling that will translate into a marketplace advantage. Customer needs take second place; regulatory ‘rent-seeking’ becomes the rule of the day, and a previously innovative and vibrant industry becomes a creature of government rule-making.”

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[Note: This post is updated regularly as I discover relevant old or new material.]

“Regulatory capture” occurs when special interests co-opt policymakers or political bodies — regulatory agencies, in particular — to further their own ends.  Capture theory is closely related to the “rent-seeking” and “political failure” theories developed by the public choice school of economics.  Another term for regulatory capture is “client politics,” which according to James Q. Wilson, “occurs when most or all of the benefits of a program go to some single, reasonably small interest (and industry, profession, or locality) but most or all of the costs will be borne by a large number of people (for example, all taxpayers).”  (James Q. Wilson, Bureaucracy, 1989, at 76).

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.  (See, for example, the reaction of New Republic’s Jonathan Chait to Will Wilkinson’s recent Economist column about the prevalence of corporatism in our modern political system.)  Yet, countless studies have shown that regulatory capture has been at work in various arenas: transportation and telecommunications; energy and environmental policy; farming and financial services; and many others.

I thought it might be useful to build a compendium of quotes from various economists and political scientists who have studied the regulatory process throughout history and identified regulatory capture or client politics as a major problem.  I would greatly appreciate having others suggest additional quotes and studies to add to this list since I plan to update it frequently and eventually work all of this into a future paper or book. [Note: I have updated this compendium over a dozen times since the original post, so please check back for updates.]

The following list is chronological and begins, surprisingly, with the thoughts of progressive hero Woodrow Wilson…

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When it comes to technology policy, I’m usually a fairly optimistic guy.  But when it comes to technology politics, well, I have my grumpier moments. I had at particularly grumpy moment earlier this summer when I was sitting at a hearing listening to a bunch of high-tech companies bash each other’s brains in and basically calling for lawmakers to throw everyone else under the regulatory bus except for them.  Instead of heeding Ben Franklin’s sound old advice that “We must, indeed, all hang together, or assuredly we shall all hang separately,” it’s increasingly clear that high-tech America seems determined to just try to hang each other. It’d be one thing if that heated competition was all taking place in the marketplace, but, increasingly, more and more of it is taking place inside the Beltway with regulation instead of innovation being the weapon of choice.

That episode made me think back to the outstanding 2000 manifesto penned by T. J. Rodgers, president and CEO of Cypress Semiconductor, “Why Silicon Valley Should Not Normalize Relations with Washington, D.C.”  I went back and re-read it upon the 10th anniversary of its publication by the Cato Institute and, sadly, came to realize that just about everything Rodgers had feared and predicted had come true.  Rodgers had attempted to preemptively discourage high-tech companies from an excessive “normalization” of relations with the parasitic culture that dominates Washington by reminding them what Washington giveth it can also taketh away. “The political scene in Washington is antithetical to the core values that drive our success in the international marketplace and risks converting entrepreneurs into statist businessmen,” he warned a decade ago. “The collectivist notion that drives policymaking in Washington is the irrevocable enemy of high-technology capitalism and the wealth creation process.”  And he reminded his fellow capitalists “that free minds and free markets are the moral foundation that has made our success possible.  We must never allow those freedoms to be diminished for any reason.”

Alas, as I point out in my new Cato Policy Report essay “The Sad State of Cyber-Politics,” no one listened to Rodgers.  Indeed, Rodgers’s dystopian vision of a highly politicized digital future has taken just a decade to become reality. The high-tech policy scene within the Beltway has become a cesspool of backstabbing politics, hypocritical policy positions, shameful PR tactics, and bloated lobbying budgets. I go on in the article to itemize a litany of examples of how high-tech America appears determined to fall prey to what Milton Friedman once called “The Business Community’s Suicidal Impulse“: the persistent propensity to persecute one’s competitors using regulation or the threat thereof.

It’s a sad tale that doesn’t make for enjoyable reading, but I do try to end the essay on an upbeat (if somewhat naive) note. If you are interested, you can find the plain text version on the Cato website here and I’ve embedded the PDF of the publication down below in a Scribd Reader. Continue reading →

In the current issue of *Foreign Affairs*, Deputy Defense Secretary William J. Lynn III, has one of the [more sober arguments](http://www.foreignaffairs.com/articles/66552/william-j-lynn-iii/defending-a-new-domain) for government involvement in cybersecurity. Naturally, his focus is on military security and the Pentagon’s efforts to protect the .mil domain and military networks. He does, however, raise the question of whether and how much the military should be involved in protecting civilian networks.

One thing that struck me about Lynn’s article is the wholesale rejection of a Cold War metaphor for cybersecurity. “[The United States] must also recognize that traditional Cold War deterrence models of assured retaliation do not apply to cyberspace, where it is difficult and time consuming to identify an attack’s perpetrator,” he writes. Given the fact that attribution is nearly impossible on the internet, he suggests that the better strategy would be “denying any benefits to attackers [rather] than imposing costs through retaliation.”

What’s interesting about this is that it is in utter contrast to the recommendations of cybersecurity enthusiasts like former NSA chief Michael McConnell, who wrote earlier this year in a [1,400-word op-ed](http://www.washingtonpost.com/wp-dyn/content/article/2010/02/25/AR2010022502493.html) in the *Washington Post*:
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