This week, the FCC rolled back the Obama regulations on “net neutrality”. The deeper we get into the 21st Century, the more different pieces of legislation proposed by both parties start to resemble Ayn Rand’s descriptions in Atlas Shrugged.
Net Neutrality is a convenient way of saying “one price fits all”. Whether you agree or disagree, I’d encourage you to open your mind up to both arguments.
One thing that nobody really knows is if and when a new technological solution will be on the horizon that will leap over existing infrastructure and deliver the internet to us in a whole new way that is more efficient, faster and cheaper than it is done today. HFT traders used to use broadband pipes but now use microwave technology now because it is faster.
What I find with public policy and politics from both sides of the aisle is the policy is never ever pure. It’s always muddy. In this day and age with so much contempt raging, you need to put aside the politics and focus on the actual policy along with the effects it will have when implemented. It’s also important to get your emotion out of it as much as you can. As I have watched the debate rage on net neutrality, I don’t think people have checked their emotion at the door.
I also think there is a big difference between laws, regulations, naturally endowed rights and economics. For myself, the last two take precedence over the first two. When it comes to economics, I make sure I know the assumptions before figuring out if I agree or not. You also cannot make inferences around things. You have to go to original sources. An example is that Austan Goolsbee maybe a professor at the University of Chicago but he is no Chicago School economist. However, because the Chicago School is steeped in the classical tradition of free-market economics and finance, you might assume Goolsbee is a person that believes in that. From his papers, opinions and actions it’s clear he is a Tobin economist which is diametrically opposed to the Chicago School.
At its core, net neutrality should be a debate about the role of price discrimination and competition. Personally, I believe in vigorous and transparent competition with very light regulation. Certainly, we do not have that in communication markets today but it is better now than it was when I was growing up in the 1960s and 1970s.
I want to point you to a couple of things that will enlighten you and help inform your own opinion. First is an article from The Atlantic that shows the debate between Supreme Court justices Anton Scalia and Clarence Thomas. What is super interesting here is Thomas and Scalia are Federalists and originalists when it comes to constitutional law. They try and find out what the original thinkers were intending and try to avoid making law from the bench. Neither Scalia or Thomas are darlings of the left wing.
Here is the majority opinion that was written by Thomas. Thomas is a strict constructionist when it comes to the US Constitution.
Here is the dissenting opinion that was written by Scalia. Scalia was also a strict constructionist when it comes to the US Constitution.
Enough about the law. What about the economics? Professor Craig Pirrong is a Chicago economist who teaches at the University of Houston. He blogged about net neutrality here. I’ll take out the salient points. I deliberately challenged him in the comment section on what net neutrality rules mean for startups. Professor Pirrong writes,
I do not believe that the ISP market is perfectly competitive, but that is a red herring. Even acknowledging the possibility of imperfect competition in that market (although I do believe fear thereof is overblown), net neutrality is not the right way to address it, and indeed, might actually mean that market power is exercised in a way that reduces efficiency. In other words, the Obama FCC wanted to fight ISP market power in the worst way–and it did!
So if net neutrality is an inefficient policy, why did it prevail in the US, at least for a while? That is, what is the political economy of net neutrality?
Well, Chicago has a lot to say about this as well. Indeed, the work of another of my former advisors–Sam Peltzman–is directly on point. Sam’s amazing 1976 JLE article “Towards a More General Theory of Regulation” has an important, but widely overlooked prediction: regulation is likely to occur in industries where there are substantial differences in costs of serving different customers, and that regulated price structures suppress these cost differences. That is, regulated price structures cross-subsidize high cost customers. As Sam put it: “cross—subsidization follows a systematic pattern in which high cost customer groups are subsidized by low cost customers.” And: “The important contribution of politics is to suppress economically important distinctions and substitute for these a common element in all prices.”
That is net neutrality in a nutshell. Put simply, the Obama FCC bought political support Google, Facebook, Amazon, Microsoft, Netflix, et al by implementing a policy that cross subsidized their services. They used the political system to push regulation that suppresses economically important distinctions.
The American Enterprise Institute weighed in here with both sides of the economic argument.
All that is well and good, but personally I still wanted to get grounded more. Where can you turn? I thought that Ronald Coase and Coase Theory would be a good place to start. If transaction costs are zero and property rights are clearly defined, how would Coase look at a policy on net neutrality? I found my answer in this podcast. Coase took on the FCC in 1934, and that argument rings true today. I’d listen to the whole thing, but at the 11:00 mark is where the podcast talks about Coase and the FCC.
My own opinion is the FCC didn’t go far enough. Coase is correct. The FCC needs to open up a lot more spectrum and make sure it gets into hands that will use it to compete with existing players. It would be good to take a look at local regulations from states and cities to see if they restricted competition in any way as well. My guess is that they almost certainly did.