One of the excesses of the Obama administration was the tendency to create regulations that stopped good things from happening. The Federal Communications Commission (FCC), under the leadership of Chairman Ajit Pai, has taken an important step toward rolling back one of these excesses, or the so-called net neutrality rules.
The Title II decision’s shaky foundations
Let’s first admit that the term “net neutrality” is a misnomer. The phrase is a nice-sounding marketing slogan that hides a harsher reality from public view; namely, regulations that keep customers from obtaining valuable services and prohibit certain innovations in one of the most dynamic areas of the US economy — the information technology sector.
What Pai has proposed is to reverse a decision to regulate broadband internet providers under laws written to control Ma Bell back when she was a monopoly telephone utility. In a late 2015 vote along party lines, the commission adopted the Ma Bell regulatory approach — called Title II in the Communications Act — with great drama that included protests at then FCC Chairman Tom Wheeler’s house, a flood of coordinated emails that crashed the agency’s server, and a YouTube video from President Obama pressuring Democratic commissioners. The coercion reportedly led Wheeler to side with President Obama at the last minute and adopt Title II regulations, abandoning the then-chairman’s own plan for a case-by-case approach to net neutrality that would have allowed the agency to deal with problems when they arose, without prohibiting good things for customers.
The real economics of net neutrality
The substantive issues in net neutrality have to do with what services broadband internet providers are allowed to offer customers. There are legitimate concerns that these companies might give their own content fast-lane priority over rivals’ content, allow free delivery (also known as zero-rating, the practice of not counting certain types of content toward data usage limits) only for favored content providers, and block consumers from accessing legitimate websites.
But in many instances, fast lanes, zero-rating, and the like benefit customers. In separate research, both former FCC Chief Economist Michael Katz (with Ben Hermalin) and I (with Janice Hauge) showed that fast lanes benefit small content providers in their attempts to compete with established industry leaders. AEI scholar Roslyn Layton has shown that elderly and low-income consumers benefit from zero-rating services.
By adopting Title II regulations, the previous FCC outlawed all such activities. The results were predictable. Consumers were denied many new service offerings, any innovation not specifically prohibited had to go through a bureaucratic review process, and as economist Hal Singer has shown, broadband investments slowed by $3.6 billion.
A more evidence-based approach
Is there a way of dealing with the anticompetitive concerns without using Title II regulations? Yes. The FCC could develop a complaint review process that would investigate claims of anticompetitive conduct. As an alternative, the FCC could aid the Federal Trade Commission (FTC) — which is already charged with addressing consumer harms — in investigations of bad conduct. Either approach would allow consumers access to new innovations that broadband internet providers offer and would block most, if not all, anticompetitive conduct.
There are other reasons for reversing the Title II decision. It would move privacy regulation back to where it belongs, the FTC. It would also close the Pandora’s box of regulations that were never intended to control a dynamic nonutility industry. And it would provide clarity for businesses on how their new, innovative services would be regulated.
The net neutrality drama
The change won’t happen easily. Anticipating that Chairman Pai has intended to reverse the decision to regulate the internet under Title II, activists have revitalized their strategy to focus on the dramatic: Protestors have shown up at the FCC, pro-regulation advertising is hitting the internet and the airwaves, and numerous op-eds have been published demonizing Pai and broadband internet providers. Democratic senators are also pressing the commission to stay with the Obama pro-regulatory path.
I hope that Pai and his colleagues are more able than their predecessors to withstand the drama and political pressures. Those who care about the power of liberal markets to deliver great things for customers should lend their support to the commission’s efforts. Consumers and our economy will benefit greatly.