Archives For cost-benefit analysis

The most welfare-inimical restrictions on competition stem from governmental action, and the Organization for Economic Cooperation and Development’s newly promulgated “Competition Assessment Toolkit, Volume 3: Operational Manual” (“Toolkit 3,” approved by the OECD in late June 2015) provides useful additional guidance on how to evaluate and tackle such harmful market distortions. Toolkit 3 is a very helpful supplement to the second and third volumes of the Competition Assessment Toolkit. Commendably, Toolkit 3 promotes itself generally as a tool that can be employed by well-intentioned governments, rather than merely marketing itself as a manual for advocacy by national competition agencies (which may lack the political clout to sell reforms to other government bureaucracies or to legislators). It is a succinct non-highly-technical document that can be used by a wide range of governments, and applied flexibly, in light of their resource constraints and institutional capacities. Let’s briefly survey Toolkit 3’s key provisions.

Toolkit 3 begins with a “competition checklist” that states that a competition assessment should be undertaken if a regulatory or legislative proposal has any one of four effects: (1) it limits the number or range of suppliers; (2) it limits the ability of suppliers to compete; (3) it reduces the incentive of suppliers to compete; or (4) it limits the choices and information available to consumers. The Toolkit then sets forth basic guidance on competition assessments in seven relatively short, clearly written chapters.

Chapter one begins by explaining that Toolkit 3 “shows how to assess laws, regulations, and policies for their competition effects, and how to revise regulations or policies to make them more procompetitive.” To that end, the chapter introduces the concept of market studies and sectoral reviews, and outlines a six-part process for carrying out competition assessments: (1) identify policies to assess; (2) apply the competition checklist (see above); (3) identify alternative options for achieving a policy objective; (4) select the best option; (5) implement the best option; and (6) review the impacts of an option once it has been implemented.

Chapter two provides general guidance on the selection of public policies for examination, with particular attention to the identification of sectors of the economy, that have the greatest restraints on competition and a major impact on economic output and efficiency.

Chapter three focuses on competition screening through use of threshold questions embodied in the four-part competition checklist. It also provides examples of the sorts of regulations that fall into each category covered by the checklist.

Chapter four sets forth guidance for the examination of potential restrictions that have been flagged for evaluation by the checklist. It provides indicators for deciding whether or not “in-depth analysis” is required, delineates specific considerations that should be brought to bear in conducting an analysis, and provides a detailed example of the steps to be followed in assessing a hypothetical drug patent law (beginning with a preliminary assessment, followed by a detailed analysis, and ending with key findings).

Chapter five centers on identifying the policy options that allow a policymaker to achieve a desired objective with a minimum distortion of competition. It discusses: (1) identifying the purpose of a policy; (2) identifying the competition problems caused by the policy under examination and whether it is necessary to achieve the desired objective; (3) evaluating the technical features of the subject matter being regulated; (4) accounting for features of the broader regulatory environment that have an effect on the market in question, in order to develop alternatives; (5) understanding changes in the business or market environment that have occurred since the last policy implementation; and (6) identifying specific techniques that allow an objective to be achieved with a minimum distortion of competition. The chapter closes by briefly describing various policy approaches for achieving a hypothetical desired reform objective (promotion of generic drug competition).

Chapter six provides guidance on comparing the policy options that have been identified. After summarizing background concepts, it discusses qualitative analysis, quantitative analysis, and the measurement of costs and benefits. The cost-benefits section is particularly thorough, delving into data gathering, techniques of measurement, estimates of values, adjustments to values, and accounting for risk and uncertainty. These tools are then applied to a specific hypothetical involving pharmaceutical regulation, featuring an assessment of the advantages and disadvantages of alternative options.

Chapter seven outlines the steps that should be taken in submitting a recommendation for government action. Those involve: (1) selecting the best policy option; (2) presenting the recommendation to a decision-maker; (3) drafting a regulation that is needed to effectuate the desired policy option; (4) obtaining final approval; and (5) implementing the regulation. The chapter closes by applying this framework to hypothetical regulations.

Chapter 8 discusses the performance of ex post evaluations of competition assessments, in order to determine whether the option chosen following the review process had the anticipated effects and was most appropriate. Four examples of ex post evaluations are summarized.

Toolkit 3 closes with a brief annex that describes mathematically and graphically the consumer benefits that arise when moving from a restrictive market equilibrium to a competitive equilibrium.

In sum, the release of Toolkit 3 is best seen as one more small step forward in the long-term fight against state-managed regulatory capitalism and cronyism, on a par with increased attention to advocacy initiatives within the International Competition Network and growing World Bank efforts to highlight the welfare harm due to governmental regulatory impediments. Although anticompetitive government market distortions will remain a huge problem for the foreseeable future, at least international organizations are starting to acknowledge their severity and to provide conceptual tools for combatting them. Now it is up to free market proponents to work in the trenches to secure the political changes needed to bring such distortions – and their rent-seeking advocates – to heel. This is a long-term fight, but well worth the candle.

Today, in Michigan v. EPA, a five-Justice Supreme Court majority (Antonin Scalia, joined by Chief Justice John Roberts, and Justices Anthony Kennedy, Clarence Thomas, and Samuel Alito, with Thomas issuing a separate concurrence) held that the Clean Air Act requires the Environmental Protection Agency (EPA) to consider costs, including the cost of compliance, when deciding whether to regulate hazardous air pollutants emitted by power plants.  The Clean Air Act, 42 U. S. C. §7412, authorizes the EPA to regulate emissions of hazardous air pollutants from certain stationary sources, such as refineries and factories.  The EPA may, however, regulate power plants under this program only if it concludes that such regulation is “appropriate and necessary” after studying hazards to public health posed by power-plant emissions, 42 U.S.C. §7412(n)(1)(A).  EPA determined that it was “appropriate and necessary” to regulate oil- and coal-fired power plants, because the plants’ emissions pose risks to public health and the environment and because controls capable of reducing these emissions were available.  (The EPA contended that its regulations would have ancillary benefits (including cutting power plants’ emissions of  particulate matter and sulfur dioxide) not covered by the hazardous air pollutants program, but conceded that its estimate of benefits “played no role” in its finding that regulation was “appropriate and necessary.”)  The EPA refused to consider costs when deciding to regulate, even though it estimated that the cost of its regulations to power plants would be $9.6 billion a year, but the quantifiable benefits from the resulting reduction in hazardous-air-pollutant emissions would be $4 to $6 million a year.  Twenty-three states challenged the EPA’s refusal to consider cost, but the U.S. Court of Appeals for the D.C. Circuit upheld the agency’s decision not to consider costs at the outset.  In reversing the D.C. Circuit, the Court stressed that EPA strayed well beyond the bounds of reasonable interpretation in concluding that cost is not a factor relevant to the appropriateness of regulating power plants.  Read naturally against the backdrop of established administrative law, the phrase “appropriate and necessary” plainly encompasses cost, according to the Court.

In a concurring opinion, Justice Thomas opined that this case “raises serious questions about the constitutionality of our broader practice of deferring to agency interpretations of federal statutes.”  Justice Elena Kagan, joined by Justices Ruth Bader Ginsburg, Stephen Breyer, and Sonya Sotomayor, dissented, reasoning that EPA “acted well within its authority in declining to consider costs at the [beginning] . . . of the regulatory process given that it would do so in every round thereafter.”

Although the Supreme Court’s holding merits praise, it is inherently limited in scope, and should not be expected to significantly constrain regulatory overreach, whether by the EPA or by other agencies.  First, in remanding the case, the Court did not opine on the precise manner in which costs and benefits should be evaluated, potentially leaving EPA broad latitude to try to reach its desired regulatory result with a bit of “cost-benefit” wordsmithing.  Such a result would not be surprising, given that “[t]he U.S. Government has a strong tendency to overregulate.  More specifically, administrative agencies such as EPA, whose staffs are dominated by regulatorily-minded permanent bureaucrats, will have every incentive to skew judicially-required “cost assessments” to justify their actions – based on, for example, “false assumptions and linkages, black-box computer models, secretive collusion with activist groups, outright deception, and supposedly ‘scientific’ reports whose shady data and methodologies the agency refuses to share with industries, citizens or even Congress.”  Since, as a practical matter, appellate courts have neither the resources nor the capacity to sort out legitimate from illegitimate agency claims that regulatory programs truly meet cost-benefit standards, it would be naïve to believe that the Court’s majority opinion will be able to do much to rein in the federal regulatory behemoth.

What, then, is the solution?  The concern that federal administrative agencies are being allowed to arrogate to themselves inherently executive and judicial functions, a theme previously stressed by Justice Thomas, has not led other justices to call for wide-scale judicial nullification or limitation of expansive agency regulatory findings.  Absent an unexpected Executive Branch epiphany, then, the best bet for reform lies primarily in congressional action.

What sort of congressional action?  The Heritage Foundation has described actions needed to help stem the tide of overregulation:  (1) require congressional approval of new major regulations promulgated by agencies; (2) establish a sunset date for federal regulations; (3) subject “independent” agencies to executive branch regulatory review; and (4) develop a congressional regulatory analysis capability.  Legislative proposals such as the REINS Act (Regulations from the Executive in Need of Scrutiny Act of 2015), would meet the first objective, while other discrete measures could advance the other three goals.  Public choice considerations suggest that these reforms will not be easily achieved (beneficiaries of the intrusive regulatory status quo may be expected to vigorously oppose reform), but they nevertheless should be pursued posthaste.

In short, all of this hand-wringing over privacy is largely a tempest in a teapot — especially when one considers the extent to which the White House and other government bodies have studiously ignored the real threat: government misuse of data à la the NSA. It’s almost as if the White House is deliberately shifting the public’s gaze from the reality of extensive government spying by directing it toward a fantasy world of nefarious corporations abusing private information….

The White House’s proposed bill is emblematic of many government “fixes” to largely non-existent privacy issues, and it exhibits the same core defects that undermine both its claims and its proposed solutions. As a result, the proposed bill vastly overemphasizes regulation to the dangerous detriment of the innovative benefits of Big Data for consumers and society at large.

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In a previous Truth on the Market blog posting, I noted that the FTC recently revised its “advertising substantiation” policy in a highly problematic manner.  In particular, in a number of recent enforcement actions, an FTC majority has taken the position that it will deem advertising claims “deceptive” unless they are supported by two randomized controlled tests (RCTs), and (in the case of food and drug supplements) will require companies to obtain prior U.S. Food and Drug Administration (FDA) approval for future advertising claims.  As I explained in a Heritage Foundation Legal Memorandum, these and other new burdens “may deter firms from investing in new health-related product improvements, in which event consumers who are denied new and beneficial products (as well as useful information about the attributes of current products) will be the losers.  Competition will also suffer as businesses shy away from informational advertising that rewards the highest quality current products and encourages firms to compete on the basis of quality.  Furthermore, the broad scope of these requirements is in tension with the constitutional prohibition on restricting commercial speech no more than is necessary to satisfy legitimate statutory purposes.” (NOTABLY, Commissioner Maureen Ohlhausen has argued against categorically imposing a two RCTs requirement in all cases , explaining that “[i]f we demand too high a level of substantiation in pursuit of certainty, we risk losing the benefits to consumers of having access to information about emerging areas of science and the corresponding pressure on firms to compete on the health features of their products.”  Commissioner Joshua Wright has also opined “that a reflexive approach in requiring two RCTs as fencing-in relief might not always be in the best interest of consumers.”)

In a January 30, 2015 decision, POM Wonderful, LLC v. FTC, the D.C. Circuit took an initial step that may help rein in FTC enthusiasm for imposing a “two RCTs” requirement on future advertising by a firm.  The FTC ruled in 2013 that POM Wonderful, a producer and seller of pomegranate products, violated the FTC Act by making advertisements that suggested POM products could treat, prevent, or reduce heart disease, prostate cancer, and erectile dysfunction.  According to the FTC, the ads were false and misleading because POM lacked valid and adequate scientific evidence to substantiate its claims.  (The FTC determined that scientific findings cited by POM, based on over $35 million of pomegranate-related research, had not been supported by subsequent studies.)   The FTC entered a cease and desist order that barred POM from making future disease claims (claims that its products treat, prevent, or reduce a disease) about its products without “competent and reliable” scientific evidence.  Specifically, the FTC’s order required that such future claims be supported by at least two RCTs.  (NOTABLY, Commissioner Ohlhausen disagreed with the majority’s view that two RCTs were warranted and would have required only one RCT, regarding that study in light of other available scientific evidence.)

POM appealed to the D.C. Circuit, which unanimously held that there was no basis for setting aside the FTC’s finding that many of POM’s ads made false or misleading claims; that there was no First Amendment protection for deceptive advertising; and that requiring an RCT was not too onerous and did not violate the First Amendment.  The court concluded that “the [FTC] injunctive order’s requirement of some RCT substantiation for disease claims directly advances, and is not more extensive than necessary to serve, the interest in preventing misleading commercial speech”, consistent with the test for evaluating commercial speech enunciated by the Supreme Court in Central Hudson.  The court, however, also held that “a categorical floor of two RCTs for any and all disease claims . . . fails Central Hudson scrutiny”.  The court stressed that the FTC “fails to demonstrate how such a rigid remedial rule bears the requisite ‘reasonable fit’ with the interest in preventing deceptive speech.”  Significantly, the court also enunciated a strong policy justification, rooted in First Amendment commercial speech concerns, for precluding a categorical “two RCTs” rule:

“Requiring additional RCTs without adequate justification exacts considerable costs, and not just in terms of the substantial resources often necessary to design and conduct a properly randomized and controlled human clinical trial.  If there is a categorical bar against claims about the disease-related benefits of a food product or dietary supplement in the absence of two RCTs, consumers may be denied useful, truthful information about products with a demonstrated capacity to treat or prevent serious disease.  That would subvert rather than promote the objectives of the commercial speech doctrine.”

Accordingly, the court modified the FTC’s order to require that POM possess at least one RCT in support of future health-related advertising claims.  Assuming that the D.C. Circuit’s POM decision is not appealed and remains in force, future advertisers investigated by the FTC will have stronger grounds to resist FTC efforts to impose “two or more RCT” requirements as part of a decree.

This is just a small step in badly-needed reforms, however.  Even a single RCT is unnecessarily onerous in many market settings (and, in my view, ignores the teachings of Central Hudson).  More broadly, as I have previously argued, the FTC should rethink its entire approach and issue new advertising substantiation guidelines that state the FTC:  (1) will seek to restrict commercial speech to the smallest extent possible, consistent with fraud prevention; (2) will apply strict cost-benefit analysis in investigating advertising claims and framing remedies in advertising substantiation cases; (3) will apply a reasonableness standard in such cases, consistent with general guidance found in a 1983 FTC policy statement; (4) will not require clinical studies be conducted in order to substantiate advertising claims; (5) will not require that the FDA or any other agency be involved in approving or reviewing advertising claims; and (6) will avoid excessive “fencing in” relief that extends well beyond the ambit of the alleged harm associated with statements that the FTC deems misleading.  Enactment of such guidelines may be a long-term project, requiring a change in Commission thinking, but it is well worth pursuing, in order to advance both free commercial speech and consumer welfare.

Last week, the George Washington University Center for Regulatory Studies convened a Conference (GW Conference) on the Status of Transatlantic Trade and Investment Partnership (TTIP) Negotiations between the European Union (EU) and the United States (U.S.), which were launched in 2013 and will continue for an indefinite period of time. In launching TTIP, the Obama Administration claimed that this pact would raise economic welfare in the U.S. and the EU through stimulating investment and lowering non-tariff barriers between the two jurisdictions, by, among other measures, “significantly cut[ting] the cost of differences in [European Union and United States] regulation and standards by promoting greater compatibility, transparency, and cooperation.

Whether TTIP, if enacted, would actually raise economic welfare in the United States is an open question, however. As a recent Heritage Foundation analysis of TTIP explained, a TTIP focus on “harmonizing” regulations could actually lower economic freedom (and welfare) by “regulating upward” through acceptance of the more intrusive approach, and by precluding future competition among alternative regulatory models that could lead to welfare-enhancing regulatory improvements. Thus, the Heritage study recommended that “[a]ny [TTIP] agreement should be based on mutual recognition, not harmonization, of regulations.”

Unfortunately, discussion at the GW Conference indicated that the welfare-superior mutual recognition approach has been rejected by negotiators – at least as of now. In response to a question I posed on the benefits of mutual recognition, an EU official responded that such an “academic” approach is not “realistic,” while a senior U.S. TTIP negotiator indicated that mutual recognition could prove difficult where regulatory approaches differ. I read those diplomatically couched responses as signaling that both sides opposed the mutual recognition approach. This is a real problem. As part of TTIP, U.S. and EU sector-specific regulators are actively engaged in discussing regulatory particulars. There is the distinct possibility that the regulators may agree on measures that raise regulatory burdens for the sectors covered – particularly given the oft-repeated motto at the GW Conference that TTIP must not reduce existing levels of “protection” for health, safety, and the environment. (Those blandishments eschew any cost-benefit calculus to justify existing protection levels.) This conclusion is further supported by public choice theory, which suggests that regulators may be expected to focus on expanding the size and scope of their regulatory domains, not on contracting them. To make things worse, TTIP raises the possibility that the highly successful U.S. tradition of reliance on private sector-led voluntary consensus standards, as opposed to the EU’s preference for heavy government involvement in standard-setting policies, may be undermined. Any move toward greater direct government influence on U.S. standard setting as part of a TTIP bargain would further undermine the vibrancy, competition, and innovation that have led to the great international success of U.S.-developed technical standards.

As a practical matter, however, is there time for a change in direction in TTIP negotiations regarding regulation and standards? Yes, there is. The TTIP negotiators face no true deadline. Moreover, as a matter of political reality, the eventual U.S. statutory adoption of TTIP measures may require the passage by Congress of “fast-track” trade promotion authority (TPA), which provides for congressional up-or-down votes (without possibility of amendment) on legislation embodying trade deals that have been negotiated by the Executive Branch. Given the political sensitivity of trade deals, they cannot easily be renegotiated if they are altered by congressional amendments. (Indeed, in recent decades all major trade agreements requiring implementing legislation have proceeded under TPA.)

If the Obama Administration decides that it wants to advance TTIP, it must rely on a Republican-controlled Congress to obtain TPA. Before it grants such authority, Congress should conduct hearings and demand that Administration officials testify about key aspects of the Administration’s TTIP negotiating philosophy, and, in particular, on how U.S. TTIP negotiators are approaching regulatory differences between the U.S. and the EU. Congress should make it a prerequisite to the grant of TPA that the final TTIP agreement embody welfare-enhancing mutual recognition of regulations and standards, rather than welfare-reducing harmonization. It should vote down any TTIP negotiated deal that fails to satisfy this requirement.

In my just published Heritage Foundation Legal Memorandum, I argue that the U.S. Federal Trade Commission (FTC) should substantially scale back its overly aggressive “advertising substantiation” program, which disincentivizes firms from providing the public with valuable information about the products they sell.  As I explain:

“The . . . [FTC] has a long history of vigorously combating false and deceptive advertising under its statutory authorities, but recent efforts by the FTC to impose excessive ‘advertising substantiation’ requirements on companies go far beyond what is needed to combat false advertising. Such actions threaten to discourage companies from providing useful information that consumers value and that improves the workings of the marketplace. They also are in tension with constitutional protection for commercial speech. The FTC should reform its advertising substantiation policy and allow businesses greater flexibility to tailor their advertising practices, which would further the interests of both consumers and businesses. It should also decline to seek ‘disgorgement’ of allegedly ‘ill-gotten gains’ in cases involving advertising substantiation.”

In particular, I recommend that the FTC issue a revised policy statement explaining that it will seek to restrict commercial speech to the minimum extent possible, consistent with fraud prevention, and will not require onerous clinical studies to substantiate non-fraudulent advertising claims.  I also urge that the FTC clarify that it will only seek equitable remedies (including injunctions and financial exactions) in court for cases of clear fraud.

Recently I highlighted problems with the FTC’s enforcement actions targeting companies’ data security protection policies, and recommended that the FTC adopt a cost-benefit approach to regulation in this area.  Yesterday the Heritage Foundation released a more detailed paper by me on this topic, replete with recommendations for new FTC guidance and specific reforms aimed at maintaining appropriate FTC oversight while reducing excessive burdens.  Happy reading!

The Federal Trade Commission’s recent enforcement actions against Amazon and Apple raise important questions about the FTC’s consumer protection practices, especially its use of economics. How does the Commission weigh the costs and benefits of its enforcement decisions? How does the agency employ economic analysis in digital consumer protection cases generally?

Join the International Center for Law and Economics and TechFreedom on Thursday, July 31 at the Woolly Mammoth Theatre Company for a lunch and panel discussion on these important issues, featuring FTC Commissioner Joshua Wright, Director of the FTC’s Bureau of Economics Martin Gaynor, and several former FTC officials. RSVP here.

Commissioner Wright will present a keynote address discussing his dissent in Apple and his approach to applying economics in consumer protection cases generally.

Geoffrey Manne, Executive Director of ICLE, will briefly discuss his recent paper on the role of economics in the FTC’s consumer protection enforcement. Berin Szoka, TechFreedom President, will moderate a panel discussion featuring:

  • Martin Gaynor, Director, FTC Bureau of Economics
  • David Balto, Fmr. Deputy Assistant Director for Policy & Coordination, FTC Bureau of Competition
  • Howard Beales, Fmr. Director, FTC Bureau of Consumer Protection
  • James Cooper, Fmr. Acting Director & Fmr. Deputy Director, FTC Office of Policy Planning
  • Pauline Ippolito, Fmr. Acting Director & Fmr. Deputy Director, FTC Bureau of Economics

Background

The FTC recently issued a complaint and consent order against Apple, alleging its in-app purchasing design doesn’t meet the Commission’s standards of fairness. The action and resulting settlement drew a forceful dissent from Commissioner Wright, and sparked a discussion among the Commissioners about balancing economic harms and benefits in Section 5 unfairness jurisprudence. More recently, the FTC brought a similar action against Amazon, which is now pending in federal district court because Amazon refused to settle.

Event Info

The “FTC: Technology and Reform” project brings together a unique collection of experts on the law, economics, and technology of competition and consumer protection to consider challenges facing the FTC in general, and especially regarding its regulation of technology. The Project’s initial report, released in December 2013, identified critical questions facing the agency, Congress, and the courts about the FTC’s future, and proposed a framework for addressing them.

The event will be live streamed here beginning at 12:15pm. Join the conversation on Twitter with the #FTCReform hashtag.

When:

Thursday, July 31
11:45 am – 12:15 pm — Lunch and registration
12:15 pm – 2:00 pm — Keynote address, paper presentation & panel discussion

Where:

Woolly Mammoth Theatre Company – Rehearsal Hall
641 D St NW
Washington, DC 20004

Questions? – Email mail@techfreedom.orgRSVP here.

See ICLE’s and TechFreedom’s other work on FTC reform, including:

  • Geoffrey Manne’s Congressional testimony on the the FTC@100
  • Op-ed by Berin Szoka and Geoffrey Manne, “The Second Century of the Federal Trade Commission”
  • Two posts by Geoffrey Manne on the FTC’s Amazon Complaint, here and here.

About The International Center for Law and Economics:

The International Center for Law and Economics is a non-profit, non-partisan research center aimed at fostering rigorous policy analysis and evidence-based regulation.

About TechFreedom:

TechFreedom is a non-profit, non-partisan technology policy think tank. We work to chart a path forward for policymakers towards a bright future where technology enhances freedom, and freedom enhances technology.

UPDATE: I’ve been reliably informed that Vint Cerf coined the term “permissionless innovation,” and, thus, that he did so with the sorts of private impediments discussed below in mind rather than government regulation. So consider the title of this post changed to “Permissionless innovation SHOULD not mean ‘no contracts required,'” and I’ll happily accept that my version is the “bastardized” version of the term. Which just means that the original conception was wrong and thank god for disruptive innovation in policy memes!

Can we dispense with the bastardization of the “permissionless innovation” concept (best developed by Adam Thierer) to mean “no contracts required”? I’ve been seeing this more and more, but it’s been around for a while. Some examples from among the innumerable ones out there:

Vint Cerf on net neutrality in 2009:

We believe that the vast numbers of innovative Internet applications over the last decade are a direct consequence of an open and freely accessible Internet. Many now-successful companies have deployed their services on the Internet without the need to negotiate special arrangements with Internet Service Providers, and it’s crucial that future innovators have the same opportunity. We are advocates for “permissionless innovation” that does not impede entrepreneurial enterprise.

Net neutrality is replete with this sort of idea — that any impediment to edge providers (not networks, of course) doing whatever they want to do at a zero price is a threat to innovation.

Chet Kanojia (Aereo CEO) following the Aereo decision:

It is troubling that the Court states in its decision that, ‘to the extent commercial actors or other interested entities may be concerned with the relationship between the development and use of such technologies and the Copyright Act, they are of course free to seek action from Congress.’ (Majority, page 17)That begs the question: Are we moving towards a permission-based system for technology innovation?

At least he puts it in the context of the Court’s suggestion that Congress pass a law, but what he really wants is to not have to ask “permission” of content providers to use their content.

Mike Masnick on copyright in 2010:

But, of course, the problem with all of this is that it goes back to creating permission culture, rather than a culture where people freely create. You won’t be able to use these popular or useful tools to build on the works of others — which, contrary to the claims of today’s copyright defenders, is a key component in almost all creativity you see out there — without first getting permission.

Fair use is, by definition, supposed to be “permissionless.” But the concept is hardly limited to fair use, is used to justify unlimited expansion of fair use, and is extended by advocates to nearly all of copyright (see, e.g., Mike Masnick again), which otherwise requires those pernicious licenses (i.e., permission) from others.

The point is, when we talk about permissionless innovation for Tesla, Uber, Airbnb, commercial drones, online data and the like, we’re talking (or should be) about ex ante government restrictions on these things — the “permission” at issue is permission from the government, it’s the “permission” required to get around regulatory roadblocks imposed via rent-seeking and baseless paternalism. As Gordon Crovitz writes, quoting Thierer:

“The central fault line in technology policy debates today can be thought of as ‘the permission question,'” Mr. Thierer writes. “Must the creators of new technologies seek the blessing of public officials before they develop and deploy their innovations?”

But it isn’t (or shouldn’t be) about private contracts.

Just about all human (commercial) activity requires interaction with others, and that means contracts and licenses. You don’t see anyone complaining about the “permission” required to rent space from a landlord. But that some form of “permission” may be required to use someone else’s creative works or other property (including broadband networks) is no different. And, in fact, it is these sorts of contracts (and, yes, the revenue that may come with them) that facilitates people engaging with other commercial actors to produce things of value in the first place. The same can’t be said of government permission.

Don’t get me wrong – there may be some net welfare-enhancing regulatory limits that might require forms of government permission. But the real concern is the pervasive abuse of these limits, imposed without anything approaching a rigorous welfare determination. There might even be instances where private permission, imposed, say, by a true monopolist, might be problematic.

But this idea that any contractual obligation amounts to a problematic impediment to innovation is absurd, and, in fact, precisely backward. Which is why net neutrality is so misguided. Instead of identifying actual, problematic impediments to innovation, it simply assumes that networks threaten edge innovation, without any corresponding benefit and with such certainty (although no actual evidence) that ex ante common carrier regulations are required.

“Permissionless innovation” is a great phrase and, well developed (as Adam Thierer has done), a useful concept. But its bastardization to justify interference with private contracts is unsupported and pernicious.

The world of economics and public policy has lost yet another giant.  Joining Ronald Coase, James Buchanan, Armen Alchian, and Robert Bork is a man whose name may be less familiar to TOTM readers but whose ideas have been hugely influential, particularly on me.

As the first chairman of President Reagan’s Council of Economic Advisers, Murray Weidenbaum lay much of the blame for the anemic economy President Reagan “inherited” (my, how I’ve come to hate that word!) on the then-existing regulatory state.  Command and control dominated in those days, and there was virtually no consideration of such mundane matters as the costs and benefits of regulatory interventions and the degree to which regulations were tailored to fit the market failures they purported to correct.  Murray understood that such an unmoored regulatory state strangled innovation and would inevitably become co-opted by regulatees, who would use the machinery of the state to squelch competition and gain other advantages.  He counseled the President to do something about it.

The result was Executive Order 12291, which subjected major federal regulations to cost-benefit analysis and stated that “[r]egulatory action shall not be undertaken unless the potential benefits to society from the regulation outweigh the potential costs to society.”  Such basic cost-benefit balancing seems like nothing more than common sense these days, but when Murray was pushing the idea at Washington University back in the late 1970s, it was considered pretty radical.  Many of the Nixon era environmental statutes, for example, proudly eschewed consideration of costs.  Murray helped us see how silly that was.

I distinctly remember a conversation we had in 1993.  I had just been hired as a research fellow at Wash U’s Center for the Study of American Business, and Murray, the Center director, was taking me and the other research fellow to lunch.  The faculty dining club at Wash U is across a busy-ish street from the main campus.  There’s a tunnel a block or so west of the dining club, but hardly anybody would use it when walking to lunch.  As we waited for an opening in traffic and crossed the street, Murray remarked, “See fellows, this is what I’m talking about.  Crossing this busy street is risky.  All these lunch-goers could eliminate the risk of an accident by walking two blocks out of their way.  But nobody ever does that.  The risk reduction just isn’t worth the cost.”

That was classic Murray.  He was a plain-talking purveyor of common sense.  He was firm in his beliefs but always kind and never doctrinaire.  By presenting his ideas calmly and rationally, he earned the respect of differently minded folks, like Democratic Senator Thomas Eagleton, with whom he co-taught a popular course at Wash U.  Our country is a better place because of Murray’s service, and I am where I am because he took me under his wing.

Rest in peace, Murray.