Archives For political economy

Today the European Commission launched its latest salvo against Google, issuing a decision in its three-year antitrust investigation into the company’s agreements for distribution of the Android mobile operating system. The massive fine levied by the Commission will dominate the headlines, but the underlying legal theory and proposed remedies are just as notable — and just as problematic.

The nirvana fallacy

It is sometimes said that the most important question in all of economics is “compared to what?” UCLA economist Harold Demsetz — one of the most important regulatory economists of the past century — coined the term “nirvana fallacy” to critique would-be regulators’ tendency to compare messy, real-world economic circumstances to idealized alternatives, and to justify policies on the basis of the discrepancy between them. Wishful thinking, in other words.

The Commission’s Android decision falls prey to the nirvana fallacy. It conjures a world in which Google offers its Android operating system on unrealistic terms, prohibits it from doing otherwise, and neglects the actual consequences of such a demand.

The idea at the core of the Commission’s decision is that by making its own services (especially Google Search and Google Play Store) easier to access than competing services on Android devices, Google has effectively foreclosed rivals from effective competition. In order to correct that claimed defect, the Commission demands that Google refrain from engaging in practices that favor its own products in its Android licensing agreements:

At a minimum, Google has to stop and to not re-engage in any of the three types of practices. The decision also requires Google to refrain from any measure that has the same or an equivalent object or effect as these practices.

The basic theory is straightforward enough, but its application here reflects a troubling departure from the underlying economics and a romanticized embrace of industrial policy that is unsupported by the realities of the market.

In a recent interview, European Commission competition chief, Margrethe Vestager, offered a revealing insight into her thinking about her oversight of digital platforms, and perhaps the economy in general: “My concern is more about whether we get the right choices,” she said. Asked about Facebook, for example, she specified exactly what she thinks the “right” choice looks like: “I would like to have a Facebook in which I pay a fee each month, but I would have no tracking and advertising and the full benefits of privacy.”

Some consumers may well be sympathetic with her preference (and even share her specific vision of what Facebook should offer them). But what if competition doesn’t result in our — or, more to the point, Margrethe Vestager’s — prefered outcomes? Should competition policy nevertheless enact the idiosyncratic consumer preferences of a particular regulator? What if offering consumers the “right” choices comes at the expense of other things they value, like innovation, product quality, or price? And, if so, can antitrust enforcers actually engineer a better world built around these preferences?

Android’s alleged foreclosure… that doesn’t really foreclose anything

The Commission’s primary concern is with the terms of Google’s deal: In exchange for royalty-free access to Android and a set of core, Android-specific applications and services (like Google Search and Google Maps) Google imposes a few contractual conditions.

Google allows manufacturers to use the Android platform — in which the company has invested (and continues to invest) billions of dollars — for free. It does not require device makers to include any of its core, Google-branded features. But if a manufacturer does decide to use any of them, it must include all of them, and make Google Search the device default. In another (much smaller) set of agreements, Google also offers device makers a small share of its revenue from Search if they agree to pre-install only Google Search on their devices (although users remain free to download and install any competing services they wish).

Essentially, that’s it. Google doesn’t allow device makers to pick and choose between parts of the ecosystem of Google products, free-riding on Google’s brand and investments. But manufacturers are free to use the Android platform and to develop their own competing brand built upon Google’s technology.

Other apps may be installed in addition to Google’s core apps. Google Search need not be the exclusive search service, but it must be offered out of the box as the default. Google Play and Chrome must be made available to users, but other app stores and browsers may be pre-installed and even offered as the default. And device makers who choose to do so may share in Search revenue by pre-installing Google Search exclusively — but users can and do install a different search service.

Alternatives to all of Google’s services (including Search) abound on the Android platform. It’s trivial both to install them and to set them as the default. Meanwhile, device makers regularly choose to offer these apps alongside Google’s services, and some, like Samsung, have developed entire customized app suites of their own. Still others, like Amazon, pre-install no Google apps and use Android without any of these constraints (and whose Google-free tablets are regularly ranked as the best-rated and most popular in Europe).

By contrast, Apple bundles its operating system with its devices, bypasses third-party device makers entirely, and offers consumers access to its operating system only if they pay (lavishly) for one of the very limited number of devices the company offers, as well. It is perhaps not surprising — although it is enlightening — that Apple earns more revenue in an average quarter from iPhone sales than Google is reported to have earned in total from Android since it began offering it in 2008.

Reality — and the limits it imposes on efforts to manufacture nirvana

The logic behind Google’s approach to Android is obvious: It is the extension of Google’s “advertisers pay” platform strategy to mobile. Rather than charging device makers (and thus consumers) directly for its services, Google earns its revenue by charging advertisers for targeted access to users via Search. Remove Search from mobile devices and you remove the mechanism by which Google gets paid.

It’s true that most device makers opt to offer Google’s suite of services to European users, and that most users opt to keep Google Search as the default on their devices — that is, indeed, the hoped-for effect, and necessary to ensure that Google earns a return on its investment.

That users often choose to keep using Google services instead of installing alternatives, and that device makers typically choose to engineer their products around the Google ecosystem, isn’t primarily the result of a Google-imposed mandate; it’s the result of consumer preferences for Google’s offerings in lieu of readily available alternatives.

The EU decision against Google appears to imagine a world in which Google will continue to develop Android and allow device makers to use the platform and Google’s services for free, even if the likelihood of recouping its investment is diminished.

The Commission also assessed in detail Google’s arguments that the tying of the Google Search app and Chrome browser were necessary, in particular to allow Google to monetise its investment in Android, and concluded that these arguments were not well founded. Google achieves billions of dollars in annual revenues with the Google Play Store alone, it collects a lot of data that is valuable to Google’s search and advertising business from Android devices, and it would still have benefitted from a significant stream of revenue from search advertising without the restrictions.

For the Commission, Google’s earned enough [trust me: you should follow the link. It’s my favorite joke…].

But that world in which Google won’t alter its investment decisions based on a government-mandated reduction in its allowable return on investment doesn’t exist; it’s a fanciful Nirvana.

Google’s real alternatives to the status quo are charging for the use of Android, closing the Android platform and distributing it (like Apple) only on a fully integrated basis, or discontinuing Android.

In reality, and compared to these actual alternatives, Google’s restrictions are trivial. Remember, Google doesn’t insist that Google Search be exclusive, only that it benefit from a “leg up” by being pre-installed as the default. And on this thin reed Google finances the development and maintenance of the (free) Android operating system and all of the other (free) apps from which Google otherwise earns little or no revenue.

It’s hard to see how consumers, device makers, or app developers would be made better off without Google’s restrictions, but in the real world in which the alternative is one of the three manifestly less desirable options mentioned above.

Missing the real competition for the trees

What’s more, while ostensibly aimed at increasing competition, the Commission’s proposed remedy — like the conduct it addresses — doesn’t relate to Google’s most significant competitors at all.

Facebook, Instagram, Firefox, Amazon, Spotify, Yelp, and Yahoo, among many others, are some of the most popular apps on Android phones, including in Europe. They aren’t foreclosed by Google’s Android distribution terms, and it’s even hard to imagine that they would be more popular if only Android phones didn’t come with, say, Google Search pre-installed.

It’s a strange anticompetitive story that has Google allegedly foreclosing insignificant competitors while apparently ignoring its most substantial threats.

The primary challenges Google now faces are from Facebook drawing away the most valuable advertising and Amazon drawing away the most valuable product searches (and increasingly advertising, as well). The fact that Google’s challenged conduct has never shifted in order to target these competitors as their threat emerged, and has had no apparent effect on these competitive dynamics, says all one needs to know about the merits of the Commission’s decision and the value of its proposed remedy.

In reality, as Demsetz suggested, Nirvana cannot be designed by politicians, especially in complex, modern technology markets. Consumers’ best hope for something close — continued innovation, low prices, and voluminous choice — lies in the evolution of markets spurred by consumer demand, not regulators’ efforts to engineer them.

Ours is not an age of nuance.  It’s an age of tribalism, of teams—“Yer either fer us or agin’ us!”  Perhaps I should have been less surprised, then, when I read the unfavorable review of my book How to Regulate in, of all places, the Federalist Society Review.

I had expected some positive feedback from reviewer J. Kennerly Davis, a contributor to the Federalist Society’s Regulatory Transparency Project.  The “About” section of the Project’s website states:

In the ultra-complex and interconnected digital age in which we live, government must issue and enforce regulations to protect public health and safety.  However, despite the best of intentions, government regulation can fail, stifle innovation, foreclose opportunity, and harm the most vulnerable among us.  It is for precisely these reasons that we must be diligent in reviewing how our policies either succeed or fail us, and think about how we might improve them.

I might not have expressed these sentiments in such pro-regulation terms.  For example, I don’t think government should regulate, even “to protect public health and safety,” absent (1) a market failure and (2) confidence that systematic governmental failures won’t cause the cure to be worse than the disease.  I agree, though, that regulation is sometimes appropriate, that government interventions often fail (in systematic ways), and that regulatory policies should regularly be reviewed with an eye toward reducing the combined costs of market and government failures.

Those are, in fact, the central themes of How to Regulate.  The book sets forth an overarching goal for regulation (minimize the sum of error and decision costs) and then catalogues, for six oft-cited bases for regulating, what regulatory tools are available to policymakers and how each may misfire.  For every possible intervention, the book considers the potential for failure from two sources—the knowledge problem identified by F.A. Hayek and public choice concerns (rent-seeking, regulatory capture, etc.).  It ends up arguing:

  • for property rights-based approaches to environmental protection (versus the command-and-control status quo);
  • for increased reliance on the private sector to produce public goods;
  • that recognizing property rights, rather than allocating usage, is the best way to address the tragedy of the commons;
  • that market-based mechanisms, not shareholder suits and mandatory structural rules like those imposed by Sarbanes-Oxley and Dodd-Frank, are the best way to constrain agency costs in the corporate context;
  • that insider trading restrictions should be left to corporations themselves;
  • that antitrust law should continue to evolve in the consumer welfare-focused direction Robert Bork recommended;
  • against the FCC’s recently abrogated net neutrality rules;
  • that occupational licensure is primarily about rent-seeking and should be avoided;
  • that incentives for voluntary disclosure will usually obviate the need for mandatory disclosure to correct information asymmetry;
  • that the claims of behavioral economics do not justify paternalistic policies to protect people from themselves; and
  • that “libertarian-paternalism” is largely a ruse that tends to morph into hard paternalism.

Given the congruence of my book’s prescriptions with the purported aims of the Regulatory Transparency Project—not to mention the laundry list of specific market-oriented policies the book advocates—I had expected a generally positive review from Mr. Davis (whom I sincerely thank for reading and reviewing the book; book reviews are a ton of work).

I didn’t get what I’d expected.  Instead, Mr. Davis denounced my book for perpetuating “progressive assumptions about state and society” (“wrongheaded” assumptions, the editor’s introduction notes).  He responded to my proposed methodology with a “meh,” noting that it “is not clearly better than the status quo.”  His one compliment, which I’ll gladly accept, was that my discussion of economic theory was “generally accessible.”

Following are a few thoughts on Mr. Davis’s critiques.

Are My Assumptions Progressive?

According to Mr. Davis, my book endorses three progressive concepts:

(i) the idea that market based arrangements among private parties routinely misallocate resources, (ii) the idea that government policymakers are capable of formulating executive directives that can correct private ordering market failures and optimize the allocation of resources, and (iii) the idea that the welfare of society is actually something that exists separate and apart from the individual welfare of each of the members of society.

I agree with Mr. Davis that these are progressive ideas.  If my book embraced them, it might be fair to label it “progressive.”  But it doesn’t.  Not one of them.

  1. Market Failure

Nothing in my book suggests that “market based arrangements among private parties routinely misallocate resources.”  I do say that “markets sometimes fail to work well,” and I explain how, in narrow sets of circumstances, market failures may emerge.  Understanding exactly what may happen in those narrow sets of circumstances helps to identify the least restrictive option for addressing problems and would thus would seem a pre-requisite to effective policymaking for a conservative or libertarian.  My mere invocation of the term “market failure,” however, was enough for Mr. Davis to kick me off the team.

Mr. Davis ignored altogether the many points where I explain how private ordering fixes situations that could lead to poor market performance.  At the end of the information asymmetry chapter, for example, I write,

This chapter has described information asymmetry as a problem, and indeed it is one.  But it can also present an opportunity for profit.  Entrepreneurs have long sought to make money—and create social value—by developing ways to correct informational imbalances and thereby facilitate transactions that wouldn’t otherwise occur.

I then describe the advent of companies like Carfax, AirBnb, and Uber, all of which offer privately ordered solutions to instances of information asymmetry that might otherwise create lemons problems.  I conclude:

These businesses thrive precisely because of information asymmetry.  By offering privately ordered solutions to the problem, they allow previously under-utilized assets to generate heretofore unrealized value.  And they enrich the people who created and financed them.  It’s a marvelous thing.

That theme—that potential market failures invite privately ordered solutions that often obviate the need for any governmental fix—permeates the book.  In the public goods chapter, I spend a great deal of time explaining how privately ordered devices like assurance contracts facilitate the production of amenities that are non-rivalrous and non-excludable.  In discussing the tragedy of the commons, I highlight Elinor Ostrom’s work showing how “groups of individuals have displayed a remarkable ability to manage commons goods effectively without either privatizing them or relying on government intervention.”  In the chapter on externalities, I spend a full seven pages explaining why Coasean bargains are more likely than most people think to prevent inefficiencies from negative externalities.  In the chapter on agency costs, I explain why privately ordered solutions like the market for corporate control would, if not precluded by some ill-conceived regulations, constrain agency costs better than structural rules from the government.

Disregarding all this, Mr. Davis chides me for assuming that “markets routinely fail.”  And, for good measure, he explains that government interventions are often a bigger source of failure, a point I repeatedly acknowledge, as it is a—perhaps the—central theme of the book.

  1. Trust in Experts

In what may be the strangest (and certainly the most misleading) part of his review, Mr. Davis criticizes me for placing too much confidence in experts by giving short shrift to the Hayekian knowledge problem and the insights of public choice.

          a.  The Knowledge Problem

According to Mr. Davis, the approach I advocate “is centered around fully functioning experts.”  He continues:

This progressive trust in experts is misplaced.  It is simply false to suppose that government policymakers are capable of formulating executive directives that effectively improve upon private arrangements and optimize the allocation of resources.  Friedrich Hayek and other classical liberals have persuasively argued, and everyday experience has repeatedly confirmed, that the information needed to allocate resources efficiently is voluminous and complex and widely dispersed.  So much so that government experts acting through top down directives can never hope to match the efficiency of resource allocation made through countless voluntary market transactions among private parties who actually possess the information needed to allocate the resources most efficiently.

Amen and hallelujah!  I couldn’t agree more!  Indeed, I said something similar when I came to the first regulatory tool my book examines (and criticizes), command-and-control pollution rules.  I wrote:

The difficulty here is an instance of a problem that afflicts regulation generally.  At the end of the day, regulating involves centralized economic planning:  A regulating “planner” mandates that productive resources be allocated away from some uses and toward others.  That requires the planner to know the relative value of different resource uses.  But such information, in the words of Nobel laureate F.A. Hayek, “is not given to anyone in its totality.”  The personal preferences of thousands or millions of individuals—preferences only they know—determine whether there should be more widgets and fewer gidgets, or vice-versa.  As Hayek observed, voluntary trading among resource owners in a free market generates prices that signal how resources should be allocated (i.e., toward the uses for which resource owners may command the highest prices).  But centralized economic planners—including regulators—don’t allocate resources on the basis of relative prices.  Regulators, in fact, generally assume that prices are wrong due to the market failure the regulators are seeking to address.  Thus, the so-called knowledge problem that afflicts regulation generally is particularly acute for command-and-control approaches that require regulators to make refined judgments on the basis of information about relative costs and benefits.

That was just the first of many times I invoked the knowledge problem to argue against top-down directives and in favor of market-oriented policies that would enable individuals to harness local knowledge to which regulators would not be privy.  The index to the book includes a “knowledge problem” entry with no fewer than nine sub-entries (e.g., “with licensure regimes,” “with Pigouvian taxes,” “with mandatory disclosure regimes”).  There are undoubtedly more mentions of the knowledge problem than those listed in the index, for the book assesses the degree to which the knowledge problem creates difficulties for every regulatory approach it considers.

Mr. Davis does mention one time where I “acknowledge[] the work of Hayek” and “recognize[] that context specific information is vitally important,” but he says I miss the point:

Having conceded these critical points [about the importance of context-specific information], Professor Lambert fails to follow them to the logical conclusion that private ordering arrangements are best for regulating resources efficiently.  Instead, he stops one step short, suggesting that policymakers defer to the regulator most familiar with the regulated party when they need context-specific information for their analysis.  Professor Lambert is mistaken.  The best information for resource allocation is not to be found in the regional office of the regulator.  It resides with the persons who have long been controlled and directed by the progressive regulatory system.  These are the ones to whom policymakers should defer.

I was initially puzzled by Mr. Davis’s description of how my approach would address the knowledge problem.  It’s inconsistent with the way I described the problem (the “regional office of the regulator” wouldn’t know people’s personal preferences, etc.), and I couldn’t remember ever suggesting that regulatory devolution—delegating decisions down toward local regulators—was the solution to the knowledge problem.

When I checked the citation in the sentences just quoted, I realized that Mr. Davis had misunderstood the point I was making in the passage he cited (my own fault, no doubt, not his).  The cited passage was at the very end of the book, where I was summarizing the book’s contributions.  I claimed to have set forth a plan for selecting regulatory approaches that would minimize the sum of error and decision costs.  I wanted to acknowledge, though, the irony of promulgating a generally applicable plan for regulating in a book that, time and again, decries top-down imposition of one-size-fits-all rules.  Thus, I wrote:

A central theme of this book is that Hayek’s knowledge problem—the fact that no central planner can possess and process all the information needed to allocate resources so as to unlock their greatest possible value—applies to regulation, which is ultimately a set of centralized decisions about resource allocation.  The very knowledge problem besetting regulators’ decisions about what others should do similarly afflicts pointy-headed academics’ efforts to set forth ex ante rules about what regulators should do.  Context-specific information to which only the “regulator on the spot” is privy may call for occasional departures from the regulatory plan proposed here.

As should be obvious, my point was not that the knowledge problem can generally be fixed by regulatory devolution.  Rather, I was acknowledging that the general regulatory approach I had set forth—i.e., the rules policymakers should follow in selecting among regulatory approaches—may occasionally misfire and should thus be implemented flexibly.

           b.  Public Choice Concerns

A second problem with my purported trust in experts, Mr. Davis explains, stems from the insights of public choice:

Actual policymakers simply don’t live up to [Woodrow] Wilson’s ideal of the disinterested, objective, apolitical, expert technocrat.  To the contrary, a vast amount of research related to public choice theory has convincingly demonstrated that decisions of regulatory agencies are frequently shaped by politics, institutional self-interest and the influence of the entities the agencies regulate.

Again, huzzah!  Those words could have been lifted straight out of the three full pages of discussion I devoted to public choice concerns with the very first regulatory intervention the book considered.  A snippet from that discussion:

While one might initially expect regulators pursuing the public interest to resist efforts to manipulate regulation for private gain, that assumes that government officials are not themselves rational, self-interest maximizers.  As scholars associated with the “public choice” economic tradition have demonstrated, government officials do not shed their self-interested nature when they step into the public square.  They are often receptive to lobbying in favor of questionable rules, especially since they benefit from regulatory expansions, which tend to enhance their job status and often their incomes.  They also tend to become “captured” by powerful regulatees who may shower them with personal benefits and potentially employ them after their stints in government have ended.

That’s just a slice.  Elsewhere in those three pages, I explain (1) how the dynamic of concentrated benefits and diffuse costs allows inefficient protectionist policies to persist, (2) how firms that benefit from protectionist regulation are often assisted by “pro-social” groups that will make a public interest case for the rules (Bruce Yandle’s Bootleggers and Baptists syndrome), and (3) the “[t]wo types of losses [that] result from the sort of interest-group manipulation public choice predicts.”  And that’s just the book’s initial foray into public choice.  The entry for “public choice concerns” in the book’s index includes eight sub-entries.  As with the knowledge problem, I addressed the public choice issues that could arise from every major regulatory approach the book considered.

For Mr. Davis, though, that was not enough to keep me out of the camp of Wilsonian progressives.  He explains:

Professor Lambert devotes a good deal of attention to the problem of “agency capture” by regulated entities.  However, he fails to acknowledge that a symbiotic relationship between regulators and regulated is not a bug in the regulatory system, but an inherent feature of a system defined by extensive and continuing government involvement in the allocation of resources.

To be honest, I’m not sure what that last sentence means.  Apparently, I didn’t recite some talismanic incantation that would indicate that I really do believe public choice concerns are a big problem for regulation.  I did say this in one of the book’s many discussions of public choice:

A regulator that has both regular contact with its regulatees and significant discretionary authority over them is particularly susceptible to capture.  The regulator’s discretionary authority provides regulatees with a strong motive to win over the regulator, which has the power to hobble the regulatee’s potential rivals and protect its revenue stream.  The regular contact between the regulator and the regulatee provides the regulatee with better access to those in power than that available to parties with opposing interests.  Moreover, the regulatee’s preferred course of action is likely (1) to create concentrated benefits (to the regulatee) and diffuse costs (to consumers generally), and (2) to involve an expansion of the regulator’s authority.  The upshot is that that those who bear the cost of the preferred policy are less likely to organize against it, and regulators, who benefit from turf expansion, are more likely to prefer it.  Rate-of-return regulation thus involves the precise combination that leads to regulatory expansion at consumer expense: broad and discretionary government power, close contact between regulators and regulatees, decisions that generally involve concentrated benefits and diffuse costs, and regular opportunities to expand regulators’ power and prestige.

In light of this combination of features, it should come as no surprise that the history of rate-of-return regulation is littered with instances of agency capture and regulatory expansion.

Even that was not enough to convince Mr. Davis that I reject the Wilsonian assumption of “disinterested, objective, apolitical, expert technocrat[s].”  I don’t know what more I could have said.

  1. Social Welfare

Mr. Davis is right when he says, “Professor Lambert’s ultimate goal for his book is to provide policymakers with a resource that will enable them to make regulatory decisions that produce greater social welfare.”  But nowhere in my book do I suggest, as he says I do, “that the welfare of society is actually something that exists separate and apart from the individual welfare of each of the members of society.”  What I mean by “social welfare” is the aggregate welfare of all the individuals in a society.  And I’m careful to point out that only they know what makes them better off.  (At one point, for example, I write that “[g]overnment planners have no way of knowing how much pleasure regulatees derive from banned activities…or how much displeasure they experience when they must comply with an affirmative command…. [W]ith many paternalistic policies and proposals…government planners are really just guessing about welfare effects.”)

I agree with Mr. Davis that “[t]here is no single generally accepted methodology that anyone can use to determine objectively how and to what extent the welfare of society will be affected by a particular regulatory directive.”  For that reason, nowhere in the book do I suggest any sort of “metes and bounds” measurement of social welfare.  (I certainly do not endorse the use of GDP, which Mr. Davis rightly criticizes; that term appears nowhere in the book.)

Rather than prescribing any sort of precise measurement of social welfare, my book operates at the level of general principles:  We have reasons to believe that inefficiencies may arise when conditions are thus; there is a range of potential government responses to this situation—from doing nothing, to facilitating a privately ordered solution, to mandating various actions; based on our experience with these different interventions, the likely downsides of each (stemming from, for example, the knowledge problem and public choice concerns) are so-and-so; all things considered, the aggregate welfare of the individuals within this group will probably be greatest with policy x.

It is true that the thrust of the book is consequentialist, not deontological.  But it’s a book about policy, not ethics.  And its version of consequentialism is rule, not act, utilitarianism.  Is a consequentialist approach to policymaking enough to render one a progressive?  Should we excise John Stuart Mill’s On Liberty from the classical liberal canon?  I surely hope not.

Is My Proposed Approach an Improvement?

Mr. Davis’s second major criticism of my book—that what it proposes is “just the status quo”—has more bite.  By that, I mean two things.  First, it’s a more painful criticism to receive.  It’s easier for an author to hear “you’re saying something wrong” than “you’re not saying anything new.”

Second, there may be more merit to this criticism.  As Mr. Davis observes, I noted in the book’s introduction that “[a]t times during the drafting, I … wondered whether th[e] book was ‘original’ enough.”  I ultimately concluded that it was because it “br[ought] together insights of legal theorists and economists of various stripes…and systematize[d] their ideas into a unified, practical approach to regulating.”  Mr. Davis thinks I’ve overstated the book’s value, and he may be right.

The current regulatory landscape would suggest, though, that my book’s approach to selecting among potential regulatory policies isn’t “just the status quo.”  The approach I recommend would generate the specific policies catalogued at the outset of this response (in the bullet points).  The fact that those policies haven’t been implemented under the existing regulatory approach suggests that what I’m recommending must be something different than the status quo.

Mr. Davis observes—and I acknowledge—that my recommended approach resembles the review required of major executive agency regulations under Executive Order 12866, President Clinton’s revised version of President Reagan’s Executive Order 12291.  But that order is quite limited in its scope.  It doesn’t cover “minor” executive agency rules (those with expected costs of less than $100 million) or rules from independent agencies or from Congress or from courts or at the state or local level.  Moreover, I understand from talking to a former administrator of the Office of Information and Regulatory Affairs, which is charged with implementing the order, that it has actually generated little serious consideration of less restrictive alternatives, something my approach emphasizes.

What my book proposes is not some sort of governmental procedure; indeed, I emphasize in the conclusion that the book “has not addressed … how existing regulatory institutions should be reformed to encourage the sort of analysis th[e] book recommends.”  Instead, I propose a way to think through specific areas of regulation, one that is informed by a great deal of learning about both market and government failures.  The best audience for the book is probably law students who will someday find themselves influencing public policy as lawyers, legislators, regulators, or judges.  I am thus heartened that the book is being used as a text at several law schools.  My guess is that few law students receive significant exposure to Hayek, public choice, etc.

So, who knows?  Perhaps the book will make a difference at the margin.  Or perhaps it will amount to sound and fury, signifying nothing.  But I don’t think a classical liberal could fairly say that the analysis it counsels “is not clearly better than the status quo.”

A Truly Better Approach to Regulating

Mr. Davis ends his review with a stirring call to revamp the administrative state to bring it “in complete and consistent compliance with the fundamental law of our republic embodied in the Constitution, with its provisions interpreted to faithfully conform to their original public meaning.”  Among other things, he calls for restoring the separation of powers, which has been erased in agencies that combine legislative, executive, and judicial functions, and for eliminating unchecked government power, which results when the legislature delegates broad rulemaking and adjudicatory authority to politically unaccountable bureaucrats.

Once again, I concur.  There are major problems—constitutional and otherwise—with the current state of administrative law and procedure.  I’d be happy to tear down the existing administrative state and begin again on a constitutionally constrained tabula rasa.

But that’s not what my book was about.  I deliberately set out to write a book about the substance of regulation, not the process by which rules should be imposed.  I took that tack for two reasons.  First, there are numerous articles and books, by scholars far more expert than I, on the structure of the administrative state.  I could add little value on administrative process.

Second, the less-addressed substantive question—what, as a substantive matter, should a policy addressing x do?—would exist even if Mr. Davis’s constitutionally constrained regulatory process were implemented.  Suppose that we got rid of independent agencies, curtailed delegations of rulemaking authority to the executive branch, and returned to a system in which Congress wrote all rules, the executive branch enforced them, and the courts resolved any disputes.  Someone would still have to write the rule, and that someone (or group of people) should have some sense of the pros and cons of one approach over another.  That is what my book seeks to provide.

A hard core Hayekian—one who had immersed himself in Law, Legislation, and Liberty—might respond that no one should design regulation (purposive rules that Hayek would call thesis) and that efficient, “purpose-independent” laws (what Hayek called nomos) will just emerge as disputes arise.  But that is not Mr. Davis’s view.  He writes:

A system of governance or regulation based on the rule of law attains its policy objectives by proscribing actions that are inconsistent with those objectives.  For example, this type of regulation would prohibit a regulated party from discharging a pollutant in any amount greater than the limiting amount specified in the regulation.  Under this proscriptive approach to regulation, any and all actions not specifically prohibited are permitted.

Mr. Davis has thus contemplated a purposive rule, crafted by someone.  That someone should know the various policy options and the upsides and downsides of each.  How to Regulate could help.

Conclusion

I’m not sure why Mr. Davis viewed my book as no more than dressed-up progressivism.  Maybe he was triggered by the book’s cover art, which he says “is faithful to the progressive tradition,” resembling “the walls of public buildings from San Francisco to Stalingrad.”  Maybe it was a case of Sunstein Derangement Syndrome.  (Progressive legal scholar Cass Sunstein had nice things to say about the book, despite its criticisms of a number of his ideas.)  Or perhaps it was that I used the term “market failure.”  Many conservatives and libertarians fear, with good reason, that conceding the existence of market failures invites all sorts of government meddling.

At the end of the day, though, I believe we classical liberals should stop pretending that market outcomes are always perfect, that pure private ordering is always and everywhere the best policy.  We should certainly sing markets’ praises; they usually work so well that people don’t even notice them, and we should point that out.  We should continually remind people that government interventions also fail—and in systematic ways (e.g., the knowledge problem and public choice concerns).  We should insist that a market failure is never a sufficient condition for a governmental fix; one must always consider whether the cure will be worse than the disease.  In short, we should take and promote the view that government should operate “under a presumption of error.”

That view, economist Aaron Director famously observed, is the essence of laissez faire.  It’s implicit in the purpose statement of the Federalist Society’s Regulatory Transparency Project.  And it’s the central point of How to Regulate.

So let’s go easy on the friendly fire.

Today would have been Henry Manne’s 90th birthday. When he passed away in 2015 he left behind an immense and impressive legacy. In 1991, at the inaugural meeting of the American Law & Economics Association (ALEA), Manne was named a Life Member of ALEA and, along with Nobel Laureate Ronald Coase, and federal appeals court judges Richard Posner and Guido Calabresi, one of the four Founders of Law and Economics. The organization I founded, the International Center for Law & Economics is dedicated to his memory, along with that of his great friend and mentor, UCLA economist Armen Alchian.

Manne is best known for his work in corporate governance and securities law and regulation, of course. But sometimes forgotten is that his work on the market for corporate control was motivated by concerns about analytical flaws in merger enforcement. As former FTC commissioners Maureen Ohlhausen and Joshua Wright noted in a 2015 dissenting statement:

The notion that the threat of takeover would induce current managers to improve firm performance to the benefit of shareholders was first developed by Henry Manne. Manne’s pathbreaking work on the market for corporate control arose out of a concern that antitrust constraints on horizontal mergers would distort its functioning. See Henry G. Manne, Mergers and the Market for Corporate Control, 73 J. POL. ECON. 110 (1965).

But Manne’s focus on antitrust didn’t end in 1965. Moreover, throughout his life he was a staunch critic of misguided efforts to expand the power of government, especially when these efforts claimed to have their roots in economic reasoning — which, invariably, was hopelessly flawed. As his obituary notes:

In his teaching, his academic writing, his frequent op-eds and essays, and his work with organizations like the Cato Institute, the Liberty Fund, the Institute for Humane Studies, and the Mont Pèlerin Society, among others, Manne advocated tirelessly for a clearer understanding of the power of markets and competition and the importance of limited government and economically sensible regulation.

Thus it came to be, in 1974, that Manne was called to testify before the Senate Judiciary Committee, Subcommittee on Antitrust and Monopoly, on Michigan Senator Philip A. Hart’s proposed Industrial Reorganization Act. His testimony is a tour de force, and a prescient rejoinder to the faddish advocates of today’s “hipster antitrust”— many of whom hearken longingly back to the antitrust of the 1960s and its misguided “gurus.”

Henry Manne’s trenchant testimony critiquing the Industrial Reorganization Act and its (ostensible) underpinnings is reprinted in full in this newly released ICLE white paper (with introductory material by Geoffrey Manne):

Henry G. Manne: Testimony on the Proposed Industrial Reorganization Act of 1973 — What’s Hip (in Antitrust) Today Should Stay Passé

Sen. Hart proposed the Industrial Reorganization Act in order to address perceived problems arising from industrial concentration. The bill was rooted in the belief that industry concentration led inexorably to monopoly power; that monopoly power, however obtained, posed an inexorable threat to freedom and prosperity; and that the antitrust laws (i.e., the Sherman and Clayton Acts) were insufficient to address the purported problems.

That sentiment — rooted in the reflexive application of the (largely-discredited structure-conduct-performance (SCP) paradigm) — had already become largely passé among economists in the 70s, but it has resurfaced today as the asserted justification for similar (although less onerous) antitrust reform legislation and the general approach to antitrust analysis commonly known as “hipster antitrust.”

The critiques leveled against the asserted economic underpinnings of efforts like the Industrial Reorganization Act are as relevant today as they were then. As Henry Manne notes in his testimony:

To be successful in this stated aim [“getting the government out of the market”] the following dreams would have to come true: The members of both the special commission and the court established by the bill would have to be satisfied merely to complete their assigned task and then abdicate their tremendous power and authority; they would have to know how to satisfactorily define and identify the limits of the industries to be restructured; the Government’s regulation would not sacrifice significant efficiencies or economies of scale; and the incentive for new firms to enter an industry would not be diminished by the threat of a punitive response to success.

The lessons of history, economic theory, and practical politics argue overwhelmingly against every one of these assumptions.

Both the subject matter of and impetus for the proposed bill (as well as Manne’s testimony explaining its economic and political failings) are eerily familiar. The preamble to the Industrial Reorganization Act asserts that

competition… preserves a democratic society, and provides an opportunity for a more equitable distribution of wealth while avoiding the undue concentration of economic, social, and political power; [and] the decline of competition in industries with oligopoly or monopoly power has contributed to unemployment, inflation, inefficiency, an underutilization of economic capacity, and the decline of exports….

The echoes in today’s efforts to rein in corporate power by adopting structural presumptions are unmistakable. Compare, for example, this language from Sen. Klobuchar’s Consolidation Prevention and Competition Promotion Act of 2017:

[C]oncentration that leads to market power and anticompetitive conduct makes it more difficult for people in the United States to start their own businesses, depresses wages, and increases economic inequality;

undue market concentration also contributes to the consolidation of political power, undermining the health of democracy in the United States; [and]

the anticompetitive effects of market power created by concentration include higher prices, lower quality, significantly less choice, reduced innovation, foreclosure of competitors, increased entry barriers, and monopsony power.

Remarkably, Sen. Hart introduced his bill as “an alternative to government regulation and control.” Somehow, it was the antithesis of “government control” to introduce legislation that, in Sen. Hart’s words,

involves changing the life styles of many of our largest corporations, even to the point of restructuring whole industries. It involves positive government action, not to control industry but to restore competition and freedom of enterprise in the economy

Like today’s advocates of increased government intervention to design the structure of the economy, Sen. Hart sought — without a trace of irony — to “cure” the problem of politicized, ineffective enforcement by doubling down on the power of the enforcers.

Henry Manne was having none of it. As he pointedly notes in his testimony, the worst problems of monopoly power are of the government’s own making. The real threat to democracy, freedom, and prosperity is the political power amassed in the bureaucratic apparatus that frequently confers monopoly, at least as much as the monopoly power it spawns:

[I]t takes two to make that bargain [political protection and subsidies in exchange for lobbying]. And as we look around at various industries we are constrained to ask who has not done this. And more to the point, who has not succeeded?

It is unhappily almost impossible to name a significant industry in the United States that has not gained some degree of protection from the rigors of competition from Federal, State or local governments.

* * *

But the solution to inefficiencies created by Government controls cannot lie in still more controls. The politically responsible task ahead for Congress is to dismantle our existing regulatory monster before it strangles us.

We have spawned a gigantic bureaucracy whose own political power threatens the democratic legitimacy of government.

We are rapidly moving toward the worst features of a centrally planned economy with none of the redeeming political, economic, or ethical features usually claimed for such systems.

The new white paper includes Manne’s testimony in full, including his exchange with Sen. Hart and committee staffers following his prepared remarks.

It is, sadly, nearly as germane today as it was then.

One final note: The subtitle for the paper is a reference to the song “What Is Hip?” by Tower of Power. Its lyrics are decidedly apt:

You done went and found you a guru,

In your effort to find you a new you,

And maybe even managed

To raise your conscious level.

While you’re striving to find the right road,

There’s one thing you should know:

What’s hip today

Might become passé.

— Tower of Power, What Is Hip? (Emilio Castillo, John David Garibaldi & Stephen M. Kupka, What Is Hip? (Bob-A-Lew Songs 1973), from the album TOWER OF POWER (Warner Bros. 1973))

And here’s the song, in all its glory:

 

This week the FCC will vote on Chairman Ajit Pai’s Restoring Internet Freedom Order. Once implemented, the Order will rescind the 2015 Open Internet Order and return antitrust and consumer protection enforcement to primacy in Internet access regulation in the U.S.

In anticipation of that, earlier this week the FCC and FTC entered into a Memorandum of Understanding delineating how the agencies will work together to police ISPs. Under the MOU, the FCC will review informal complaints regarding ISPs’ disclosures about their blocking, throttling, paid prioritization, and congestion management practices. Where an ISP fails to make the proper disclosures, the FCC will take enforcement action. The FTC, for its part, will investigate and, where warranted, take enforcement action against ISPs for unfair, deceptive, or otherwise unlawful acts.

Critics of Chairman Pai’s plan contend (among other things) that the reversion to antitrust-agency oversight of competition and consumer protection in telecom markets (and the Internet access market particularly) would be an aberration — that the US will become the only place in the world to move backward away from net neutrality rules and toward antitrust law.

But this characterization has it exactly wrong. In fact, much of the world has been moving toward an antitrust-based approach to telecom regulation. The aberration was the telecom-specific, common-carrier regulation of the 2015 Open Internet Order.

The longstanding, global transition from telecom regulation to antitrust enforcement

The decade-old discussion around net neutrality has morphed, perhaps inevitably, to join the larger conversation about competition in the telecom sector and the proper role of antitrust law in addressing telecom-related competition issues. Today, with the latest net neutrality rules in the US on the chopping block, the discussion has grown more fervent (and even sometimes inordinately violent).

On the one hand, opponents of the 2015 rules express strong dissatisfaction with traditional, utility-style telecom regulation of innovative services, and view the 2015 rules as a meritless usurpation of antitrust principles in guiding the regulation of the Internet access market. On the other hand, proponents of the 2015 rules voice skepticism that antitrust can actually provide a way to control competitive harms in the tech and telecom sectors, and see the heavy hand of Title II, common-carrier regulation as a necessary corrective.

While the evidence seems clear that an early-20th-century approach to telecom regulation is indeed inappropriate for the modern Internet (see our lengthy discussions on this point, e.g., here and here, as well as Thom Lambert’s recent post), it is perhaps less clear whether antitrust, with its constantly evolving, common-law foundation, is up to the task.

To answer that question, it is important to understand that for decades, the arc of telecom regulation globally has been sweeping in the direction of ex post competition enforcement, and away from ex ante, sector-specific regulation.

Howard Shelanski, who served as President Obama’s OIRA Administrator from 2013-17, Director of the Bureau of Economics at the FTC from 2012-2013, and Chief Economist at the FCC from 1999-2000, noted in 2002, for instance, that

[i]n many countries, the first transition has been from a government monopoly to a privatizing entity controlled by an independent regulator. The next transformation on the horizon is away from the independent regulator and towards regulation through general competition law.

Globally, nowhere perhaps has this transition been more clearly stated than in the EU’s telecom regulatory framework which asserts:

The aim is to progressively reduce ex ante sector-specific regulation progressively as competition in markets develops and, ultimately, for electronic communications [i.e., telecommunications] to be governed by competition law only. (Emphasis added.)

To facilitate the transition and quash regulatory inconsistencies among member states, the EC identified certain markets for national regulators to decide, consistent with EC guidelines on market analysis, whether ex ante obligations were necessary in their respective countries due to an operator holding “significant market power.” In 2003 the EC identified 18 such markets. After observing technological and market changes over the next four years, the EC reduced that number to seven in 2007 and, in 2014, the number was further reduced to four markets, all wholesale markets, that could potentially require ex ante regulation.

It is important to highlight that this framework is not uniquely achievable in Europe because of some special trait in its markets, regulatory structure, or antitrust framework. Determining the right balance of regulatory rules and competition law, whether enforced by a telecom regulator, antitrust regulator, or multi-purpose authority (i.e., with authority over both competition and telecom) means choosing from a menu of options that should be periodically assessed to move toward better performance and practice. There is nothing jurisdiction-specific about this; it is simply a matter of good governance.

And since the early 2000s, scholars have highlighted that the US is in an intriguing position to transition to a merged regulator because, for example, it has both a “highly liberalized telecommunications sector and a well-established body of antitrust law.” For Shelanski, among others, the US has been ready to make the transition since 2007.

Far from being an aberrant move away from sound telecom regulation, the FCC’s Restoring Internet Freedom Order is actually a step in the direction of sensible, antitrust-based telecom regulation — one that many parts of the world have long since undertaken.

How antitrust oversight of telecom markets has been implemented around the globe

In implementing the EU’s shift toward antitrust oversight of the telecom sector since 2003, agencies have adopted a number of different organizational reforms.

Some telecom regulators assumed new duties over competition — e.g., Ofcom in the UK. Other non-European countries, including, e.g., Mexico have also followed this model.

Other European Member States have eliminated their telecom regulator altogether. In a useful case study, Roslyn Layton and Joe Kane outline Denmark’s approach, which includes disbanding its telecom regulator and passing the regulation of the sector to various executive agencies.

Meanwhile, the Netherlands and Spain each elected to merge its telecom regulator into its competition authority. New Zealand has similarly adopted this framework.

A few brief case studies will illuminate these and other reforms:

The Netherlands

In 2013, the Netherlands merged its telecom, consumer protection, and competition regulators to form the Netherlands Authority for Consumers and Markets (ACM). The ACM’s structure streamlines decision-making on pending industry mergers and acquisitions at the managerial level, eliminating the challenges arising from overlapping agency reviews and cross-agency coordination. The reform also unified key regulatory methodologies, such as creating a consistent calculation method for the weighted average cost of capital (WACC).

The Netherlands also claims that the ACM’s ex post approach is better able to adapt to “technological developments, dynamic markets, and market trends”:

The combination of strength and flexibility allows for a problem-based approach where the authority first engages in a dialogue with a particular market player in order to discuss market behaviour and ensure the well-functioning of the market.

The Netherlands also cited a significant reduction in the risk of regulatory capture as staff no longer remain in positions for long tenures but rather rotate on a project-by-project basis from a regulatory to a competition department or vice versa. Moving staff from team to team has also added value in terms of knowledge transfer among the staff. Finally, while combining the cultures of each regulator was less difficult than expected, the government reported that the largest cause of consternation in the process was agreeing on a single IT system for the ACM.

Spain

In 2013, Spain created the National Authority for Markets and Competition (CNMC), merging the National Competition Authority with several sectoral regulators, including the telecom regulator, to “guarantee cohesion between competition rulings and sectoral regulation.” In a report to the OECD, Spain stated that moving to the new model was necessary because of increasing competition and technological convergence in the sector (i.e., the ability for different technologies to offer the substitute services (like fixed and wireless Internet access)). It added that integrating its telecom regulator with its competition regulator ensures

a predictable business environment and legal certainty [i.e., removing “any threat of arbitrariness”] for the firms. These two conditions are indispensable for network industries — where huge investments are required — but also for the rest of the business community if investment and innovation are to be promoted.

Like in the Netherlands, additional benefits include significantly lowering the risk of regulatory capture by “preventing the alignment of the authority’s performance with sectoral interests.”

Denmark

In 2011, the Danish government unexpectedly dismantled the National IT and Telecom Agency and split its duties between four regulators. While the move came as a surprise, it did not engender national debate — vitriolic or otherwise — nor did it receive much attention in the press.

Since the dismantlement scholars have observed less politicization of telecom regulation. And even though the competition authority didn’t take over telecom regulatory duties, the Ministry of Business and Growth implemented a light touch regime, which, as Layton and Kane note, has helped to turn Denmark into one of the “top digital nations” according to the International Telecommunication Union’s Measuring the Information Society Report.

New Zealand

The New Zealand Commerce Commission (NZCC) is responsible for antitrust enforcement, economic regulation, consumer protection, and certain sectoral regulations, including telecommunications. By combining functions into a single regulator New Zealand asserts that it can more cost-effectively administer government operations. Combining regulatory functions also created spillover benefits as, for example, competition analysis is a prerequisite for sectoral regulation, and merger analysis in regulated sectors (like telecom) can leverage staff with detailed and valuable knowledge. Similar to the other countries, New Zealand also noted that the possibility of regulatory capture “by the industries they regulate is reduced in an agency that regulates multiple sectors or also has competition and consumer law functions.”

Advantages identified by other organizations

The GSMA, a mobile industry association, notes in its 2016 report, Resetting Competition Policy Frameworks for the Digital Ecosystem, that merging the sector regulator into the competition regulator also mitigates regulatory creep by eliminating the prodding required to induce a sector regulator to roll back regulation as technological evolution requires it, as well as by curbing the sector regulator’s temptation to expand its authority. After all, regulators exist to regulate.

At the same time, it’s worth noting that eliminating the telecom regulator has not gone off without a hitch in every case (most notably, in Spain). It’s important to understand, however, that the difficulties that have arisen in specific contexts aren’t endemic to the nature of competition versus telecom regulation. Nothing about these cases suggests that economic-based telecom regulations are inherently essential, or that replacing sector-specific oversight with antitrust oversight can’t work.

Contrasting approaches to net neutrality in the EU and New Zealand

Unfortunately, adopting a proper framework and implementing sweeping organizational reform is no guarantee of consistent decisionmaking in its implementation. Thus, in 2015, the European Parliament and Council of the EU went against two decades of telecommunications best practices by implementing ex ante net neutrality regulations without hard evidence of widespread harm and absent any competition analysis to justify its decision. The EU placed net neutrality under the universal service and user’s rights prong of the regulatory framework, and the resulting rules lack coherence and economic rigor.

BEREC’s net neutrality guidelines, meant to clarify the EU regulations, offered an ambiguous, multi-factored standard to evaluate ISP practices like free data programs. And, as mentioned in a previous TOTM post, whether or not they allow the practice, regulators (e.g., Norway’s Nkom and the UK’s Ofcom) have lamented the lack of regulatory certainty surrounding free data programs.

Notably, while BEREC has not provided clear guidance, a 2017 report commissioned by the EU’s Directorate-General for Competition weighing competitive benefits and harms of zero rating concluded “there appears to be little reason to believe that zero-rating gives rise to competition concerns.”

The report also provides an ex post framework for analyzing such deals in the context of a two-sided market by assessing a deal’s impact on competition between ISPs and between content and application providers.

The EU example demonstrates that where a telecom regulator perceives a novel problem, competition law, grounded in economic principles, brings a clear framework to bear.

In New Zealand, if a net neutrality issue were to arise, the ISP’s behavior would be examined under the context of existing antitrust law, including a determination of whether the ISP is exercising market power, and by the Telecommunications Commissioner, who monitors competition and the development of telecom markets for the NZCC.

Currently, there is broad consensus among stakeholders, including a local content providers and networking equipment manufacturers, that there is no need for ex ante regulation of net neutrality. Wholesale ISP, Chorus, states, for example, that “in any event, the United States’ transparency and non-interference requirements [from the 2015 OIO] are arguably covered by the TCF Code disclosure rules and the provisions of the Commerce Act.”

The TCF Code is a mandatory code of practice establishing requirements concerning the information ISPs are required to disclose to consumers about their services. For example, ISPs must disclose any arrangements that prioritize certain traffic. Regarding traffic management, complaints of unfair contract terms — when not resolved by a process administered by an independent industry group — may be referred to the NZCC for an investigation in accordance with the Fair Trading Act. Under the Commerce Act, the NZCC can prohibit anticompetitive mergers, or practices that substantially lessen competition or that constitute price fixing or abuse of market power.

In addition, the NZCC has been active in patrolling vertical agreements between ISPs and content providers — precisely the types of agreements bemoaned by Title II net neutrality proponents.

In February 2017, the NZCC blocked Vodafone New Zealand’s proposed merger with Sky Network (combining Sky’s content and pay TV business with Vodafone’s broadband and mobile services) because the Commission concluded that the deal would substantially lessen competition in relevant broadband and mobile services markets. The NZCC was

unable to exclude the real chance that the merged entity would use its market power over premium live sports rights to effectively foreclose a substantial share of telecommunications customers from rival telecommunications services providers (TSPs), resulting in a substantial lessening of competition in broadband and mobile services markets.

Such foreclosure would result, the NZCC argued, from exclusive content and integrated bundles with features such as “zero rated Sky Sport viewing over mobile.” In addition, Vodafone would have the ability to prevent rivals from creating bundles using Sky Sport.

The substance of the Vodafone/Sky decision notwithstanding, the NZCC’s intervention is further evidence that antitrust isn’t a mere smokescreen for regulators to do nothing, and that regulators don’t need to design novel tools (such as the Internet conduct rule in the 2015 OIO) to regulate something neither they nor anyone else knows very much about: “not just the sprawling Internet of today, but also the unknowable Internet of tomorrow.” Instead, with ex post competition enforcement, regulators can allow dynamic innovation and competition to develop, and are perfectly capable of intervening — when and if identifiable harm emerges.

Conclusion

Unfortunately for Title II proponents — who have spent a decade at the FCC lobbying for net neutrality rules despite a lack of actionable evidence — the FCC is not acting without precedent by enabling the FTC’s antitrust and consumer protection enforcement to police conduct in Internet access markets. For two decades, the object of telecommunications regulation globally has been to transition away from sector-specific ex ante regulation to ex post competition review and enforcement. It’s high time the U.S. got on board.

The populists are on the march, and as the 2018 campaign season gets rolling we’re witnessing more examples of political opportunism bolstered by economic illiteracy aimed at increasingly unpopular big tech firms.

The latest example comes in the form of a new investigation of Google opened by Missouri’s Attorney General, Josh Hawley. Mr. Hawley — a Republican who, not coincidentally, is running for Senate in 2018alleges various consumer protection violations and unfair competition practices.

But while Hawley’s investigation may jump start his campaign and help a few vocal Google rivals intent on mobilizing the machinery of the state against the company, it is unlikely to enhance consumer welfare — in Missouri or anywhere else.  

According to the press release issued by the AG’s office:

[T]he investigation will seek to determine if Google has violated the Missouri Merchandising Practices Act—Missouri’s principal consumer-protection statute—and Missouri’s antitrust laws.  

The business practices in question are Google’s collection, use, and disclosure of information about Google users and their online activities; Google’s alleged misappropriation of online content from the websites of its competitors; and Google’s alleged manipulation of search results to preference websites owned by Google and to demote websites that compete with Google.

Mr. Hawley’s justification for his investigation is a flourish of populist rhetoric:

We should not just accept the word of these corporate giants that they have our best interests at heart. We need to make sure that they are actually following the law, we need to make sure that consumers are protected, and we need to hold them accountable.

But Hawley’s “strong” concern is based on tired retreads of the same faulty arguments that Google’s competitors (Yelp chief among them), have been plying for the better part of a decade. In fact, all of his apparent grievances against Google were exhaustively scrutinized by the FTC and ultimately rejected or settled in separate federal investigations in 2012 and 2013.

The antitrust issues

To begin with, AG Hawley references the EU antitrust investigation as evidence that

this is not the first-time Google’s business practices have come into question. In June, the European Union issued Google a record $2.7 billion antitrust fine.

True enough — and yet, misleadingly incomplete. Missing from Hawley’s recitation of Google’s antitrust rap sheet are the following investigations, which were closed without any finding of liability related to Google Search, Android, Google’s advertising practices, etc.:

  • United States FTC, 2013. The FTC found no basis to pursue a case after a two-year investigation: “Challenging Google’s product design decisions in this case would require the Commission — or a court — to second-guess a firm’s product design decisions where plausible procompetitive justifications have been offered, and where those justifications are supported by ample evidence.” The investigation did result in a consent order regarding patent licensing unrelated in any way to search and a voluntary commitment by Google not to engage in certain search-advertising-related conduct.
  • South Korea FTC, 2013. The KFTC cleared Google after a two-year investigation. It opened a new investigation in 2016, but, as I have discussed, “[i]f anything, the economic conditions supporting [the KFTC’s 2013] conclusion have only gotten stronger since.”
  • Canada Competition Bureau, 2016. The CCB closed a three-year long investigation into Google’s search practices without taking any action.

Similar investigations have been closed without findings of liability (or simply lie fallow) in a handful of other countries (e.g., Taiwan and Brazil) and even several states (e.g., Ohio and Texas). In fact, of all the jurisdictions that have investigated Google, only the EU and Russia have actually assessed liability.

As Beth Wilkinson, outside counsel to the FTC during the Google antitrust investigation, noted upon closing the case:

Undoubtedly, Google took aggressive actions to gain advantage over rival search providers. However, the FTC’s mission is to protect competition, and not individual competitors. The evidence did not demonstrate that Google’s actions in this area stifled competition in violation of U.S. law.

The CCB was similarly unequivocal in its dismissal of the very same antitrust claims Missouri’s AG seems intent on pursuing against Google:

The Bureau sought evidence of the harm allegedly caused to market participants in Canada as a result of any alleged preferential treatment of Google’s services. The Bureau did not find adequate evidence to support the conclusion that this conduct has had an exclusionary effect on rivals, or that it has resulted in a substantial lessening or prevention of competition in a market.

Unfortunately, rather than follow the lead of these agencies, Missouri’s investigation appears to have more in common with Russia’s effort to prop up a favored competitor (Yandex) at the expense of consumer welfare.

The Yelp Claim

Take Mr. Hawley’s focus on “Google’s alleged misappropriation of online content from the websites of its competitors,” for example, which cleaves closely to what should become known henceforth as “The Yelp Claim.”

While the sordid history of Yelp’s regulatory crusade against Google is too long to canvas in its entirety here, the primary elements are these:

Once upon a time (in 2005), Google licensed Yelp’s content for inclusion in its local search results. In 2007 Yelp ended the deal. By 2010, and without a license from Yelp (asserting fair use), Google displayed small snippets of Yelp’s reviews that, if clicked on, led to Yelp’s site. Even though Yelp received more user traffic from those links as a result, Yelp complained, and Google removed Yelp snippets from its local results.

In its 2013 agreement with the FTC, Google guaranteed that Yelp could opt-out of having even snippets displayed in local search results by committing Google to:

make available a web-based notice form that provides website owners with the option to opt out from display on Google’s Covered Webpages of content from their website that has been crawled by Google. When a website owner exercises this option, Google will cease displaying crawled content from the domain name designated by the website owner….

The commitments also ensured that websites (like Yelp) that opt out would nevertheless remain in Google’s general index.

Ironically, Yelp now claims in a recent study that Google should show not only snippets of Yelp reviews, but even more of Yelp’s content. (For those interested, my colleagues and I have a paper explaining why the study’s claims are spurious).

The key bit here, of course, is that Google stopped pulling content from Yelp’s pages to use in its local search results, and that it implemented a simple mechanism for any other site wishing to opt out of the practice to do so.

It’s difficult to imagine why Missouri’s citizens might require more than this to redress alleged anticompetitive harms arising from the practice.

Perhaps AG Hawley thinks consumers would be better served by an opt-in mechanism? Of course, this is absurd, particularly if any of Missouri’s citizens — and their businesses — have websites. Most websites want at least some of their content to appear on Google’s search results pages as prominently as possible — see this and this, for example — and making this information more accessible to users is why Google exists.

To be sure, some websites may take issue with how much of their content Google features and where it places that content. But the easy opt out enables them to prevent Google from showing their content in a manner they disapprove of. Yelp is an outlier in this regard because it views Google as a direct competitor, especially to the extent it enables users to read some of Yelp’s reviews without visiting Yelp’s pages.

For Yelp and a few similarly situated companies the opt out suffices. But for almost everyone else the opt out is presumably rarely exercised, and any more-burdensome requirement would just impose unnecessary costs, harming instead of helping their websites.

The privacy issues

The Missouri investigation also applies to “Google’s collection, use, and disclosure of information about Google users and their online activities.” More pointedly, Hawley claims that “Google may be collecting more information from users than the company was telling consumers….”

Presumably this would come as news to the FTC, which, with a much larger staff and far greater expertise, currently has Google under a 20 year consent order (with some 15 years left to go) governing its privacy disclosures and information-sharing practices, thus ensuring that the agency engages in continual — and well-informed — oversight of precisely these issues.

The FTC’s consent order with Google (the result of an investigation into conduct involving Google’s short-lived Buzz social network, allegedly in violation of Google’s privacy policies), requires the company to:

  • “[N]ot misrepresent in any manner, expressly or by implication… the extent to which respondent maintains and protects the privacy and confidentiality of any [user] information…”;
  • “Obtain express affirmative consent from” users “prior to any new or additional sharing… of the Google user’s identified information with any third party” if doing so would in any way deviate from previously disclosed practices;
  • “[E]stablish and implement, and thereafter maintain, a comprehensive privacy program that is reasonably designed to [] address privacy risks related to the development and management of new and existing products and services for consumers, and (2) protect the privacy and confidentiality of [users’] information”; and
  • Along with a laundry list of other reporting requirements, “[submit] biennial assessments and reports [] from a qualified, objective, independent third-party professional…, approved by the [FTC] Associate Director for Enforcement, Bureau of Consumer Protection… in his or her sole discretion.”

What, beyond the incredibly broad scope of the FTC’s consent order, could the Missouri AG’s office possibly hope to obtain from an investigation?

Google is already expressly required to provide privacy reports to the FTC every two years. It must provide several of the items Hawley demands in his CID to the FTC; others are required to be made available to the FTC upon demand. What materials could the Missouri AG collect beyond those the FTC already receives, or has the authority to demand, under its consent order?

And what manpower and expertise could Hawley apply to those materials that would even begin to equal, let alone exceed, those of the FTC?

Lest anyone think the FTC is falling down on the job, a year after it issued that original consent order the Commission fined Google $22.5 million for violating the order in a questionable decision that was signed on to by all of the FTC’s Commissioners (both Republican and Democrat) — except the one who thought it didn’t go far enough.

That penalty is of undeniable import, not only for its amount (at the time it was the largest in FTC history) and for stemming from alleged problems completely unrelated to the issue underlying the initial action, but also because it was so easy to obtain. Having put Google under a 20-year consent order, the FTC need only prove (or threaten to prove) contempt of the consent order, rather than the specific elements of a new violation of the FTC Act, to bring the company to heel. The former is far easier to prove, and comes with the ability to impose (significant) damages.

So what’s really going on in Jefferson City?

While states are, of course, free to enforce their own consumer protection laws to protect their citizens, there is little to be gained — other than cold hard cash, perhaps — from pursuing cases that, at best, duplicate enforcement efforts already undertaken by the federal government (to say nothing of innumerable other jurisdictions).

To take just one relevant example, in 2013 — almost a year to the day following the court’s approval of the settlement in the FTC’s case alleging Google’s violation of the Buzz consent order — 37 states plus DC (not including Missouri) settled their own, follow-on litigation against Google on the same facts. Significantly, the terms of the settlement did not impose upon Google any obligation not already a part of the Buzz consent order or the subsequent FTC settlement — but it did require Google to fork over an additional $17 million.  

Not only is there little to be gained from yet another ill-conceived antitrust campaign, there is much to be lost. Such massive investigations require substantial resources to conduct, and the opportunity cost of doing so may mean real consumer issues go unaddressed. The Consumer Protection Section of the Missouri AG’s office says it receives some 100,000 consumer complaints a year. How many of those will have to be put on the back burner to accommodate an investigation like this one?

Even when not politically motivated, state enforcement of CPAs is not an unalloyed good. In fact, empirical studies of state consumer protection actions like the one contemplated by Mr. Hawley have shown that such actions tend toward overreach — good for lawyers, perhaps, but expensive for taxpayers and often detrimental to consumers. According to a recent study by economists James Cooper and Joanna Shepherd:

[I]n recent decades, this thoughtful balance [between protecting consumers and preventing the proliferation of lawsuits that harm both consumers and businesses] has yielded to damaging legislative and judicial overcorrections at the state level with a common theoretical mistake: the assumption that more CPA litigation automatically yields more consumer protection…. [C]ourts and legislatures gradually have abolished many of the procedural and remedial protections designed to cabin state CPAs to their original purpose: providing consumers with redress for actual harm in instances where tort and contract law may provide insufficient remedies. The result has been an explosion in consumer protection litigation, which serves no social function and for which consumers pay indirectly through higher prices and reduced innovation.

AG Hawley’s investigation seems almost tailored to duplicate the FTC’s extensive efforts — and to score political points. Or perhaps Mr. Hawley is just perturbed that Missouri missed out its share of the $17 million multistate settlement in 2013.

Which raises the spectre of a further problem with the Missouri case: “rent extraction.”

It’s no coincidence that Mr. Hawley’s investigation follows closely on the heels of Yelp’s recent letter to the FTC and every state AG (as well as four members of Congress and the EU’s chief competition enforcer, for good measure) alleging that Google had re-started scraping Yelp’s content, thus violating the terms of its voluntary commitments to the FTC.

It’s also no coincidence that Yelp “notified” Google of the problem only by lodging a complaint with every regulator who might listen rather than by actually notifying Google. But an action like the one Missouri is undertaking — not resolution of the issue — is almost certainly exactly what Yelp intended, and AG Hawley is playing right into Yelp’s hands.  

Google, for its part, strongly disputes Yelp’s allegation, and, indeed, has — even according to Yelp — complied fully with Yelp’s request to keep its content off Google Local and other “vertical” search pages since 18 months before Google entered into its commitments with the FTC. Google claims that the recent scraping was inadvertent, and that it would happily have rectified the problem if only Yelp had actually bothered to inform Google.

Indeed, Yelp’s allegations don’t really pass the smell test: That Google would suddenly change its practices now, in violation of its commitments to the FTC and at a time of extraordinarily heightened scrutiny by the media, politicians of all stripes, competitors like Yelp, the FTC, the EU, and a host of other antitrust or consumer protection authorities, strains belief.

But, again, identifying and resolving an actual commercial dispute was likely never the goal. As a recent, fawning New York Times article on “Yelp’s Six-Year Grudge Against Google” highlights (focusing in particular on Luther Lowe, now Yelp’s VP of Public Policy and the author of the letter):

Yelp elevated Mr. Lowe to the new position of director of government affairs, a job that more or less entails flying around the world trying to sic antitrust regulators on Google. Over the next few years, Yelp hired its first lobbyist and started a political action committee. Recently, it has started filing complaints in Brazil.

Missouri, in other words, may just be carrying Yelp’s water.

The one clear lesson of the decades-long Microsoft antitrust saga is that companies that struggle to compete in the market can profitably tax their rivals by instigating antitrust actions against them. As Milton Friedman admonished, decrying “the business community’s suicidal impulse” to invite regulation:

As a believer in the pursuit of self-interest in a competitive capitalist system, I can’t blame a businessman who goes to Washington [or is it Jefferson City?] and tries to get special privileges for his company.… Blame the rest of us for being so foolish as to let him get away with it.

Taking a tough line on Silicon Valley firms in the midst of today’s anti-tech-company populist resurgence may help with the electioneering in Mr. Hawley’s upcoming bid for a US Senate seat and serve Yelp, but it doesn’t offer any clear, actual benefits to Missourians. As I’ve wondered before: “Exactly when will regulators be a little more skeptical of competitors trying to game the antitrust laws for their own advantage?”

Last week, the Internet Association (“IA”) — a trade group representing some of America’s most dynamic and fastest growing tech companies, including the likes of Google, Facebook, Amazon, and eBay — presented the incoming Trump Administration with a ten page policy paper entitled “Policy Roadmap for New Administration, Congress.”

The document’s content is not surprising, given its source: It is, in essence, a summary of the trade association’s members’ preferred policy positions, none of which is new or newly relevant. Which is fine, in principle; lobbying on behalf of members is what trade associations do — although we should be somewhat skeptical of a policy document that purports to represent the broader social welfare while it advocates for members’ preferred policies.

Indeed, despite being labeled a “roadmap,” the paper is backward-looking in certain key respects — a fact that leads to some strange syntax: “[the document is a] roadmap of key policy areas that have allowed the internet to grow, thrive, and ensure its continued success and ability to create jobs throughout our economy” (emphasis added). Since when is a “roadmap” needed to identify past policies? Indeed, as Bloomberg News reporter, Joshua Brustein, wrote:

The document released Monday is notable in that the same list of priorities could have been sent to a President-elect Hillary Clinton, or written two years ago.

As a wishlist of industry preferences, this would also be fine, in principle. But as an ostensibly forward-looking document, aimed at guiding policy transition, the IA paper is disappointingly un-self-aware. Rather than delineating an agenda aimed at improving policies to promote productivity, economic development and social cohesion throughout the economy, the document is overly focused on preserving certain regulations adopted at the dawn of the Internet age (when the internet was capitalized). Even more disappointing given the IA member companies’ central role in our contemporary lives, the document evinces no consideration of how Internet platforms themselves should strive to balance rights and responsibilities in new ways that promote meaningful internet freedom.

In short, the IA’s Roadmap constitutes a policy framework dutifully constructed to enable its members to maintain the status quo. While that might also serve to further some broader social aims, it’s difficult to see in the approach anything other than a defense of what got us here — not where we go from here.

To take one important example, the document reiterates the IA’s longstanding advocacy for the preservation of the online-intermediary safe harbors of the 20 year-old Digital Millennium Copyright Act (“DMCA”) — which were adopted during the era of dial-up, and before any of the principal members of the Internet Association even existed. At the same time, however, it proposes to reform one piece of legislation — the Electronic Communications Privacy Act (“ECPA”) — precisely because, at 30 years old, it has long since become hopelessly out of date. But surely if outdatedness is a justification for asserting the inappropriateness of existing privacy/surveillance legislation — as seems proper, given the massive technological and social changes surrounding privacy — the same concern should apply to copyright legislation with equal force, given the arguably even-more-substantial upheavals in the economic and social role of creative content in society today.

Of course there “is more certainty in reselling the past, than inventing the future,” but a truly valuable roadmap for the future from some of the most powerful and visionary companies in America should begin to tackle some of the most complicated and nuanced questions facing our country. It would be nice to see a Roadmap premised upon a well-articulated theory of accountability across all of the Internet ecosystem in ways that protect property, integrity, choice and other essential aspects of modern civil society.

Each of IA’s companies was principally founded on a vision of improving some aspect of the human condition; in many respects they have succeeded. But as society changes, even past successes may later become inconsistent with evolving social mores and economic conditions, necessitating thoughtful introspection and, often, policy revision. The IA can do better than pick and choose from among existing policies based on unilateral advantage and a convenient repudiation of responsibility.

Netflix’s latest net neutrality hypocrisy (yes, there have been others. See here and here, for example) involves its long-term, undisclosed throttling of its video traffic on AT&T’s and Verizon’s wireless networks, while it lobbied heavily for net neutrality rules from the FCC that would prevent just such throttling by ISPs.

It was Netflix that coined the term “strong net neutrality,” in an effort to import interconnection (the connections between ISPs and edge provider networks) into the net neutrality fold. That alone was a bastardization of what net neutrality purportedly stood for, as I previously noted:

There is a reason every iteration of the FCC’s net neutrality rules, including the latest, have explicitly not applied to backbone interconnection agreements: Interconnection over the backbone has always been open and competitive, and it simply doesn’t give rise to the kind of discrimination concerns net neutrality is meant to address.

That Netflix would prefer not to pay for delivery of its content isn’t surprising. But net neutrality regulations don’t — and shouldn’t — have anything to do with it.

But Netflix did something else with “strong net neutrality.” It tied it to consumer choice:

This weak net neutrality isn’t enough to protect an open, competitive Internet; a stronger form of net neutrality is required. Strong net neutrality additionally prevents ISPs from charging a toll for interconnection to services like Netflix, YouTube, or Skype, or intermediaries such as Cogent, Akamai or Level 3, to deliver the services and data requested by ISP residential subscribers. Instead, they must provide sufficient access to their network without charge. (Emphasis added).

A focus on consumers is laudable, of course, but when the focus is on consumers there’s no reason to differentiate between ISPs (to whom net neutrality rules apply) and content providers entering into contracts with ISPs to deliver their content (to whom net neutrality rules don’t apply).

And Netflix has just showed us exactly why that’s the case.

Netflix can and does engage in management of its streams in order (presumably) to optimize consumer experience as users move between networks, devices and viewers (e.g., native apps vs Internet browser windows) with very different characteristics and limitations. That’s all well and good. But as we noted in our Policy Comments in the FCC’s Open Internet Order proceeding,

In this circumstance, particularly when the content in question is Netflix, with 30% of network traffic, both the network’s and the content provider’s transmission decisions may be determinative of network quality, as may the users’ device and application choices.

As a 2011 paper by a group of network engineers studying the network characteristics of video streaming data from Netflix and YouTube noted:

This is a concern as it means that a sudden change of application or container in a large population might have a significant impact on the network traffic. Considering the very fast changes in trends this is a real possibility, the most likely being a change from Flash to HTML5 along with an increase in the use of mobile devices…. [S]treaming videos at high resolutions can result in smoother aggregate traffic while at the same time linearly increase the aggregate data rate due to video streaming.

Again, a concern with consumers is admirable, but Netflix isn’t concerned with consumers. It’s concerned at most with consumers of Netflix, while they are consuming Netflix. But the reality is that Netflix’s content management decisions can adversely affect consumers overall, including its own subscribers when they aren’t watching Netflix.

And here’s the huge irony. The FCC’s net neutrality rules are tailor-made to guarantee that Netflix will never have any incentive to take these externalities into account in its own decisions. What’s more, they ensure that ISPs are severely hamstrung in managing their networks for the benefit of all consumers, not least because their interconnection deals with large content providers like Netflix are now being closely scrutinized.

It’s great that Netflix thinks it should manage its video delivery to optimize viewing under different network conditions. But net neutrality rules ensure that Netflix bears no cost for overwhelming the network in the process. Essentially, short of building new capacity — at great expense to all ISP subscribers, of course — ISPs can’t do much about it, either, under the rules. And, of course, the rules also make it impossible for ISPs to negotiate for financial help from Netflix (or its heaviest users) in paying for those upgrades.

On top of this, net neutrality advocates have taken aim at usage-based billing and other pricing practices that would help with the problem by enabling ISPs to charge their heaviest users more in order to alleviate the inherent subsidy by normal users that flat-rate billing entails. (Netflix itself, as one of the articles linked above discusses at length, is hypocritically inconsistent on this score).

As we also noted in our OIO Policy Comments:

The idea that consumers and competition generally are better off when content providers face no incentive to take account of congestion externalities in their pricing (or when users have no incentive to take account of their own usage) runs counter to basic economic logic and is unsupported by the evidence. In fact, contrary to such claims, usage-based pricing, congestion pricing and sponsored content, among other nonlinear pricing models, would, in many circumstances, further incentivize networks to expand capacity (not create artificial scarcity).

Some concern for consumers. Under Netflix’s approach consumers get it coming and going: Either their non-Netflix traffic is compromised for the sake of Netflix’s traffic, or they have to pay higher subscription fees to ISPs for the privilege of accommodating Netflix’s ever-expanding traffic loads (4K videos, anyone?) — whether they ever use Netflix or not.

Sometimes, apparently, Netflix throttles its own traffic in order to “help” a few consumers. (That it does so without disclosing the practice is pretty galling, especially given the enhanced transparency rules in the Open Internet Order — something Netflix also advocated for, and which also apply only to ISPs and not to content providers). But its self-aggrandizing advocacy for the FCC’s latest net neutrality rules reveals that its first priority is to screw over consumers, so long as it can shift the blame and the cost to others.

I received word today that Douglass North passed away yesterday at the age of 95 (obit here). Professor North shared the Nobel Prize in Economic with Robert Fogel in 1993 for his work in economic history on the role of institutions in shaping economic development and performance.

Doug was one of my first professors in graduate school at Washington University. Many of us in our first year crammed into Doug’s economic history class for fear that he might retire and we not get the chance to study under him. Little did we expect that he would continue teaching into his DoughNorth_color_300-doc80s. The text for our class was the pre-publication manuscript of his book, Institutions, Institutional Change and Economic Performance. Doug’s course offered an interesting juxtaposition to the traditional neoclassical microeconomics course for first-year PhD students. His work challenged the simplifying assumptions of the neoclassical system and shed a whole new light on understanding economic history, development and performance. I still remember that day in October 1993 when the department was abuzz with the announcement that Doug had received the Nobel Prize. It was affirming and inspiring.

As I started work on my dissertation, I had hoped to incorporate a historical component on the early development of crude oil futures trading in the 1930s so I could get Doug involved on my committee. Unfortunately, there was not enough information still available to provide any analysis (there was one news reference to a new crude futures exchange, but nothing more–and the historical records of the NY Mercantile Exchange had been lost in a fire).and I had to focus solely on the deregulatory period of the late 1970s and early 1980s. I remember joking at one of our economic history workshops that I wasn’t sure if it counted as economic history since it happened during Doug’s lifetime.

Doug was one of the founding conspirators for the International Society for New Institutional Economics (now the Society for Institutional & Organizational Economics) in 1997, along with Ronald Coase and Oliver Williamson. Although the three had strong differences of opinions concerning certain aspects of their respective theoretical approaches, they understood the generally complementary nature of their work and its importance not just for the economic profession, but for understanding how societies and organizations perform and evolve and the role institutions play in that process.

The opportunity to work around these individuals, particularly with North and Coase, strongly shaped and influenced my understanding not only of economics, but of why a broader perspective of economics is so important for understanding the world around us. That experience profoundly affected my own research interests and my teaching of economics. Some of Doug’s papers continue to play an important role in courses I teach on economic policy. Students, especially international students, continue to be inspired by his explanation of the roles of institutions, how they affect markets and societies, and the forces that lead to institutional change.

As we prepare to celebrate Thanksgiving in the States, Doug’s passing is a reminder of how much I have to be thankful for over my career. I’m grateful for having had the opportunity to know and to work with Doug. I’m grateful that we had an opportunity to bring him to Mizzou in 2003 for our CORI Seminar series, at which he spoke on Understanding the Process of Economic Change (the title of his next book at the time). And I’m especially thankful for the influence he had on my understanding of economics and that his ideas will continue to shape economic thinking and economic policy for years to come.

As the organizer of this retrospective on Josh Wright’s tenure as FTC Commissioner, I have the (self-conferred) honor of closing out the symposium.

When Josh was confirmed I wrote that:

The FTC will benefit enormously from Josh’s expertise and his error cost approach to antitrust and consumer protection law will be a tremendous asset to the Commission — particularly as it delves further into the regulation of data and privacy. His work is rigorous, empirically grounded, and ever-mindful of the complexities of both business and regulation…. The Commissioners and staff at the FTC will surely… profit from his time there.

Whether others at the Commission have really learned from Josh is an open question, but there’s no doubt that Josh offered an enormous amount from which they could learn. As Tim Muris said, Josh “did not disappoint, having one of the most important and memorable tenures of any non-Chair” at the agency.

Within a month of his arrival at the Commission, in fact, Josh “laid down the cost-benefit-analysis gauntlet” in a little-noticed concurring statement regarding a proposed amendment to the Hart-Scott-Rodino Rules. The technical details of the proposed rule don’t matter for these purposes, but, as Josh noted in his statement, the situation intended to be avoided by the rule had never arisen:

The proposed rulemaking appears to be a solution in search of a problem. The Federal Register notice states that the proposed rules are necessary to prevent the FTC and DOJ from “expend[ing] scarce resources on hypothetical transactions.” Yet, I have not to date been presented with evidence that any of the over 68,000 transactions notified under the HSR rules have required Commission resources to be allocated to a truly hypothetical transaction.

What Josh asked for in his statement was not that the rule be scrapped, but simply that, before adopting the rule, the FTC weigh its costs and benefits.

As I noted at the time:

[I]t is the Commission’s responsibility to ensure that the rules it enacts will actually be beneficial (it is a consumer protection agency, after all). The staff, presumably, did a perfectly fine job writing the rule they were asked to write. Josh’s point is simply that it isn’t clear the rule should be adopted because it isn’t clear that the benefits of doing so would outweigh the costs.

As essentially everyone who has contributed to this symposium has noted, Josh was singularly focused on the rigorous application of the deceptively simple concept that the FTC should ensure that the benefits of any rule or enforcement action it adopts outweigh the costs. The rest, as they say, is commentary.

For Josh, this basic principle should permeate every aspect of the agency, and permeate the way it thinks about everything it does. Only an entirely new mindset can ensure that outcomes, from the most significant enforcement actions to the most trivial rule amendments, actually serve consumers.

While the FTC has a strong tradition of incorporating economic analysis in its antitrust decision-making, its record in using economics in other areas is decidedly mixed, as Berin points out. But even in competition policy, the Commission frequently uses economics — but it’s not clear it entirely understands economics. The approach that others have lauded Josh for is powerful, but it’s also subtle.

Inherent limitations on anyone’s knowledge about the future of technology, business and social norms caution skepticism, as regulators attempt to predict whether any given business conduct will, on net, improve or harm consumer welfare. In fact, a host of factors suggests that even the best-intentioned regulators tend toward overconfidence and the erroneous condemnation of novel conduct that benefits consumers in ways that are difficult for regulators to understand. Coase’s famous admonition in a 1972 paper has been quoted here before (frequently), but bears quoting again:

If an economist finds something – a business practice of one sort or another – that he does not understand, he looks for a monopoly explanation. And as in this field we are very ignorant, the number of ununderstandable practices tends to be very large, and the reliance on a monopoly explanation, frequent.

Simply “knowing” economics, and knowing that it is important to antitrust enforcement, aren’t enough. Reliance on economic formulae and theoretical models alone — to say nothing of “evidence-based” analysis that doesn’t or can’t differentiate between probative and prejudicial facts — doesn’t resolve the key limitations on regulatory decisionmaking that threaten consumer welfare, particularly when it comes to the modern, innovative economy.

As Josh and I have written:

[O]ur theoretical knowledge cannot yet confidently predict the direction of the impact of additional product market competition on innovation, much less the magnitude. Additionally, the multi-dimensional nature of competition implies that the magnitude of these impacts will be important as innovation and other forms of competition will frequently be inversely correlated as they relate to consumer welfare. Thus, weighing the magnitudes of opposing effects will be essential to most policy decisions relating to innovation. Again, at this stage, economic theory does not provide a reliable basis for predicting the conditions under which welfare gains associated with greater product market competition resulting from some regulatory intervention will outweigh losses associated with reduced innovation.

* * *

In sum, the theoretical and empirical literature reveals an undeniably complex interaction between product market competition, patent rules, innovation, and consumer welfare. While these complexities are well understood, in our view, their implications for the debate about the appropriate scale and form of regulation of innovation are not.

Along the most important dimensions, while our knowledge has expanded since 1972, the problem has not disappeared — and it may only have magnified. As Tim Muris noted in 2005,

[A] visitor from Mars who reads only the mathematical IO literature could mistakenly conclude that the U.S. economy is rife with monopoly power…. [Meanwhile, Section 2’s] history has mostly been one of mistaken enforcement.

It may not sound like much, but what is needed, what Josh brought to the agency, and what turns out to be absolutely essential to getting it right, is unflagging awareness of and attention to the institutional, political and microeconomic relationships that shape regulatory institutions and regulatory outcomes.

Regulators must do their best to constantly grapple with uncertainty, problems of operationalizing useful theory, and, perhaps most important, the social losses associated with error costs. It is not (just) technicians that the FTC needs; it’s regulators imbued with the “Economic Way of Thinking.” In short, what is needed, and what Josh brought to the Commission, is humility — the belief that, as Coase also wrote, sometimes the best answer is to “do nothing at all.”

The technocratic model of regulation is inconsistent with the regulatory humility required in the face of fast-changing, unexpected — and immeasurably valuable — technological advance. As Virginia Postrel warns in The Future and Its Enemies:

Technocrats are “for the future,” but only if someone is in charge of making it turn out according to plan. They greet every new idea with a “yes, but,” followed by legislation, regulation, and litigation…. By design, technocrats pick winners, establish standards, and impose a single set of values on the future.

For Josh, the first JD/Econ PhD appointed to the FTC,

economics provides a framework to organize the way I think about issues beyond analyzing the competitive effects in a particular case, including, for example, rulemaking, the various policy issues facing the Commission, and how I weigh evidence relative to the burdens of proof and production. Almost all the decisions I make as a Commissioner are made through the lens of economics and marginal analysis because that is the way I have been taught to think.

A representative example will serve to illuminate the distinction between merely using economics and evidence and understanding them — and their limitations.

In his Nielson/Arbitron dissent Josh wrote:

The Commission thus challenges the proposed transaction based upon what must be acknowledged as a novel theory—that is, that the merger will substantially lessen competition in a market that does not today exist.

[W]e… do not know how the market will evolve, what other potential competitors might exist, and whether and to what extent these competitors might impose competitive constraints upon the parties.

Josh’s straightforward statement of the basis for restraint stands in marked contrast to the majority’s decision to impose antitrust-based limits on economic activity that hasn’t even yet been contemplated. Such conduct is directly at odds with a sensible, evidence-based approach to enforcement, and the economic problems with it are considerable, as Josh also notes:

[I]t is an exceedingly difficult task to predict the competitive effects of a transaction where there is insufficient evidence to reliably answer the[] basic questions upon which proper merger analysis is based.

When the Commission’s antitrust analysis comes unmoored from such fact-based inquiry, tethered tightly to robust economic theory, there is a more significant risk that non-economic considerations, intuition, and policy preferences influence the outcome of cases.

Compare in this regard Josh’s words about Nielsen with Deborah Feinstein’s defense of the majority from such charges:

The Commission based its decision not on crystal-ball gazing about what might happen, but on evidence from the merging firms about what they were doing and from customers about their expectations of those development plans. From this fact-based analysis, the Commission concluded that each company could be considered a likely future entrant, and that the elimination of the future offering of one would likely result in a lessening of competition.

Instead of requiring rigorous economic analysis of the facts, couched in an acute awareness of our necessary ignorance about the future, for Feinstein the FTC fulfilled its obligation in Nielsen by considering the “facts” alone (not economic evidence, mind you, but customer statements and expressions of intent by the parties) and then, at best, casually applying to them the simplistic, outdated structural presumption – the conclusion that increased concentration would lead inexorably to anticompetitive harm. Her implicit claim is that all the Commission needed to know about the future was what the parties thought about what they were doing and what (hardy disinterested) customers thought they were doing. This shouldn’t be nearly enough.

Worst of all, Nielsen was “decided” with a consent order. As Josh wrote, strongly reflecting the essential awareness of the broader institutional environment that he brought to the Commission:

[w]here the Commission has endorsed by way of consent a willingness to challenge transactions where it might not be able to meet its burden of proving harm to competition, and which therefore at best are competitively innocuous, the Commission’s actions may alter private parties’ behavior in a manner that does not enhance consumer welfare.

Obviously in this regard his successful effort to get the Commission to adopt a UMC enforcement policy statement is a most welcome development.

In short, Josh is to be applauded not because he brought economics to the Commission, but because he brought the economic way of thinking. Such a thing is entirely too rare in the modern administrative state. Josh’s tenure at the FTC was relatively short, but he used every moment of it to assiduously advance his singular, and essential, mission. And, to paraphrase the last line of the movie The Right Stuff (it helps to have the rousing film score playing in the background as you read this): “for a brief moment, [Josh Wright] became the greatest [regulator] anyone had ever seen.”

I would like to extend my thanks to everyone who participated in this symposium. The contributions here will stand as a fitting and lasting tribute to Josh and his legacy at the Commission. And, of course, I’d also like to thank Josh for a tenure at the FTC very much worth honoring.

Remember when net neutrality wasn’t going to involve rate regulation and it was crazy to say that it would? Or that it wouldn’t lead to regulation of edge providers? Or that it was only about the last mile and not interconnection? Well, if the early petitions and complaints are a preview of more to come, the Open Internet Order may end up having the FCC regulating rates for interconnection and extending the reach of its privacy rules to edge providers.

On Monday, Consumer Watchdog petitioned the FCC to not only apply Customer Proprietary Network Information (CPNI) rules originally meant for telephone companies to ISPs, but to also start a rulemaking to require edge providers to honor Do Not Track requests in order to “promote broadband deployment” under Section 706. Of course, we warned of this possibility in our joint ICLE-TechFreedom legal comments:

For instance, it is not clear why the FCC could not, through Section 706, mandate “network level” copyright enforcement schemes or the DNS blocking that was at the heart of the Stop Online Piracy Act (SOPA). . . Thus, it would appear that Section 706, as re-interpreted by the FCC, would, under the D.C. Circuit’s Verizon decision, allow the FCC sweeping power to regulate the Internet up to and including (but not beyond) the process of “communications” on end-user devices. This could include not only copyright regulation but everything from cybersecurity to privacy to technical standards. (emphasis added).

While the merits of Do Not Track are debatable, it is worth noting that privacy regulation can go too far and actually drastically change the Internet ecosystem. In fact, it is actually a plausible scenario that overregulating data collection online could lead to the greater use of paywalls to access content.  This may actually be a greater threat to Internet Openness than anything ISPs have done.

And then yesterday, the first complaint under the new Open Internet rule was brought against Time Warner Cable by a small streaming video company called Commercial Network Services. According to several news stories, CNS “plans to file a peering complaint against Time Warner Cable under the Federal Communications Commission’s new network-neutrality rules unless the company strikes a free peering deal ASAP.” In other words, CNS is asking for rate regulation for interconnectionshakespeare. Under the Open Internet Order, the FCC can rule on such complaints, but it can only rule on a case-by-case basis. Either TWC assents to free peering, or the FCC intervenes and sets the rate for them, or the FCC dismisses the complaint altogether and pushes such decisions down the road.

This was another predictable development that many critics of the Open Internet Order warned about: there was no way to really avoid rate regulation once the FCC reclassified ISPs. While the FCC could reject this complaint, it is clear that they have the ability to impose de facto rate regulation through case-by-case adjudication. Whether it is rate regulation according to Title II (which the FCC ostensibly didn’t do through forbearance) is beside the point. This will have the same practical economic effects and will be functionally indistinguishable if/when it occurs.

In sum, while neither of these actions were contemplated by the FCC (they claim), such abstract rules are going to lead to random complaints like these, and companies are going to have to use the “ask FCC permission” process to try to figure out beforehand whether they should be investing or whether they’re going to be slammed. As Geoff Manne said in Wired:

That’s right—this new regime, which credits itself with preserving “permissionless innovation,” just put a bullet in its head. It puts innovators on notice, and ensures that the FCC has the authority (if it holds up in court) to enforce its vague rule against whatever it finds objectionable.

I mean, I don’t wanna brag or nothin, but it seems to me that we critics have been right so far. The reclassification of broadband Internet service as Title II has had the (supposedly) unintended consequence of sweeping in far more (both in scope of application and rules) than was supposedly bargained for. Hopefully the FCC rejects the petition and the complaint and reverses this course before it breaks the Internet.