In a recent op-ed, Robert Bork Jr. laments the Biden administration’s drive to jettison the Consumer Welfare Standard that has formed nearly half a century of antitrust jurisprudence. The move can be seen in the near-revolution at the Federal Trade Commission, in the president’s executive order on competition enforcement, and in several of the major antitrust bills currently before Congress.
Bork is correct that it will be more than 80 companies, but it is likely to be way more. While the Klobuchar bill does not explicitly outlaw such mergers, under certain circumstances, it shifts the burden of proof to the merging parties, who must demonstrate that the benefits of the transaction outweigh the potential risks. Under current law, the burden is on the government to demonstrate the potential costs outweigh the potential benefits.
One of the measure’s specific triggers for this burden-shifting is if the acquiring party has a market capitalization, assets, or annual net revenue of more than $100 billion and seeks a merger or acquisition valued at $50 million or more. About 120 or more U.S. companies satisfy at least one of these conditions. The end of this post provides a list of publicly traded companies, according to Zacks’ stock screener, that would likely be subject to the shift in burden of proof.
If the goal is to go after Big Tech, the Klobuchar bill hits the mark. All of the FAANG companies—Facebook, Amazon, Apple, Netflix, and Alphabet (formerly known as Google)—satisfy one or more of the criteria. So do Microsoft and PayPal.
But even some smaller tech firms will be subject to the shift in burden of proof. Zoom and Square have market caps that would trigger under Klobuchar’s bill and Snap is hovering around $100 billion in market cap. Twitter and eBay, however, are well under any of the thresholds. Likewise, privately owned Advance Communications, owner of Reddit, would also likely fall short of any of the triggers.
Snapchat has a little more than 300 million monthly active users. Twitter and Reddit each have about 330 million monthly active users. Nevertheless, under the Klobuchar bill, Snapchat is presumed to have more market power than either Twitter or Reddit, simply because the market assigns a higher valuation to Snap.
But this bill is about more than Big Tech. Tesla, which sold its first car only 13 years ago, is now considered big enough that it will face the same antitrust scrutiny as the Big 3 automakers. Walmart, Costco, and Kroger would be subject to the shifted burden of proof, while Safeway and Publix would escape such scrutiny. An acquisition by U.S.-based Nike would be put under the microscope, but a similar acquisition by Germany’s Adidas would not fall under the Klobuchar bill’s thresholds.
Tesla accounts for less than 2% of the vehicles sold in the United States. I have no idea what Walmart, Costco, Kroger, or Nike’s market share is, or even what comprises “the” market these companies compete in. What we do know is that the U.S. Department of Justice and Federal Trade Commission excel at narrowly crafting market definitions so that just about any company can be defined as dominant.
So much of the recent interest in antitrust has focused on Big Tech. But even the biggest of Big Tech firms operate in dynamic and competitive markets. None of my four children use Facebook or Twitter. My wife and I don’t use Snapchat. We all use Netflix, but we also use Hulu, Disney+, HBO Max, YouTube, and Amazon Prime Video. None of these services have a monopoly on our eyeballs, our attention, or our pocketbooks.
The antitrust bills currently working their way through Congress abandon the long-standing balancing of pro- versus anti-competitive effects of mergers in favor of a “big is bad” approach. While the Klobuchar bill appears to provide clear guidance on the thresholds triggering a shift in the burden of proof, the arbitrary nature of the thresholds will result in arbitrary application of the burden of proof. If passed, we will soon be faced with a case in which two firms who differ only in market cap, assets, or sales will be subject to very different antitrust scrutiny, resulting in regulatory chaos.
Publicly traded companies with more than $100 billion in market capitalization
Deere & Co.
Eli Lilly and Co.
Philip Morris International
Procter & Gamble
Advanced Micro Devices
General Electric Co.
Johnson & Johnson
Bank of America
The Coca-Cola Co.
The Estée Lauder Cos.
The Home Depot
The Walt Disney Co.
Bristol Myers Squibb
Thermo Fisher Scientific
Merck & Co.
Union Pacific Corp.
Charles Schwab Corp.
United Parcel Service
Zoom Video Communications
Publicly traded companies with more than $100 billion in current assets
American International Group
Citizens Financial Group
PNC Financial Services
Regions Financial Corp.
Fifth Third Bank
State Street Corp.
First Republic Bank
Ford Motor Co.
Publicly traded companies with more than $100 billion in sales
This post is authored by Nicolas Petit himself, the Joint Chair in Competition Law at the Department of Law at European University Institute in Fiesole, Italy, and at EUI’s Robert Schuman Centre for Advanced Studies. He is also invited professor at the College of Europe in Bruges.]
A lot of water has gone under the bridge since my book was published last year. To close this symposium, I thought I would discuss the new phase of antirust statutorification taking place before our eyes. In the United States, Congress is working on five antitrust bills that propose to subject platforms to stringent obligations, including a ban on mergers and acquisitions, required data portability and interoperability, and line-of-business restrictions. In the European Union (EU), lawmakers are examining the proposed Digital Markets Act (“DMA”) that sets out a complicated regulatory system for digital “gatekeepers,” with per se behavioral limitations of their freedom over contractual terms, technological design, monetization, and ecosystem leadership.
Proponents of legislative reform on both sides of the Atlantic appear to share the common view that ongoing antitrust adjudication efforts are both instrumental and irrelevant. They are instrumental because government (or plaintiff) losses build the evidence needed to support the view that antitrust doctrine is exceedingly conservative, and that legal reform is needed. Two weeks ago, antitrust reform activists ran to Twitter to point out that the U.S. District Court dismissal of the Federal Trade Commission’s (FTC) complaint against Facebook was one more piece of evidence supporting the view that the antitrust pendulum needed to swing. They are instrumental because, again, government (or plaintiffs) wins will support scaling antitrust enforcement in the marginal case by adoption of governmental regulation. In the EU, antitrust cases follow each other almost like night the day, lending credence to the view that regulation will bring much needed coordination and economies of scale.
But both instrumentalities are, at the end of the line, irrelevant, because they lead to the same conclusion: legislative reform is long overdue. With this in mind, the logic of lawmakers is that they need not await the courts, and they can advance with haste and confidence toward the promulgation of new antitrust statutes.
The antitrust reform process that is unfolding is a cause for questioning. The issue is not legal reform in itself. There is no suggestion here that statutory reform is necessarily inferior, and no correlative reification of the judge-made-law method. Legislative intervention can occur for good reason, like when it breaks judicial inertia caused by ideological logjam.
The issue is rather one of precipitation. There is a lot of learning in the cases. The point, simply put, is that a supplementary court-legislative dialogue would yield additional information—or what Guido Calabresi has called “starting points” for regulation—that premature legislative intervention is sweeping under the rug. This issue is important because specification errors (see Doug Melamed’s symposium piece on this) in statutory legislation are not uncommon. Feedback from court cases create a factual record that will often be missing when lawmakers act too precipitously.
Moreover, a court-legislative iteration is useful when the issues in discussion are cross-cutting. The digital economy brings an abundance of them. As tech analysist Ben Evans has observed, data-sharing obligations raise tradeoffs between contestability and privacy. Chapter VI of my book shows that breakups of social networks or search engines might promote rivalry and, at the same time, increase the leverage of advertisers to extract more user data and conduct more targeted advertising. In such cases, Calabresi said, judges who know the legal topography are well-placed to elicit the preferences of society. He added that they are better placed than government agencies’ officials or delegated experts, who often attend to the immediate problem without the big picture in mind (all the more when officials are denied opportunities to engage with civil society and the press, as per the policy announced by the new FTC leadership).
Of course, there are three objections to this. The first consists of arguing that statutes are needed now because courts are too slow to deal with problems. The argument is not dissimilar to Frank Easterbrook’s concerns about irreversible harms to the economy, though with a tweak. Where Easterbook’s concern was one of ossification of Type I errors due to stare decisis, the concern here is one of entrenchment of durable monopoly power in the digital sector due to Type II errors. The concern, however, fails the test of evidence. The available data in both the United States and Europe shows unprecedented vitality in the digital sector. Venture capital funding cruises at historical heights, fueling new firm entry, business creation, and economic dynamism in the U.S. and EU digital sectors, topping all other industries. Unless we require higher levels of entry from digital markets than from other industries—or discount the social value of entry in the digital sector—this should give us reason to push pause on lawmaking efforts.
The second objection is that following an incremental process of updating the law through the courts creates intolerable uncertainty. But this objection, too, is unconvincing, at best. One may ask which of an abrupt legislative change of the law after decades of legal stability or of an experimental process of judicial renovation brings more uncertainty.
Besides, ad hoc statutes, such as the ones in discussion, are likely to pose quickly and dramatically the problem of their own legal obsolescence. Detailed and technical statutes specify rights, requirements, and procedures that often do not stand the test of time. For example, the DMA likely captures Windows as a core platform service subject to gatekeeping. But is the market power of Microsoft over Windows still relevant today, and isn’t it constrained in effect by existing antitrust rules? In antitrust, vagueness in critical statutory terms allows room for change. The best way to give meaning to buzzwords like “smart” or “future-proof” regulation consists of building in first principles, not in creating discretionary opportunities for permanent adaptation of the law. In reality, it is hard to see how the methods of future-proof regulation currently discussed in the EU creates less uncertainty than a court process.
The third objection is that we do not need more information, because we now benefit from economic knowledge showing that existing antitrust laws are too permissive of anticompetitive business conduct. But is the economic literature actually supportive of stricter rules against defendants than the rule-of-reason framework that applies in many unilateral conduct cases and in merger law? The answer is surely no. The theoretical economic literature has travelled a lot in the past 50 years. Of particular interest are works on network externalities, switching costs, and multi-sided markets. But the progress achieved in the economic understanding of markets is more descriptive than normative.
Take the celebrated multi-sided market theory. The main contribution of the theory is its advice to decision-makers to take the periscope out, so as to consider all possible welfare tradeoffs, not to be more or less defendant friendly. Payment cards provide a good example. Economic research suggests that any antitrust or regulatory intervention on prices affect tradeoffs between, and payoffs to, cardholders and merchants, cardholders and cash users, cardholders and banks, and banks and card systems. Equally numerous tradeoffs arise in many sectors of the digital economy, like ridesharing, targeted advertisement, or social networks. Multi-sided market theory renders these tradeoffs visible. But it does not come with a clear recipe for how to solve them. For that, one needs to follow first principles. A system of measurement that is flexible and welfare-based helps, as Kelly Fayne observed in her critical symposium piece on the book.
Another example might be worth considering. The theory of increasing returns suggests that markets subject to network effects tend to converge around the selection of a single technology standard, and it is not a given that the selected technology is the best one. One policy implication is that social planners might be justified in keeping a second option on the table. As I discuss in Chapter V of my book, the theory may support an M&A ban against platforms in tipped markets, on the conjecture that the assets of fringe firms might be efficiently repositioned to offer product differentiation to consumers. But the theory of increasing returns does not say under what conditions we can know that the selected technology is suboptimal. Moreover, if the selected technology is the optimal one, or if the suboptimal technology quickly obsolesces, are policy efforts at all needed?
Last, as Bo Heiden’s thought provoking symposium piece argues, it is not a given that antitrust enforcement of rivalry in markets is the best way to maintain an alternative technology alive, let alone to supply the innovation needed to deliver economic prosperity. Government procurement, science and technology policy, and intellectual-property policy might be equally effective (note that the fathers of the theory, like Brian Arthur or Paul David, have been very silent on antitrust reform).
There are, of course, exceptions to the limited normative content of modern economic theory. In some areas, economic theory is more predictive of consumer harms, like in relation to algorithmic collusion, interlocking directorates, or “killer” acquisitions. But the applications are discrete and industry-specific. All are insufficient to declare that the antitrust apparatus is dated and that it requires a full overhaul. When modern economic research turns normative, it is often way more subtle in its implications than some wild policy claims derived from it. For example, the emerging studies that claim to identify broad patterns of rising market power in the economy in no way lead to an implication that there are no pro-competitive mergers.
Similarly, the empirical picture of digital markets is incomplete. The past few years have seen a proliferation of qualitative research reports on industry structure in the digital sectors. Most suggest that industry concentration has risen, particularly in the digital sector. As with any research exercise, these reports’ findings deserve to be subject to critical examination before they can be deemed supportive of a claim of “sufficient experience.” Moreover, there is no reason to subject these reports to a lower standard of accountability on grounds that they have often been drafted by experts upon demand from antitrust agencies. After all, we academics are ethically obliged to be at least equally exacting with policy-based research as we are with science-based research.
Now, with healthy skepticism at the back of one’s mind, one can see immediately that the findings of expert reports to date have tended to downplay behavioral observations that counterbalance findings of monopoly power—such as intense business anxiety, technological innovation, and demand-expansion investments in digital markets. This was, I believe, the main takeaway from Chapter IV of my book. And less than six months ago, The Economist ran its leading story on the new marketplace reality of “Tech’s Big Dust-Up.”
Similarly, the expert reports did not really question the real possibility of competition for the purchase of regulation. As in the classic George Stigler paper, where the railroad industry fought motor-trucking competition with state regulation, the businesses that stand to lose most from the digital transformation might be rationally jockeying to convince lawmakers that not all business models are equal, and to steer regulation toward specific business models. Again, though we do not know how to consider this issue, there are signs that a coalition of large news corporations and the publishing oligopoly are behind many antitrust initiatives against digital firms.
Now, as is now clear from these few lines, my cautionary note against antitrust statutorification might be more relevant to the U.S. market. In the EU, sunk investments have been made, expectations have been created, and regulation has now become inevitable. The United States, however, has a chance to get this right. Court cases are the way to go. And unlike what the popular coverage suggests, the recent District Court dismissal of the FTC case far from ruled out the applicability of U.S. antitrust laws to Facebook’s alleged killer acquisitions. On the contrary, the ruling actually contains an invitation to rework a rushed complaint. Perhaps, as Shane Greenstein observed in his retrospective analysis of the U.S. Microsoft case, we would all benefit if we studied more carefully the learning that lies in the cases, rather than haste to produce instant antitrust analysis on Twitter that fits within 280 characters.
 But some threshold conditions like agreement or dominance might also become dated.
From Sen. Elizabeth Warren (D-Mass.) to Sen. Josh Hawley (R-Mo.), populist calls to “fix” our antitrust laws and the underlying Consumer Welfare Standard have found a foothold on Capitol Hill. At the same time, there are calls to “fix” the Supreme Court by packing it with new justices. The court’s unanimous decision in NCAA v. Alston demonstrates that neither needs repair. To the contrary, clearly anti-competitive conduct—like the NCAA’s compensation rules—is proscribed under the Consumer Welfare Standard, and every justice from Samuel Alito to Sonia Sotomayor can agree on that.
In 1984, the court in NCAA v. Board of Regents suggested that “courts should take care when assessing the NCAA’s restraints on student-athlete compensation.” After all, joint ventures like sports leagues are entitled to rule-of-reason treatment. But while times change, the Consumer Welfare Standard is sufficiently flexible to meet those changes.
Where a competitive restraint exists primarily to ensure that “enormous sums of money flow to seemingly everyone except the student athletes,” the court rightly calls it out for what it is. As Associate Justice Brett Kavanaugh wrote in his concurrence:
Nowhere else in America can businesses get away with agreeing not to pay their workers a fair market rate on the theory that their product is defined by not paying their workers a fair market rate. And under ordinary principles of antitrust law, it is not evident why college sports should be any different. The NCAA is not above the law.
Disturbing these “ordinary principles”—whether through legislation, administrative rulemaking, or the common law—is simply unnecessary. For example, the Open Markets Institute filed an amicus brief arguing that the rule of reason should be “bounded” and willfully blind to the pro-competitive benefits some joint ventures can create (an argument that has been used, unsuccessfully, to attack ridesharing services like Uber and Lyft). Sen. Amy Klobuchar (D-Minn.) has proposed shifting the burden of proof so that merging parties are guilty until proven innocent. Sen. Warren would go further, deeming Amazon’s acquisition of Whole Foods anti-competitive simply because the company is “big,” and ignoring the merger’s myriad pro-competitive benefits. Sen. Hawley has gone further still: calling on Amazon to be investigated criminally for the crime of being innovative and successful.
Several of the current proposals, including those from Sens. Klobuchar and Hawley (and those recently introduced in the House that essentially single out firms for disfavored treatment), would replace the Consumer Welfare Standard that has underpinned antitrust law for decades with a policy that effectively punishes firms for being politically unpopular.
These examples demonstrate we should be wary when those in power assert that things are so irreparably broken that they need a complete overhaul. The “solutions” peddled usually increase politicians’ power by enabling them to pick winners and losers through top-down approaches that stifle the bottom-up innovations that make consumers’ lives better.
Are antitrust law and the Supreme Court perfect? Hardly. But in a 9-0 decision, the court proved this week that there’s nothing broken about either.
In what has become regularly scheduled programming on Capitol Hill, Facebook CEO Mark Zuckerberg, Twitter CEO Jack Dorsey, and Google CEO Sundar Pichai will be subject to yet another round of congressional grilling—this time, about the platforms’ content-moderation policies—during a March 25 joint hearing of two subcommittees of the House Energy and Commerce Committee.
The stated purpose of this latest bit of political theatre is to explore, as made explicit in the hearing’s title, “social media’s role in promoting extremism and misinformation.” Specific topics are expected to include proposed changes to Section 230 of the Communications Decency Act, heightened scrutiny by the Federal Trade Commission, and misinformation about COVID-19—the subject of new legislation introduced by Rep. Jennifer Wexton (D-Va.) and Sen. Mazie Hirono (D-Hawaii).
But while many in the Democratic majority argue that social media companies have not done enough to moderate misinformation or hate speech, it is a problem with no realistic legal fix. Any attempt to mandate removal of speech on grounds that it is misinformation or hate speech, either directly or indirectly, would run afoul of the First Amendment.
Misinformation Is Usually Legal
Much of the recent focus has been on misinformation spread on social media about the 2020 election and the COVID-19 pandemic. The memorandum for the March 25 hearing sums it up:
Facebook, Google, and Twitter have long come under fire for their role in the dissemination and amplification of misinformation and extremist content. For instance, since the beginning of the coronavirus disease of 2019 (COVID-19) pandemic, all three platforms have spread substantial amounts of misinformation about COVID-19. At the outset of the COVID-19 pandemic, disinformation regarding the severity of the virus and the effectiveness of alleged cures for COVID-19 was widespread. More recently, COVID-19 disinformation has misrepresented the safety and efficacy of COVID-19 vaccines.
Facebook, Google, and Twitter have also been distributors for years of election disinformation that appeared to be intended either to improperly influence or undermine the outcomes of free and fair elections. During the November 2016 election, social media platforms were used by foreign governments to disseminate information to manipulate public opinion. This trend continued during and after the November 2020 election, often fomented by domestic actors, with rampant disinformation about voter fraud, defective voting machines, and premature declarations of victory.
It is true that, despite social media companies’ efforts to label and remove false content and bar some of the biggest purveyors, there remains a considerable volume of false information on social media. But U.S. Supreme Court precedent consistently has limited government regulation of false speech to distinct categories like defamation, perjury, and fraud.
The Case of Stolen Valor
The court’s 2011 decision in United States v. Alvarez struck down as unconstitutional the Stolen Valor Act of 2005, which made it a federal crime to falsely claim to have earned a military medal. A four-justice plurality opinion written by Justice Anthony Kennedy, along with a two-justice concurrence, both agreed that a statement being false did not, by itself, exclude it from First Amendment protection.
Kennedy’s opinion noted that while the government may impose penalties for false speech connected with the legal process (perjury or impersonating a government official); with receiving a benefit (fraud); or with harming someone’s reputation (defamation); the First Amendment does not sanction penalties for false speech, in and of itself. The plurality exhibited particular skepticism toward the notion that government actors could be entrusted as a “Ministry of Truth,” empowered to determine what categories of false speech should be made illegal:
Permitting the government to decree this speech to be a criminal offense, whether shouted from the rooftops or made in a barely audible whisper, would endorse government authority to compile a list of subjects about which false statements are punishable. That governmental power has no clear limiting principle. Our constitutional tradition stands against the idea that we need Oceania’s Ministry of Truth… Were this law to be sustained, there could be an endless list of subjects the National Government or the States could single out… Were the Court to hold that the interest in truthful discourse alone is sufficient to sustain a ban on speech, absent any evidence that the speech was used to gain a material advantage, it would give government a broad censorial power unprecedented in this Court’s cases or in our constitutional tradition. The mere potential for the exercise of that power casts a chill, a chill the First Amendment cannot permit if free speech, thought, and discourse are to remain a foundation of our freedom. [EMPHASIS ADDED]
As noted in the opinion, declaring false speech illegal constitutes a content-based restriction subject to “exacting scrutiny.” Applying that standard, the court found “the link between the Government’s interest in protecting the integrity of the military honors system and the Act’s restriction on the false claims of liars like respondent has not been shown.”
While finding that the government “has not shown, and cannot show, why counterspeech would not suffice to achieve its interest,” the plurality suggested a more narrowly tailored solution could be simply to publish Medal of Honor recipients in an online database. In other words, the government could overcome the problem of false speech by promoting true speech.
In 2012, President Barack Obama signed an updated version of the Stolen Valor Act that limited its penalties to situations where a misrepresentation is shown to result in receipt of some kind of benefit. That places the false speech in the category of fraud, consistent with the Alvarez opinion.
A Social Media Ministry of Truth
Applying the Alvarez standard to social media, the government could (and already does) promote its interest in public health or election integrity by publishing true speech through official channels. But there is little reason to believe the government at any level could regulate access to misinformation. Anything approaching an outright ban on accessing speech deemed false by the government not only would not be the most narrowly tailored way to deal with such speech, but it is bound to have chilling effects even on true speech.
The analysis doesn’t change if the government instead places Big Tech itself in the position of Ministry of Truth. Some propose making changes to Section 230, which currently immunizes social media companies from liability for user speech (with limited exceptions), regardless what moderation policies the platform adopts. A hypothetical change might condition Section 230’s liability shield on platforms agreeing to moderate certain categories of misinformation. But that would still place the government in the position of coercing platforms to take down speech.
Even the “fix” of making social media companies liable for user speech they amplify through promotions on the platform, as proposed by Sen. Mark Warner’s (D-Va.) SAFE TECH Act, runs into First Amendment concerns. The aim of the bill is to regard sponsored content as constituting speech made by the platform, thus opening the platform to liability for the underlying misinformation. But any such liability also would be limited to categories of speech that fall outside First Amendment protection, like fraud or defamation. This would not appear to include most of the types of misinformation on COVID-19 or election security that animate the current legislative push.
There is no way for the government to regulate misinformation, in and of itself, consistent with the First Amendment. Big Tech companies are free to develop their own policies against misinformation, but the government may not force them to do so.
Extremely Limited Room to Regulate Extremism
The Big Tech CEOs are also almost certain to be grilled about the use of social media to spread “hate speech” or “extremist content.” The memorandum for the March 25 hearing sums it up like this:
Facebook executives were repeatedly warned that extremist content was thriving on their platform, and that Facebook’s own algorithms and recommendation tools were responsible for the appeal of extremist groups and divisive content. Similarly, since 2015, videos from extremists have proliferated on YouTube; and YouTube’s algorithm often guides users from more innocuous or alternative content to more fringe channels and videos. Twitter has been criticized for being slow to stop white nationalists from organizing, fundraising, recruiting and spreading propaganda on Twitter.
Social media has often played host to racist, sexist, and other types of vile speech. While social media companies have community standards and other policies that restrict “hate speech” in some circumstances, there is demand from some public officials that they do more. But under a First Amendment analysis, regulating hate speech on social media would fare no better than the regulation of misinformation.
The First Amendment doesn’t allow for the regulation of “hate speech” as its own distinct category. Hate speech is, in fact, as protected as any other type of speech. There are some limited exceptions, as the First Amendment does not protect incitement, true threats of violence, or “fighting words.” Some of these flatly do not apply in the online context. “Fighting words,” for instance, applies only in face-to-face situations to “those personally abusive epithets which, when addressed to the ordinary citizen, are, as a matter of common knowledge, inherently likely to provoke violent reaction.”
One relevant precedent is the court’s 1992 decision in R.A.V. v. St. Paul, which considered a local ordinance in St. Paul, Minnesota, prohibiting public expressions that served to cause “outrage, alarm, or anger with respect to racial, gender or religious intolerance.” A juvenile was charged with violating the ordinance when he created a makeshift cross and lit it on fire in front of a black family’s home. The court unanimously struck down the ordinance as a violation of the First Amendment, finding it an impermissible content-based restraint that was not limited to incitement or true threats.
By contrast, in 2003’s Virginia v. Black, the Supreme Court upheld a Virginia law outlawing cross burnings done with the intent to intimidate. The court’s opinion distinguished R.A.V. on grounds that the Virginia statute didn’t single out speech regarding disfavored topics. Instead, it was aimed at speech that had the intent to intimidate regardless of the victim’s race, gender, religion, or other characteristic. But the court was careful to limit government regulation of hate speech to instances that involve true threats or incitement.
When it comes to incitement, the legal standard was set by the court’s landmark Brandenberg v. Ohiodecision in 1969, which laid out that:
the constitutional guarantees of free speech and free press do not permit a State to forbid or proscribe advocacy of the use of force or of law violation except where such advocacy is directed to inciting or producing imminent lawless action and is likely to incite or produce such action. [EMPHASIS ADDED]
In other words, while “hate speech” is protected by the First Amendment, specific types of speech that convey true threats or fit under the related doctrine of incitement are not. The government may regulate those types of speech. And they do. In fact, social media users can be, and often are, charged with crimes for threats made online. But the government can’t issue a per se ban on hate speech or “extremist content.”
Just as with misinformation, the government also can’t condition Section 230 immunity on platforms removing hate speech. Insofar as speech is protected under the First Amendment, the government can’t specifically condition a government benefit on its removal. Even the SAFE TECH Act’s model for holding platforms accountable for amplifying hate speech or extremist content would have to be limited to speech that amounts to true threats or incitement. This is a far narrower category of hateful speech than the examples that concern legislators.
Social media companies do remain free under the law to moderate hateful content as they see fit under their terms of service. Section 230 immunity is not dependent on whether companies do or don’t moderate such content, or on how they define hate speech. But government efforts to step in and define hate speech would likely run into First Amendment problems unless they stay focused on unprotected threats and incitement.
What Can the Government Do?
One may fairly ask what it is that governments can do to combat misinformation and hate speech online. The answer may be a law that requires takedowns by court order of speech after it is declared illegal, as proposed by the PACT Act, sponsored in the last session by Sens. Brian Schatz (D-Hawaii) and John Thune (R-S.D.). Such speech may, in some circumstances, include misinformation or hate speech.
But as outlined above, the misinformation that the government can regulate is limited to situations like fraud or defamation, while the hate speech it can regulate is limited to true threats and incitement. A narrowly tailored law that looked to address those specific categories may or may not be a good idea, but it would likely survive First Amendment scrutiny, and may even prove a productive line of discussion with the tech CEOs.
[TOTM: The following is part of a digital symposium by TOTM guests and authors on the legal and regulatory issues that arose during Ajit Pai’s tenure as chairman of the Federal Communications Commission. The entire series of posts is available here.
Daniel Lyons is a professor of law at Boston College Law School and a visiting fellow at the American Enterprise Institute.]
For many, the chairmanship of Ajit Pai is notable for its many headline-grabbing substantive achievements, including the Restoring Internet Freedom order, 5G deployment, and rural buildout—many of which have been or will be discussed in this symposium. But that conversation is incomplete without also acknowledging Pai’s careful attention to the basic blocking and tackling of running a telecom agency. The last four years at the Federal Communications Commission were marked by small but significant improvements in how the commission functions, and few are more important than the chairman’s commitment to transparency.
Draft Orders: The Dark Ages Before 2017
This commitment is most notable in Pai’s revisions to the open meeting process. From time immemorial, the FCC chairman would set the agenda for the agency’s monthly meeting by circulating draft orders to the other commissioners three weeks in advance. But the public was deliberately excluded from that distribution list. During this period, the commissioners would read proposals, negotiate revisions behind the scenes, then meet publicly to vote on final agency action. But only after the meeting—often several days later—would the actual text of the order be made public.
The opacity of this process had several adverse consequences. Most obviously, the public lacked details about the substance of the commission’s deliberations. The Government in the Sunshine Act requires the agency’s meetings to be made public so the American people know what their government is doing. But without the text of the orders under consideration, the public had only a superficial understanding of what was happening each month. The process was reminiscent of House Speaker Nancy Pelosi’s famous gaffe that Congress needed to “pass the [Affordable Care Act] bill so that you can find out what’s in it.” During the high-profile deliberations over the Open Internet Order in 2015, then-Commissioner Pai made significant hay over this secrecy, repeatedlyposting pictures of himself with the 300-plus-page order on Twitter with captions such as “I wish the public could see what’s inside” and “the public still can’t see it.”
Other consequences were less apparent, but more detrimental. Because the public lacked detail about key initiatives, the telecom media cycle could be manipulated by strategic leaks designed to shape the final vote. As then-Commissioner Pai testified to Congress in 2016:
[T]he public gets to see only what the Chairman’s Office deigns to release, so controversial policy proposals can be (and typically are) hidden in a wave of media adulation. That happened just last month when the agency proposed changes to its set-top-box rules but tried to mislead content producers and the public about whether set-top box manufacturers would be permitted to insert their own advertisements into programming streams.
Sometimes, this secrecy backfired on the chairman, such as when net-neutrality advocates used media pressure to shape the 2014 Open Internet NPRM. Then-Chairman Tom Wheeler’s proposed order sought to follow the roadmap laid out by the D.C. Circuit’s Verizon decision, which relied on Title I to prevent ISPs from blocking content or acting in a “commercially unreasonable manner.” Proponents of a more aggressive Title II approach leaked these details to the media in a negative light, prompting tech journalists and advocates to unleash a wave of criticism alleging the chairman was “killing off net neutrality to…let the big broadband providers double charge.” In full damage control mode, Wheeler attempted to “set the record straight” about “a great deal of misinformation that has recently surfaced regarding” the draft order. But the tempest created by these leaks continued, pressuring Wheeler into adding a Title II option to the NPRM—which, of course, became the basis of the 2015 final rule.
This secrecy also harmed agency bipartisanship, as minority commissioners sometimes felt as much in the dark as the general public. As Wheeler scrambled to address Title II advocates’ concerns, he reportedly shared revised drafts with fellow Democrats but did not circulate the final draft to Republicans until less than 48 hours before the vote—leading Pai to remark cheekily that “when it comes to the Chairman’s latest net neutrality proposal, the Democratic Commissioners are in the fast lane and the Republican Commissioners apparently are being throttled.” Similarly, Pai complained during the 2014 spectrum screen proceeding that “I was not provided a final version of the item until 11:50 p.m. the night before the vote and it was a substantially different document with substantively revised reasoning than the one that was previously circulated.”
Letting the Sunshine In
Eliminating this culture of secrecy was one of Pai’s first decisions as chairman. Less than a month after assuming the reins at the agency, he announced that the FCC would publish all draft items at the same time they are circulated to commissioners, typically three weeks before each monthly meeting. While this move was largely applauded, some were concerned that this transparency would hamper the agency’s operations. One critic suggested that pre-meeting publication would hamper negotiations among commissioners: “Usually, drafts created negotiating room…Now the chairman’s negotiating position looks like a final position, which undercuts negotiating ability.” Another, while supportive of the change, was concerned that the need to put a draft order in final form well before a meeting might add “a month or more to the FCC’s rulemaking adoption process.”
Fortunately, these concerns proved to be unfounded. The Pai era proved to be the most productive in recent memory, averaging just over six items per month, which is double the average number under Pai’s immediate predecessors. Moreover, deliberations were more bipartisan than in years past: Nathan Leamer notes that 61.4% of the items adopted by the Pai FCC were unanimous and 92.1% were bipartisan—compared to 33% and 69.9%, respectively, under Chairman Wheeler.
This increased transparency also improved the overall quality of the agency’s work product. In a 2018 speech before the Free State Foundation, Commissioner Mike O’Rielly explained that “drafts are now more complete and more polished prior to the public reveal, so edits prior to the meeting are coming from Commissioners, as opposed to there being last minute changes—or rewrites—from staff or the Office of General Counsel.” Publishing draft orders in advance allows the public to flag potential issues for revision before the meeting, which improves the quality of the final draft and reduces the risk of successful post-meeting challenges via motions for reconsideration or petitions for judicial review. O’Rielly went on to note that the agency seemed to be running more efficiently as well, as “[m]eetings are targeted to specific issues, unnecessary discussions of non-existent issues have been eliminated, [and] conversations are more productive.”
While pre-meeting publication was the most visible improvement to agency transparency, there are other initiatives also worth mentioning.
Limiting Editorial Privileges: Chairman Pai dramatically limited “editorial privileges,” a longtime tradition that allowed agency staff to make changes to an order’s text even after the final vote. Under Pai, editorial privileges were limited to technical and conforming edits only; substantive changes were not permitted unless they were proposed directly by a commissioner and only in response to new arguments offered by a dissenting commissioner. This reduces the likelihood of a significant change being introduced outside the public eye.
Fact Sheet: Adopting a suggestion of Commissioner Mignon Clyburn, Pai made it a practice to preface each published draft order with a one-page fact sheet that summarized the item in lay terms, as much as possible. This made the agency’s monthly work more accessible and transparent to members of the public who lacked the time to wade through the full text of each draft order.
Online Transparency Dashboard: Pai also launched an online dashboard on the agency’s website. This dashboard offers metrics on the number of items currently pending at the commission by category, as well as quarterly trends over time.
Restricting Comment on Upcoming Items: As a gesture of respect to fellow commissioners, Pai committed that the chairman’s office would not brief the press or members of the public, or publish a blog, about an upcoming matter before it was shared with other commissioners. This was another step toward reducing the strategic use of leaks or selective access to guide the tech media news cycle.
And while it’s technically not a transparency reform, Pai also deserves credit for his willingness to engage the public as the face of the agency. He was the first FCC commissioner to join Twitter, and throughout his chairmanship he maintained an active social media presence that helped personalize the agency and make it more accessible. His commitment to this channel is all the more impressive when one considers the way some opponents used these platforms to hurl a steady stream of hateful, often violent and racist invective at him during his tenure.
Pai deserves tremendous credit for spearheading these efforts to bring the agency out of the shadows and into the sunlight. Of course, he was not working alone. Pai shares credit with other commissioners and staff who supported transparency and worked to bring these policies to fruition, most notably former Commissioner O’Rielly, who beat a steady drum for process reform throughout his tenure.
We do not yet know who President Joe Biden will appoint as Pai’s successor. It is fair to assume that whomever is chosen will seek to put his or her own stamp on the agency. But let’s hope that enhanced transparency and the other process reforms enacted over the past four years remain a staple of agency practice moving forward. They may not be flashy, but they may prove to be the most significant and long-lasting impact of the Pai chairmanship.
[TOTM: The following is part of a digital symposium by TOTM guests and authors on the legal and regulatory issues that arose during Ajit Pai’s tenure as chairman of the Federal Communications Commission. The entire series of posts is available here.
Brent Skorup is a senior research fellow at the Mercatus Center at George Mason University.]
Ajit Pai came into the Federal Communications Commission chairmanship with a single priority: to improve the coverage, cost, and competitiveness of U.S. broadband for the benefit of consumers. The 5G Fast Plan, the formation of the Broadband Deployment Advisory Committee, the large spectrum auctions, and other broadband infrastructure initiatives over the past four years have resulted in accelerated buildouts and higher-quality services. Millions more Americans have gotten connected because of agency action and industry investment.
That brings us to Chairman Pai’s most important action: restoring the deregulatory stance of the FCC toward broadband services and repealing the Title II “net neutrality” rules in 2018. Had he not done this, his and future FCCs would have been bogged down in inscrutable, never-ending net neutrality debates, reminiscent of the Fairness Doctrine disputes that consumed the agency 50 years ago. By doing that, he cleared the decks for the pro-deployment policies that followed and redirected the agency away from its roots in mass-media policy toward a future where the agency’s primary responsibilities are encouraging broadband deployment and adoption.
It took tremendous courage from Chairman Pai and Commissioners Michael O’Rielly and Brendan Carr to vote to repeal the 2015 Title II regulations, though they probably weren’t prepared for the public reaction to a seemingly arcane dispute over regulatory classification. The hysteria ginned up by net-neutrality advocates, members of Congress, celebrities, and too-credulous journalists was unlike anything I’ve seen in political advocacy. Advocates, of course, don’t intend to provoke disturbed individuals but the irresponsible predictions of “the end of the internet as we know it” and widespread internet service provider (ISP) content blocking drove one man to call in a bomb threat to the FCC, clearing the building in a desperate attempt to delay or derail the FCC’s Title II repeal. At least two othermen pleaded guilty to federal charges after issuing vicious death threats to Chairman Pai, a New York congressman, and their families in the run-up to the regulation’s repeal. No public official should have to face anything resembling that over a policy dispute.
For all the furor, net-neutrality advocates promised a neutral internet that never was and never will be. ”Happy little bunny rabbit dreams” is how David Clark of MIT, an early chief protocol architect of the internet, derided the idea of treating all online traffic the same. Relatedly, the no-blocking rule—the sine na qua of net neutrality—was always a legally dubious requirement. Legal scholars for years had called into doubt the constitutionality of imposing must-carry requirements on ISPs. Unsurprisingly, a federal appellate judge pressed this point in oral arguments defending the net neutrality rules in 2016. The Obama FCC attorney conceded without a fight; even after the net neutrality order, ISPs were “absolutely” free to curate the internet.
Chairman Pai recognized that the fight wasn’t about website blocking and it wasn’t, strictly speaking, about net neutrality. This was the latest front in the long battle over whether the FCC should strictly regulate mass-media distribution. There is a long tradition of progressive distrust of new (unregulated) media. The media access movement that pushed for broadcast TV and radio and cable regulations from the 1960s to 1980s never went away, but the terminology has changed: disinformation, net neutrality, hate speech, gatekeeper.
The decline in power of regulated media—broadcast radio and TV—and the rising power of unregulated internet-based media—social media, Netflix, and podcasts—meant that the FCC and Congress had few ways to shape American news and media consumption. In the words of Tim Wu, the law professor who coined the term “net neutrality,” the internet rules are about giving the agency the continuing ability to shape “media policy, social policy, oversight of the political process, [and] issues of free speech.”
Title II was the only tool available to bring this powerful new media—broadband access—under intense regulatory scrutiny by regulators and the political class. As net-neutrality advocate and Public Knowledge CEO Gene Kimmelman has said, the 2015 Order was about threatening the industry with vague but severe rules: “Legal risk and some ambiguity around what practices will be deemed ‘unreasonably discriminatory’ have been effective tools to instill fear for the last 20 years” for the telecom industry. Internet regulation advocates, he said at the time, “have to have fight after fight over every claim of discrimination, of new service or not.”
Chairman Pai and the Republican commissioners recognized the threat that Title II posed, not only to free speech, but to the FCC’s goals of expanding telecommunications services and competition. Net neutrality would draw the agency into contentious mass-media regulation once again, distracting it from universal service efforts, spectrum access and auctions, and cleaning up the regulatory detritus that had slowly accumulated since the passage of the agency’s guiding statutes: the 1934 Communications Act and the 1996 Telecommunications Act.
There are probably items that Chairman Pai wish he’d finished or had done slightly differently. He’s left a proud legacy, however, and his politically risky decision to repeal the Title II rules redirected agency energies away from no-win net-neutrality battles and toward broadband deployment and infrastructure. Great progress was made and one hopes the Biden FCC chairperson will continue that trajectory that Pai set.
[TOTM: The following is part of a digital symposium by TOTM guests and authors on the legal and regulatory issues that arose during Ajit Pai’s tenure as chairman of the Federal Communications Commission. The entire series of posts is available here.
Mark Jamison is the Gerald L. Gunter Memorial Professor and director of the Public Utility Research Center at the University of Florida’s Warrington College of Business. He’s also a visiting scholar at the American Enterprise Institute.]
Chairman Ajit Pai will be remembered as one of the most consequential Federal Communications Commission chairmen in history. His policy accomplishments are numerous, including the repeal of Title II regulation of the internet, rural broadband development, increased spectrum for 5G, decreasing waste in universal service funding, and better controlling robocalls.
Less will be said about the important work he has done rebuilding the FCC’s independence. It is rare for a new FCC chairman to devote resources to building the institution. Most focus on their policy agendas, because policies and regulations make up their legacies that the media notices, and because time and resources are limited. Chairman Pai did what few have even attempted to do: both build the organization and make significant regulatory reforms.
Independence is the ability of a regulatory institution to operate at arm’s length from the special interests of industry, politicians, and the like. The pressures to bias actions to benefit favored stakeholders can be tremendous; the FCC greatly influences who gets how much of the billions of dollars that are at stake in FCC decisions. But resisting those pressures is critical because investment and services suffer when a weak FCC is directed by political winds or industry pressures rather than law and hard analysis.
Chairman Pai inherited a politicized FCC. Research by Scott Wallsten showed that commission votes had been unusually partisan under the previous chairman (November 2013 through January 2017). From the beginning of Reed Hundt’s term as chairman until November 2013, only 4% of commission votes had divided along party lines. By contrast, 26% of votes divided along party lines from November 2013 until Chairman Pai took over. This division was also reflected in a sharp decline in unanimous votes under the previous administration. Only 47% of FCC votes on orders were unanimous, as opposed to an average of 60% from Hundt through the brief term of Mignon Clyburn.
Chairman Pai and his fellow commissioners worked to heal this divide. According to the FCC’s data, under Chairman Pai, over 80% of items on the monthly meeting agenda had bipartisan support and over 70% were adopted without dissent. This was hard, as Democrats in general were deeply against President Donald Trump and some members of Congress found a divided FCC convenient.
The political orientation of the FCC prior to Chairman Pai was made clear in the management of controversial issues. The agency’s work on net neutrality in 2015 pivoted strongly toward heavy regulation when President Barack Obama released his video supporting Title II regulation of the internet. And there is evidence that the net-neutrality decision was made in the White House, not at the FCC. Agency economists were cut out of internal discussions once the political decision had been made to side with the president, causing the FCC’s chief economist to quip that the decision was an economics-free zone.
On other issues, a vote on Lifeline was delayed several hours so that people on Capitol Hill could lobby a Democratic commissioner to align with fellow Democrats and against the Republican commissioners. And an initiative to regulate set-top boxes was buoyed, not by analyses by FCC staff, but by faulty data and analyses from Democratic senators.
Chairman Pai recognized the danger of politically driven decision-making and noted that it was enabled in part by the agency’s lack of a champion for economic analyses. To remedy this situation, Chairman Pai proposed forming an Office of Economics and Analytics (OEA). The commission adopted his proposal, but unfortunately it was with one of the rare party-line votes. Hopefully, Democratic commissioners have learned the value of the OEA.
The OEA has several responsibilities, but those most closely aligned with supporting the agency’s independence are that it: (a) provides economic analysis, including cost-benefit analysis, for commission actions; (b) develops policies and strategies on data resources and best practices for data use; and (c) conducts long-term research. The work of the OEA makes it hard for a politically driven chairman to pretend that his or her initiatives are somehow substantive.
Another institutional weakness at the FCC was a lack of transparency. Prior to Chairman Pai, the public was not allowed to view the text of commission decisions until after they were adopted. Even worse, sometimes the text that the commissioners saw when voting was not the text in the final decision. Wallsten described in his research a situation where the meaning of a vote actually changed from the time of the vote to the release of the text:
On February 9, 2011 the Federal Communications Commission (FCC) released a proposed rule that included, among many other provisions, capping the Universal Service Fund at $4.5 billion. The FCC voted to approve a final order on October 27, 2011. But when the order was finally released on November 18, 2011, the $4.5 billion ceiling had effectively become a floor, with the order requiring the agency to forever estimate demand at no less than $4.5 billion. Because payments from the fund had been decreasing steadily, this floor means that the FCC is now collecting hundreds of billions of dollars more in taxes than it is spending on the program. [footnotes omitted]
The lack of transparency led many to not trust the FCC and encouraged stakeholders with inside access to bypass the legitimate public process for lobbying the agency. This would have encouraged corruption had not Chairman Pai changed the system. He required that decision texts be released to the public at the same time they were released to commissioners. This allows the public to see what the commissioners are voting on. And it ensures that orders do not change after they are voted on.
The FCC demonstrated its independence under Chairman Pai. In the case of net neutrality, the three Republican commissioners withstood personal threats, mocking from congressional Democrats, and pressure from Big Tech to restore light-handed regulation. About a year later, Chairman Pai was strongly criticized by President Trump for rejecting the Sinclair-Tribune merger. And despite the president’s support of the merger, he apparently had sufficient respect for the FCC’s independence that the White House never contacted the FCC about the issue. In the case of Ligado Networks’ use of its radio spectrum license, the FCC stood up to intense pressure from the U.S. Department of Defense and from members of Congress who wanted to substitute their technical judgement for the FCC’s research on the impacts of Ligado’s proposal.
It is possible that a new FCC could undo this new independence. Commissioners could marginalize their economists, take their directions from partisans, and reintroduce the practice of hiding information from the public. But Chairman Pai foresaw this and carefully made his changes part of the institutional structure of the FCC, making any steps backward visible to all concerned.
[TOTM: The following is part of a digital symposium by TOTM guests and authors on the legal and regulatory issues that arose during Ajit Pai’s tenure as chairman of the Federal Communications Commission. The entire series of posts is available here.
Harold Feld is senior vice president of Public Knowledge.]
Chairman Ajit Pai prioritized making new spectrum available for 5G. To his credit, he succeeded. Over the course of four years, Chairman Pai made available more high-band and mid-band spectrum, for licensed use and unlicensed use, than any other Federal Communications Commission chairman. He did so in the face of unprecedented opposition from other federal agencies, navigating the chaotic currents of the Trump administration with political acumen and courage. The Pai FCC will go down in history as the 5G FCC, and as the chairman who protected the primacy of FCC control over commercial spectrum policy.
At the same time, the Pai FCC will also go down in history as the most conventional FCC on spectrum policy in the modern era. Chairman Pai undertook no sweeping review of spectrum policy in the manner of former Chairman Michael Powell and no introduction of new and radically different spectrum technologies such as the introduction of unlicensed spectrum and spread spectrum in the 1980s, or the introduction of auctions in the 1990s. To the contrary, Chairman Pai actually rolled back the experimental short-term license structure adopted in the 3.5 GHz Citizens Broadband Radio Service (CBRS) band and replaced it with the conventional long-term with renewal expectation license. He missed a once-in-a-lifetime opportunity to dramatically expand the availability of unlicensed use of the TV white spaces (TVWS) via repacking after the television incentive auction. In reworking the rules for the 2.5 GHz band, although Pai laudably embraced the recommendation to create an application window for rural tribal lands, he rejected the proposal to allow nonprofits a chance to use the band for broadband in favor of conventional auction policy.
Ajit Pai’s Spectrum Policy Gave the US a Strong Position for 5G and Wi-Fi 6
To fully appreciate Chairman Pai’s accomplishments, we must first fully appreciate the urgency of opening new spectrum, and the challenges Pai faced from within the Trump administration itself. While providers can (and should) repurpose spectrum from older technologies to newer technologies, successful widespread deployment can only take place when sufficient amounts of new spectrum become available. This “green field” spectrum allows providers to build out new technologies with the most up-to-date equipment without disrupting existing subscriber services. The protocols developed for mobile 5G services work best with “mid-band” spectrum (generally considered to be frequencies between 2 GHz and 6 GHz). At the time Pai became chairman, the FCC did not have any mid-band spectrum identified for auction.
In addition, spectrum available for unlicensed use has become increasingly congested as more and more services depend on Wi-Fi and other unlicensed applications. Indeed, we have become so dependent on Wi-Fi for home broadband and networking that people routinely talk about buying “Wi-Fi” from commercial broadband providers rather than buying “internet access.” The United States further suffered a serious disadvantage moving forward to next generation Wi-Fi, Wi-Fi 6, because the U.S. lacked a contiguous block of spectrum large enough to take advantage of Wi-Fi 6’s gigabit capabilities. Without gigabit Wi-Fi, Americans will increasingly be unable to use the applications that gigabit broadband to the home makes possible.
But virtually all spectrum—particularly mid-band spectrum—have significant incumbents. These incumbents include federal users, particularly the U.S. Department of Defense. Finding new spectrum optimal for 5G required reclaiming spectrum from these incumbents. Unlicensed services do not require relocating incumbent users but creating such “underlay” unlicensed spectrum access requires rules to prevent unlicensed operations from causing harmful interference to licensed services. Needless to say, incumbent services fiercely resist any change in spectrum-allocation rules, claiming that reducing their spectrum allocation or permitting unlicensed services will compromise valuable existing services, while simultaneously causing harmful interference.
The need to reallocate unprecedented amounts of spectrum to ensure successful 5G and Wi-Fi 6 deployment in the United States created an unholy alliance of powerful incumbents, commercial and federal, dedicated to blocking FCC action. Federal agencies—in violation of established federal spectrum policy—publicly challenged the FCC’s spectrum-allocation decisions. Powerful industry incumbents—such as the auto industry, the power industry, and defense contractors—aggressively lobbied Congress to reverse the FCC’s spectrum action by legislation. The National Telecommunications and Information Agency (NTIA), the federal agency tasked with formulating federal spectrum policy, was missing in action as it rotated among different acting agency heads. As the chair and ranking member of the House Commerce Committee noted, this unprecedented and very public opposition by federal agencies to FCC spectrum policy threatened U.S. wireless interests both domestically and internationally.
Navigating this hostile terrain required Pai to exercise both political acumen and political will. Pai accomplished his goal of reallocating 600 MHz of spectrum for auction, opening over 1200 MHz of contiguous spectrum for unlicensed use, and authorized the new entrant Ligado Networks over the objections of the DOD. He did so by a combination of persuading President Donald Trump of the importance of maintaining U.S. leadership in 5G, and insisting on impeccable analysis by the FCC’s engineers to provide support for the reallocation and underlay decisions. On the most significant votes, Pai secured support (or partial support) from the Democrats. Perhaps most importantly, Pai successfully defended the institutional role of the FCC as the ultimate decisionmaker on commercial spectrum use, not subject to a “heckler’s veto” by other federal agencies.
Missed Innovation, ‘Command and Control Lite‘
While acknowledging Pai’s accomplishments, a fair consideration of Pai’s legacy must also consider his shortcomings. As chairman, Pai proved the most conservative FCC chair on spectrum policy since the 1980s. The Reagan FCC produced unlicensed and spread spectrum rules. The Clinton FCC created the spectrum auction regime. The Bush FCC included a spectrum task force and produced the concept of database management for unlicensed services, creating the TVWS and laying the groundwork for CBRS in the 3.5 GHz band. The Obama FCC recommended and created the world’s first incentive auction.
The Trump FCC does more than lack comparable accomplishments; it actively rolled back previous innovations. Within the first year of his chairmanship, Pai began a rulemaking designed to roll back the innovative priority access licensing (PALs). Under the rules adopted under the previous chairman, PALs provided exclusive use on a census block basis for three years with no expectation of renewal. Pai delayed the rollout of CBRS for two years to replace this approach with a standard license structure of 10 years with an expectation of renewal, explicitly to facilitate traditional carrier investment in traditional networks. Pai followed the same path when restructuring the 2.5 GHz band. While laudably creating a window for Native Americans to apply for 2.5 GHz licenses on rural tribal lands, Pai rejected proposals from nonprofits to adopt a window for non-commercial providers to offer broadband. Instead, he simply eliminated the educational requirement and adopted a standard auction for distribution of remaining licenses.
Similarly, in the unlicensed space, Pai consistently declined to promote innovation. In the repacking following the broadcast incentive auction, Pai rejected the proposal of structuring the repacking to ensure usable TVWS in every market. Instead, under Pai, the FCC managed the repacking so as to minimize the burden on incumbent primary and secondary licensees. As a result, major markets such as Los Angeles have zero channels available for unlicensed TVWS operation. This effectively relegates the service to a niche rural service, augmenting existing rural wireless ISPs.
The result is a modified form of “command and control,” the now-discredited system where the FCC would allocate licenses to provide specific services such as “FM radio” or “mobile pager service.” While preserving license flexibility in name, the licensing rules are explicitly structured to promote certain types of investment and business cases. The result is to encourage the same types of licensees to offer improved and more powerful versions of the same types of services, while discouraging more radical innovations.
Chairman Pai can rightly take pride in his overall 5G legacy. He preserved the institutional role of the FCC as the agency responsible for expanding our nation’s access to wireless services against sustained attack by federal agencies determined to protect their own spectrum interests. He provided enough green field spectrum for both licensed services and unlicensed services to permit the successful deployment of 5G and Wi-Fi 6. At the same time, however, he failed to encourage more radical spectrum policies that have made the United States the birthplace of such technologies as mobile broadband and Wi-Fi. We have won the “race” to next generation wireless, but the players and services are likely to stay the same.
This guest post is by Corbin K. Barthold, Senior Litigation Counsel at Washington Legal Foundation.
A boy throws a brick through a bakeshop window. He flees and is never identified. The townspeople gather around the broken glass. “Well,” one of them says to the furious baker, “at least this will generate some business for the windowmaker!”
A reasonable statement? Not really. Although it is indeed a good day for the windowmaker, the money for the new window comes from the baker. Perhaps the baker was planning to use that money to buy a new suit. Now, instead of owning a window and a suit, he owns only a window. The windowmaker’s gain, meanwhile, is simply the tailor’s loss.
This parable of the broken window was conceived by Frédéric Bastiat, a nineteenth-century French economist. He wanted to alert the reader to the importance of opportunity costs—in his words, “that which is not seen.” Time and money spent on one activity cannot be spent on another.
Today Bastiat might tell the parable of the harassed technology company. A tech firm creates a revolutionary new product or service and grows very large. Rivals, lawyers, activists, and politicians call for an antitrust probe. Eventually they get their way. Millions of documents are produced, dozens of depositions are taken, and several hearings are held. In the end no concrete action is taken. “Well,” the critics say, “at least other companies could grow while the firm was sidetracked by the investigation!”
Consider the antitrust case against Microsoft twenty years ago. The case ultimately settled, and Microsoft agreed merely to modify minor aspects of how it sold its products. “It’s worth wondering,” writes Brian McCullough, a generally astute historian of the internet, “how much the flowering of the dot-com era was enabled by the fact that the most dominant, rapacious player in the industry was distracted while the new era was taking shape.” “It’s easy to see,” McCullough says, “that the antitrust trial hobbled Microsoft strategically, and maybe even creatively.”
Should we really be glad that an antitrust dispute “distracted” and “hobbled” Microsoft? What would a focused and unfettered Microsoft have achieved? Maybe nothing; incumbents often grow complacent. Then again, Microsoft might have developed a great search engine or social-media platform. Or it might have invented something that, thanks to the lawsuit, remains absent to this day. What Microsoft would have created in the early 2000s, had it not had to fight the government, is that which is not seen.
But doesn’t obstructing the most successful companies create “room” for new competitors? David Cicilline, the chairman of the House’s antitrust subcommittee, argues that “just pursuing the [Microsoft] enforcement action itself” made “space for an enormous amount of additional innovation and competition.” He contends that the large tech firms seek to buy promising startups before they become full-grown threats, and that such purchases must be blocked.
It’s easy stuff to say. It’s not at all clear that it’s true or that it makes sense. Hindsight bias is rampant. In 2012, for example, Facebook bought Instagram for $1 billion, a purchase that is now cited as a quintessential “killer acquisition.” At the time of the sale, however, Instagram had 27 million users and $0 in revenue. Today it has around a billion users, it is estimated to generate $7 billion in revenue each quarter, and it is worth perhaps $100 billion. It is presumptuous to declare that Instagram, which had only 13 employees in 2012, could have achieved this success on its own.
If distraction is an end in itself, last week’s Big Tech hearing before Cicilline and his subcommittee was a smashing success. Presumably Jeff Bezos, Tim Cook, Sundar Pichai, and Mark Zuckerberg would like to spend the balance of their time developing the next big innovations and staying ahead of smart, capable, ruthless competitors, starting with each other and including foreign firms such as ByteDance and Huawei. Last week they had to put their aspirations aside to prepare for and attend five hours of political theater.
The most common form of exchange at the hearing ran as follows. A representative asks a slanted question. The witness begins to articulate a response. The representative cuts the witness off. The representative gives a prepared speech about how the witness’s answer proved her point.
Many of the antitrust subcommittee’s queries had nothing to do with antitrust. One representative fixated on Amazon’s ties with the Southern Poverty Law Center. Another seemed to want Facebook to interrogate job applicants about their political beliefs. A third asked Zuckerberg to answer for the conduct of Twitter. One representative demanded that social-media posts about unproven Covid-19 treatments be left up, another that they be taken down. Most of the questions that were at least vaguely on topic, meanwhile, were exceedingly weak. The representatives often mistook emails showing that tech CEOs play to win, that they seek to outcompete challengers and rivals, for evidence of anticompetitive harm to consumers. And the panel was often treated like a customer-service hotline. This app developer ran into a difficulty; what say you, Mr. Cook? That third-party seller has a gripe; why won’t you listen to her, Mr. Bezos?
In his opening remarks, Bezos cited a survey that ranked Amazon one of the country’s most trusted institutions. No surprise there. In many places one could have ordered a grocery delivery from Amazon as the hearing started and had the goods put away before it ended. Was Bezos taking a muted dig at Congress? He had every right to—it is one of America’s least trusted institutions. Pichai, for his part, noted that many users would be willing to pay thousands of dollars a year for Google’s free products. Is Congress providing people that kind of value?
The advance of technology will never be an unalloyed blessing. There are legitimate concerns, for instance, about how social-media platforms affect public discourse. “Human beings evolved to gossip, preen, manipulate, and ostracize,” psychologist Jonathan Haidt and technologist Tobias Rose-Stockwell observe. Social media exploits these tendencies, they contend, by rewarding those who trade in the glib put-down, the smug pronouncement, the theatrical smear. Speakers become “cruel and shallow”; “nuance and truth” become “casualties in [a] competition to gain the approval of [an] audience.”
Three things are true at once. First, Haidt and Rose-Stockwell have a point. Second, their point goes only so far. Social media does not force people to behave badly. Assuming otherwise lets individual humans off too easy. Indeed, it deprives them of agency. If you think it is within your power to display grace, love, and transcendence, you owe it to others to think it is within their power as well.
Third, if you really want to see adults act like children, watch a high-profile congressional hearing. A hearing for Attorney General William Barr, held the day before the Big Tech hearing and attended by many of the same representatives, was a classic of the format.
The tech hearing was not as shambolic as the Barr hearing. And the representatives act like sanctimonious halfwits in part to concoct the sick burns that attract clicks on the very platforms built, facilitated, and delivered by the tech companies. For these and other obvious reasons, no one should feel sorry for the four men who spent a Wednesday afternoon serving as props for demagogues. But that doesn’t mean the charade was a productive use of time. There is always that which is not seen.
[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.
This post is authored by Corbin Barthold, (Senior Litigation Counsel, Washington Legal Foundation).]
The pandemic is serious. COVID-19 will overwhelm our hospitals. It might break our entire healthcare system. To keep the number of deaths in the low hundreds of thousands, a study from Imperial College London finds, we will have to shutter much of our economy for months. Small wonder the markets have lost a third of their value in a relentless three-week plunge. Grievous and cruel will be the struggle to come.
“All men of sense will agree,” Hamilton wrote in Federalist No. 70, “in the necessity of an energetic Executive.” In an emergency, certainly, that is largely true. In the midst of this crisis even a staunch libertarian can applaud the government’s efforts to maintain liquidity, and can understand its urge to start dispersing helicopter money. By at least acting like it knows what it’s doing, the state can lessen many citizens’ sense of panic. Some of the emergency measures might even work.
Of course, many of them won’t. Even a trillion-dollar stimulus package might be too small, and too slowly dispersed, to do much good. What’s worse, that pernicious line, “Don’t let a crisis go to waste,” is in the air. Much as price gougers are trying to arbitrage Purell, political gougers, such as Senator Elizabeth Warren, are trying to cram woke diktats into disaster-relief bills. Even now, especially now, it is well to remember that government is not very good at what it does.
But dreams of dirigisme die hard, especially at the New York Times. “During the Great Depression,” Farhad Manjoo writes, “Franklin D. Roosevelt assembled a mighty apparatus to rebuild a broken economy.” Government was great at what it does, in Manjoo’s view, until neoliberalism arrived in the 1980s and ruined everything. “The incompetence we see now is by design. Over the last 40 years, America has been deliberately stripped of governmental expertise.” Manjoo implores us to restore the expansive state of yesteryear—“the sort of government that promised unprecedented achievement, and delivered.”
This is nonsense. Our government is not incompetent because Grover Norquist tried (and mostly failed) to strangle it. Our government is incompetent because, generally speaking, government is incompetent. The keystone of the New Deal, the National Industrial Recovery Act of 1933, was an incoherent mess. Its stated goals were at once to “reduce and relieve unemployment,” “improve standards of labor,” “avoid undue restriction of production,” “induce and maintain united action of labor and management,” “organiz[e] . . . co-operative action among trade groups,” and “otherwise rehabilitate industry.” The law empowered trade groups to create their own “codes of unfair competition,” a privilege they quite predictably used to form anticompetitive cartels.
At no point in American history has the state, with all its “governmental expertise,” been adept at spending money, stimulus or otherwise. A law supplying funds for the Transcontinental Railroad offered to pay builders more for track laid in the mountains, but failed to specify where those mountains begin. Leland Stanford commissioned a study finding that, lo and behold, the Sierra Nevada begins deep in the Sacramento Valley. When “the federal Interior Department initially challenged [his] innovative geology,” reports the historian H.W. Brands, Stanford sent an agent directly to President Lincoln, a politician who “didn’t know much geology” but “preferred to keep his allies happy.” “My pertinacity and Abraham’s faith moved mountains,” the triumphant lobbyist quipped after the meeting.
The supposed golden age of expert government, the time between the rise of FDR and the fall of LBJ, was no better. At the height of the Apollo program, it occurred to a physics professor at Princeton that if there were a small glass reflector on the Moon, scientists could use lasers to calculate the distance between it and Earth with great accuracy. The professor built the reflector for $5,000 and approached the government. NASA loved the idea, but insisted on building the reflector itself. This it proceeded to do, through its standard contracting process, for $3 million.
When the pandemic at last subsides, the government will still be incapable of setting prices, predicting industry trends, or adjusting to changed circumstances. What F.A. Hayek called the knowledge problem—the fact that useful information is dispersed throughout society—will be as entrenched and insurmountable as ever. Innovation will still have to come, if it is to come at all, overwhelmingly from extensive, vigorous, undirected trial and error in the private sector.
When New York Times columnists are not pining for the great government of the past, they are surmising that widespread trauma will bring about the great government of the future. “The outbreak,” Jamelle Bouie proposes in an article entitled “The Era of Small Government is Over,” has “made our mutual interdependence clear. This, in turn, has made it a powerful, real-life argument for the broadest forms of social insurance.” The pandemic is “an opportunity,” Bouie declares, to “embrace direct state action as a powerful tool.”
It’s a bit rich for someone to write about the coming sense of “mutual interdependence” in the pages of a publication so devoted to sowing grievance and discord. The New York Times is a totem of our divisions. When one of its progressive columnists uses the word “unity,” what he means is “submission to my goals.”
In any event, disunity in America is not a new, or even necessarily a bad, thing. We are a fractious, almost ungovernable people. The colonists rebelled against the British government because they didn’t want to pay it back for defending them from the French during the Seven Years’ War. When Hamilton, champion of the “energetic Executive,” pushed through a duty on liquor, the frontier settlers of western Pennsylvania tarred and feathered the tax collectors. In the Astor Place Riot of 1849, dozens of New Yorkers died in a brawl over which of two men was the better Shakespearean actor. Americans are not housetrained.
True enough, if the virus takes us to the kind of depths not seen in these parts since the Great Depression, all bets are off. Short of that, however, no one should lightly assume that Americans will long tolerate a statist revolution imposed on their fears. And thank goodness for that. Our unruliness, our unwillingness to do what we’re told, is part of what makes our society so dynamic and prosperous.
COVID-19 will shake the world. When it has gone, a new scene will open. We can say very little now about what is going to change. But we can hope that Americans will remain a creative, opinionated, fiercely independent lot. And we can be confident that, come what may, planned administration will remain a source of problems, while unplanned free enterprise will remain the surest source of solutions.
[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.
This post is authored by Robert Litan, (Non-resident Senior Fellow, Economic Studies, The Brookings Institution; former Associate Director, Office of Management and Budget).]
We have moved well beyond testing as the highest priority for responding to the COVID disaster – although it remains important – to meeting the immediate peak demand for hospital equipment and ICU beds outside hospitals in most urban areas. President Trump recognized this being the case when he declared on March 18 that was acting as a “wartime President.”
While the President invoked the Defense Production Act to have the private sector produce more ventilators and other necessary medical equipment, such as respirators and hospital gowns, that Act principally provides for government purchases and the authority to allocate scarce supplies.
As part of this effort, if it is not already in the works, the President should require manufacturers of such equipment – especially ventilators – to license at low or no royalties any and all intellectual property rights required for such production to as many other manufacturers that are willing and capable of making this equipment as rapidly as possible, 24/7. The President should further direct FDA to surge its inspector force to ensure that the processes and output of these other manufacturers are in compliance with applicable FDA requirements. The same IP licensing requirement should extend to manufacturers of any other medical supplies expected to be in short supply.
To avoid price gouging – yes, this is one instance where market principles should be suspended – the declaration should cap the prices of future ventilators, including those manufactured by current suppliers, to the price pre-crisis.
Second, to solve the bed shortage problem, some states (such New York) are already investigating the use of existing facilities – schools, university dorms, hotel rooms, and the like. This idea should be mandated immediately, as part of the emergency declaration, nationwide. The President has ordered a Navy hospital ship to help out with extra beds in New York, which is a good idea that should be extended to other coastal cities where this is possible. But he should also order the military, as needed, to assist with the conversion efforts of land-based facilities – which require infection-free environments, special filtration systems and the like – where private contractors are not available.
The costs for all this should be borne by the federal government, using the Disaster Relief Fund, authorized by the Stafford Act. As of year-end FY 2019, the balance in this fund was approximately $30 billion. It is not clear what the balance is expected to be after the outlays that have recently been ordered by the President, as relief for states and localities. If the DRF needs topping up, this should be urgently provided by the Congress, ideally as part of the third round of fiscal stimulus being considered this week.
John Maynard Keynes wrote in his famous General Theorythat “[t]he ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”
This is true even of those who wish to criticize the effect of economic thinking on society. In his new book, The Economists’ Hour: False Prophets, Free Markets, and the Fracture of Society, New York Times economics reporter Binyamin Appelbaum aims to show that economists have had a detrimental effect on public policy. But the central irony of the Economists’ Hour is that in criticizing the influence of economists over policy, Appelbaum engages in a great deal of economic speculation himself. Appelbaum would discard the opinions of economists in favor of “the lessons of history,” but all he is left with is unsupported economic reasoning.
Much of The Economists’ Hour is about the history of ideas. To his credit, Appelbaum does a fair job describing Anglo-American economic thought post-New Deal until the start of the 21st century. Part I mainly focuses on macroeconomics, detailing the demise of the Keynesian consensus and the rise of the monetarists and supply-siders. If the author were not so cynical about the influence of economists, he might have represented these changes in dominant economic paradigms as an example of how science progresses over time.
Interestingly, Appelbaum often makes the case that the insights of economists have been incredibly beneficial. For instance, in the opening chapter, he describes how Milton Friedman (one of the main protagonists/antagonists of the book, depending on your point of view) and a band of economists (including Martin Anderson and Walter Oi) fought the military establishment and ended the draft. For that, I’m sure most of us born in the past fifty years would be thankful. One suspects that group includes Appelbaum, though he tries to find objections, claiming for example that “by making war more efficient and more remote from the lives of most Americans, the end of the draft may also have made war more likely.”
Appelbaum also notes positively that economists, most prominently Alfred Kahn in the United States, led the charge in a largely beneficial deregulation of the airline and trucking industries in the late 1970s and early 1980s.
Yet, overall, it is clear that Appelbaum believes the “outsized” influence of economists over policymaking itself fails the cost-benefit analysis. Appelbaum focuses on the costs of listening too much to economists on antitrust law, trade and development, interest rates and currency, the use of cost-benefit analysis in regulation, and the deregulation of the financial services industry. He sees the deregulation of airlines and trucking as the height of the economists’ hour, and its close with the financial crisis of the late-2000s. His thesis is that (his interpretation of) economists’ notions of efficiency, their (alleged) lack of concern about distributional effects, and their (alleged) myopia has harmed society as their influence over policy has grown.
In his chapter on antitrust, for instance, Appelbaum admits that even though “[w]e live in a new era of giant corporations… there is little evidence consumers are suffering.” Appelbaum argues instead that lax antitrust enforcement has resulted in market concentration harmful to workers, democracy, and innovation. In order to make those arguments, he uncritically cites the work of economists and non-economist legal scholars that make economic claims. A closer inspection of each of these (economic) arguments suggests there is more to the story.
First, recent research questions the narrative that increasing market concentration has resulted in harm to consumers, workers, or society. In their recent paper, “The Industrial Revolution in Services,” Chang-Tai Hsieh of the University of Chicago and Esteban Rossi-Hansberg of Princeton University argue that increasing concentration is primarily due to technological innovation in services, retail, and wholesale sectors. While there has been greater concentration at the national level, this has been accompanied by increased competition locally as national chains expanded to more local markets. Of note, employment has increased in the sectors where national concentration is rising.
The rise in national industry concentration in the US between 1977 and 2013 is driven by a new industrial revolution in three broad non-traded sectors: services, retail, and wholesale. Sectors where national concentration is rising have increased their share of employment, and the expansion is entirely driven by the number of local markets served by firms. Firm employment per market has either increased slightly at the MSA level, or decreased substantially at the county or establishment levels. In industries with increasing concentration, the expansion into more markets is more pronounced for the top 10% firms, but is present for the bottom 90% as well. These trends have not been accompanied by economy-wide concentration. Top U.S. firms are increasingly specialized in sectors with rising industry concentration, but their aggregate employment share has remained roughly stable. We argue that these facts are consistent with the availability of a new set of fixed-cost technologies that enable adopters to produce at lower marginal costs in all markets. We present a simple model of firm size and market entry to describe the menu of new technologies and trace its implications.
In other words, any increase in concentration has been sector-specific and primarily due to more efficient national firms expanding into local markets. This has been associated with lower prices for consumers and more employment opportunities for workers in those sectors.
Appelbaum also looks to Lina Khan’s law journal article, which attacks Amazon for allegedly engaging in predatory pricing, as an example of a new group of young scholars coming to the conclusion that there is a need for more antitrust scrutiny. But, as ICLE scholars Alec Stapp and Kristian Stout have pointed out, there is very little evidence Amazon is actually engaging in predatory pricing. Khan’s article is a challenge to the consensus on how to think about predatory pricing and consumer welfare, but her underlying economic theory is premised on Amazon having such a long time horizon that they can lose money on retail for decades (even though it has been profitable for some time), on the theory that someday down the line they can raise prices after they have run all retail competition out.
Second, Appelbaum argues that mergers and acquisitions in the technology sector, especially acquisitions by Google and Facebook of potential rivals, has decreased innovation. Appelbaum’s belief is that innovation is spurred when government forces dominant players “to make room” for future competition. Here he draws in part on claims by some economists that dominant firms sometimes engage in “killer acquisitions” — acquiring nascent competitors in order to reduce competition, to the detriment of consumer welfare. But a simple model of how that results in reduced competition must be balanced by a recognition that many companies, especially technology startups, are incentivized to innovate in part by the possibility that they will be bought out. As noted by the authors of the leading study on the welfare effects of alleged “killer acquisitions”,
“it is possible that the presence of an acquisition channel also has a positive effect on welfare if the prospect of entrepreneurial exit through acquisition (by an incumbent) spurs ex-ante innovation …. Whereas in our model entrepreneurs are born with a project and thus do not have to exert effort to come up with an idea, it is plausible that the prospect of later acquisition may motivate the origination of entrepreneurial ideas in the first place… If, on the other hand, killer acquisitions do increase ex-ante innovation, this potential welfare gain will have to be weighed against the ex-post efficiency loss due to reduced competition. Whether the former positive or the latter negative effect dominates will depend on the elasticity of the entrepreneur’s innovation response.”
This analysis suggests that a case-by-case review is necessary if antitrust plaintiffs can show evidence that harm to consumers is likely to occur due to a merger.. But shifting the burden to merging entities, as Applebaum seems to suggest, will come with its own costs. In other words, more economics is needed to understand this area, not less.
Third, Appelbaum’s few concrete examples of harm to consumers resulting from “lax antitrust enforcement” in the United States come from airline mergers and telecommunications. In both cases, he sees the increased attention from competition authorities in Europe compared to the U.S. at the explanation for better outcomes. Neither is a clear example of harm to consumers, nor can be used to show superior antitrust frameworks in Europe versus the United States.
In the case of airline mergers, Appelbaum argues the gains from deregulation of the industry have been largely given away due to poor antitrust enforcement and prices stopped falling, leading to a situation where “[f]or the first time since the dawn of aviation, it is generally cheaper to fly in Europe than in the United States.” This is hard to square with the data.
While the concentration and profits story fits the antitrust populist narrative, other observations run contrary to [this] conclusion. For example, airline prices, as measured by price indexes, show that changes in U.S. and EU airline prices have fairly closely tracked each other until 2014, when U.S. prices began dropping. Sure, airlines have instituted baggage fees, but the CPI includes taxes, fuel surcharges, airport, security, and baggage fees. It’s not obvious that U.S. consumers are worse off in the so-called era of rising concentration.
Our main conclusion is simple: The recent legacy carrier mergers have been associated with pro-competitive outcomes. We find that, on average across all three mergers combined, nonstop overlap routes (on which both merging parties were present pre-merger) experienced statistically significant output increases and statistically insignificant nominal fare decreases relative to non-overlap routes. This pattern also holds when we study each of the three mergers individually. We find that nonstop overlap routes experienced statistically significant output and capacity increases following all three legacy airline mergers, with statistically significant nominal fare decreases following Delta/Northwest and American/USAirways mergers, and statistically insignificant nominal fare decreases following the United/Continental merger…
One implication of our findings is that any fare increases that have been observed since the mergers were very unlikely to have been caused by the mergers. In particular, our results demonstrate pro-competitive output expansions on nonstop overlap routes indicating reductions in quality-adjusted fares and a lack of significant anti-competitive effects on connecting overlaps. Hence ,our results demonstrate consumer welfare gains on overlap routes, without even taking credit for the large benefits on non-overlap routes (due to new online service, improved service networks at airports, fleet reallocation, etc.). While some of our results indicate that passengers on non-overlap routes also benefited from the mergers, we leave the complete exploration of such network effects for future research.
In other words, neither part of Applebaum’s proposition, that Europe has cheaper fares and that concentration has led to worse outcomes for consumers in the United States, appears to be true. Perhaps the influence of economists over antitrust law in the United States has not been so bad after all.
Appelbaum also touts the lower prices for broadband in Europe as an example of better competition policy over telecommunications in Europe versus the United States. While prices are lower on average in Europe for broadband, this obfuscates distribution of prices depending on speed tiers. UPenn Professor Christopher Yoo’s 2014 study titled U.S. vs. European Broadband Deployment: What Do the Data Say? found:
U.S. broadband was cheaper than European broadband for all speed tiers below 12 Mbps. U.S. broadband was more expensive for higher speed tiers, although the higher cost was justified in no small part by the fact that U.S. Internet users on average consumed 50% more bandwidth than their European counterparts.
Population density also helps explain differences between Europe and the United States. The closer people are together, the easier it is to build out infrastructure like broadband Internet. The United States is considerably more rural than most European countries. As a result, consideration of prices and speed need to be adjusted to reflect those differences. For instance, the FCC’s 2018 International Broadband Data Report shows a move in position from 23rd to 14th for the United States compared to 28 (mostly European) other countries once population density and income are taken into consideration for fixed broadband prices (Model 1 to Model 2). The United States climbs even further to 6th out of the 29 countries studied if data usage is included and 7th if quality (i.e. websites available in language) is taken into consideration (Model 4).
Model 1: Unadjusted for demographics and content quality
Model 2: Adjusted for demographics but not content quality
Model 3: Adjusted for demographics and data usage
Model 4: Adjusted for demographics and content quality
Furthermore, investment and buildout are other important indicators of how well the United States is doing compared to Europe. Appelbaum fails to consider all of these factors when comparing the European model of telecommunications to the United States’. Yoo’s conclusion is an appropriate response:
The increasing availability of high-quality data has the promise to effect a sea change in broadband policy. Debates that previously relied primarily on anecdotal evidence and personal assertions of visions for the future can increasingly take place on a firmer empirical footing.
In particular, these data can resolve the question whether the U.S. is running behind Europe in the broadband race or vice versa. The U.S. and European mapping studies are clear and definitive: These data indicate that the U.S. is ahead of Europe in terms of the availability of Next Generation Access (NGA) networks. The U.S. advantage is even starker in terms of rural NGA coverage and with respect to key technologies such as FTTP and LTE.
Empirical analysis, both in terms of top-level statistics and in terms of eight country case studies, also sheds light into the key policy debate between facilities-based competition and service-based competition. The evidence again is fairly definitive, confirming that facilities-based competition is more effective in terms of driving broadband investment than service-based competition.
In other words, Appelbaum relies on bad data to come to his conclusion that listening to economists has been wrong for American telecommunications policy. Perhaps it is his economic assumptions that need to be questioned.
At the end of the day, in antitrust, environmental regulation, and other areas he reviewed, Appelbaum does not believe economic efficiency should be the primary concern anyway. For instance, he repeats the common historical argument that the purpose of the Sherman Act was to protect small businesses from bigger, and often more efficient, competitors.
So applying economic analysis to Appelbaum’s claims may itself be an illustration of caring too much about economic models instead of learning “the lessons of history.” But Appelbaum inescapably assumes economic models of its own. And these models appear less grounded in empirical data than those of the economists he derides. There’s no escaping mental models to understand the world. It is just a question of whether we are willing to change our mind if a better way of understanding the world presents itself. As Keynes is purported to have said, “When the facts change, I change my mind. What do you do, sir?”
For all the criticism of economists, there at least appears to be a willingness among them to change their minds, as illustrated by the increasing appreciation for anti-inflationary monetary policy among macroeconomists described in TheEconomists’ Hour. The question which remains is whether Appelbaum and other critics of the economic way of thinking are as willing to reconsider their strongly held views when they conflict with the evidence.