President Joe Biden named his post-COVID-19 agenda “Build Back Better,” but his proposals to prioritize support for government-run broadband service “with less pressure to turn profits” and to “reduce Internet prices for all Americans” will slow broadband deployment and leave taxpayers with an enormous bill.
Policymakers should pay particular heed to this danger, amid news that the Senate is moving forward with considering a $1.2 trillion bipartisan infrastructure package, and that the Federal Communications Commission, the U.S. Commerce Department’s National Telecommunications and Information Administration, and the U.S. Agriculture Department’s Rural Utilities Service will coordinate on spending broadband subsidy dollars.
In order to ensure that broadband subsidies lead to greater buildout and adoption, policymakers must correctly understand the state of competition in broadband and not assume that increasing the number of firms in a market will necessarily lead to better outcomes for consumers or the public.
A recent white paper published by us here at the International Center for Law & Economics makes the case that concentration is a poor predictor of competitiveness, while offering alternative policies for reaching Americans who don’t have access to high-speed Internet service.
The data show that the state of competition in broadband is generally healthy. ISPs routinely invest billions of dollars per year in building, maintaining, and upgrading their networks to be faster, more reliable, and more available to consumers. FCC data show that average speeds available to consumers, as well as the number of competitors providing higher-speed tiers, have increased each year. And prices for broadband, as measured by price-per-Mbps, have fallen precipitously, dropping 98% over the last 20 years. None of this makes sense if the facile narrative about the absence of competition were true.
In our paper, we argue that the real public policy issue for broadband isn’t curbing the pursuit of profits or adopting price controls, but making sure Americans have broadband access and encouraging adoption. In areas where it is very costly to build out broadband networks, like rural areas, there tend to be fewer firms in the market. But having only one or two ISPs available is far less of a problem than having none at all. Understanding the underlying market conditions and how subsidies can both help and hurt the availability and adoption of broadband is an important prerequisite to good policy.
The basic problem is that those who have decried the lack of competition in broadband often look at the number of ISPs in a given market to determine whether a market is competitive. But this is not how economists think of competition. Instead, economists look at competition as a dynamic process where changes in supply and demand factors are constantly pushing the market toward new equilibria.
In general, where a market is “contestable”—that is, where existing firms face potential competition from the threat of new entry—even just a single existing firm may have to act as if it faces vigorous competition. Such markets often have characteristics (e.g., price, quality, and level of innovation) similar or even identical to those with multiple existing competitors. This dynamic competition, driven by changes in technology or consumer preferences, ensures that such markets are regularly disrupted by innovative products and services—a process that does not always favor incumbents.
Proposals focused on increasing the number of firms providing broadband can actually reduce consumer welfare. Whether through overbuilding—by allowing new private entrants to free-ride on the initial investment by incumbent companies—or by going into the Internet business itself through municipal broadband, government subsidies can increase the number of firms providing broadband. But it can’t do so without costs―which include not just the cost of the subsidies themselves, which ultimately come from taxpayers, but also the reduced incentives for unsubsidized private firms to build out broadband in the first place.
If underlying supply and demand conditions in rural areas lead to a situation where only one provider can profitably exist, artificially adding another completely reliant on subsidies will likely just lead to the exit of the unsubsidized provider. Or, where a community already has municipal broadband, it is unlikely that a private ISP will want to enter and compete with a firm that doesn’t have to turn a profit.
A much better alternative for policymakers is to increase the demand for buildout through targeted user subsidies, while reducing regulatory barriers to entry that limit supply.
For instance, policymakers should consider offering connectivity vouchers to unserved households in order to stimulate broadband deployment and consumption. Current subsidy programs rely largely on subsidizing the supply side, but this requires the government to determine the who and where of entry. Connectivity vouchers would put the choice in the hands of consumers, while encouraging more buildout to areas that may currently be uneconomic to reach due to low population density or insufficient demand due to low adoption rates.
Local governments could also facilitate broadband buildout by reducing unnecessary regulatory barriers. Local building codes could adopt more connection-friendly standards. Local governments could also reduce the cost of access to existing poles and other infrastructure. Eligible Telecommunications Carrier (ETC) requirements could also be eliminated, because they deter potential providers from seeking funds for buildout (and don’t offer countervailing benefits).
Albert Einstein once said: “if I were given one hour to save the planet, I would spend 59 minutes defining the problem, and one minute resolving it.” When it comes to encouraging broadband buildout, policymakers should make sure they are solving the right problem. The problem is that the cost of building out broadband to unserved areas is too high or the demand too low—not that there are too few competitors.
Economist Josh Hendrickson asserts that the Jones Act is properly understood as a Coasean bargain. In this view, the law serves as a subsidy to the U.S. maritime industry through its restriction of waterborne domestic commerce to vessels that are constructed in U.S. shipyards, U.S.-flagged, and U.S.-crewed. Such protectionism, it is argued, provides the government with ready access to these assets, rather than taking precious time to build them up during times of conflict.
We are skeptical of this characterization.
Although there is an implicit bargain behind the Jones Act, its relationship to the work of Ronald Coase is unclear. Coase is best known for his theorem on the use of bargains and exchanges to reduce negative externalities. But the negative externality is that the Jones Act attempts to address is not apparent. While it may be more efficient or effective than the government building up its own shipbuilding, vessels, and crew in times of war, that’s rather different than addressing an externality. The Jones Act may reflect an implied exchange between the domestic maritime industry and government, but there does not appear to be anything particularly Coasean about it.
Rather, close scrutiny reveals this arrangement between government and industry to be a textbook example of policy failure and rent-seeking run amok. The Jones Act is not a bargain, but a rip-off, with costs and benefits completely out of balance.
The Jones Act and National Defense
For all of the talk of the Jones Act’s critical role in national security, its contributions underwhelm. Ships offer a case in point. In times of conflict, the U.S. military’s primary sources of transport are not Jones Act vessels but government-owned ships in the Military Sealift Command and Ready Reserve Force fleets. These are further supplemented by the 60 non-Jones Act U.S.-flag commercial ships enrolled in the Maritime Security Program, a subsidy arrangement by which ships are provided $5 million per year in exchange for the government’s right to use them in time of need.
In contrast, Jones Act ships are used only sparingly. That’s understandable, as removing these vessels from domestic trade would leave a void in the country’s transportation needs not easily filled.
The law’s contributions to domestic shipbuilding are similarly meager. if not outright counterproductive. A mere two to three large, oceangoing commercial ships are delivered by U.S. shipyards per year. That’s not per shipyard, but all U.S. shipyards combined.
Given the vastly uncompetitive state of domestic shipbuilding—a predictable consequence of handing the industry a captive domestic market via the Jones Act’s U.S.-built requirement—there is a little appetite for what these shipyards produce. As Hendrickson himself points out, the domestic build provision serves to “discourage shipbuilders from innovating and otherwise pursuing cost-saving production methods since American shipbuilders do not face international competition.” We could not agree more.
What keeps U.S. shipyards active and available to meet the military’s needs is not work for the Jones Act commercial fleet but rather government orders. A 2015 Maritime Administration report found that such business accounts for 70 percent of revenue for the shipbuilding and repair industry. A 2019 American Enterprise Institute study concluded that, among U.S. shipbuilders that construct both commercial and military ships, Jones Act vessels accounted for less than 5 percent of all shipbuilding orders.
If the Jones Act makes any contributions of note at all, it is mariners. Of those needed to crew surge sealift ships during times of war, the Jones Act fleet is estimated to account for 29 percent. But here the Jones Act also acts as a double-edged sword. By increasing the cost of ships to four to five times the world price, the law’s U.S.-built requirement results in a smaller fleet with fewer mariners employed than would otherwise be the case. That’s particularly noteworthy given government calculations that there is a deficit of roughly 1,800 mariners to crew its fleet in the event of a sustained sealift operation.
Beyond its ruinous impact on the competitiveness of domestic shipbuilding, the Jones Act has had other deleterious consequences for national security. The increased cost of waterborne transport, or its outright impossibility in the case of liquefied natural gas and propane, results in reduced self-reliance for critical energy supplies. This is a sufficiently significant issue that members of the National Security Council unsuccessfully sought a long-term Jones Act waiver in 2019. The law also means fewer redundancies and less flexibility in the country’s transportation system when responding to crises, both natural and manmade. Waivers of the Jones Act can be issued, but this highly politicized process eats up precious days when time is of the essence. All of these factors merit consideration in the overall national security calculus.
To review, the Jones Act’s opaque and implicit subsidy—doled out via protectionism—results in anemic and uncompetitive shipbuilding, few ships available in time of war, and fewer mariners than would otherwise be the case without its U.S.-built requirement. And it has other consequences for national security that are not only underwhelming but plainly negative. Little wonder that Hendrickson concedes it is unclear whether U.S. maritime policy—of which the Jones Act plays a foundational role—achieves its national security goals.
The toll exacted in exchange for the Jones Act’s limited benefits, meanwhile, is considerable. According to a 2019 OECD study, the law’s repeal would increase domestic value added by $19-$64 billion. Incredibly, that estimate may actually understate matters. Not included in this estimate are related costs such as environmental degradation, increased congestion and highway maintenance, and retaliation from U.S. trade partners during free-trade agreement negotiations due to U.S. unwillingness to liberalize the Jones Act.
Against such critiques, Hendrickson posits that substantial cost savings are illusory due to immigration and other U.S. laws. But how big a barrier such laws would pose is unclear. It’s worth considering, for example, that cruise ships with foreign crews are able to visit multiple U.S. ports so long as a foreign port is also included on the voyage. The granting of Jones Act waivers, meanwhile, has enabled foreign ships to transport cargo between U.S. ports in the past despite U.S. immigration laws.
Would Chinese-flagged and crewed barges be able to engage in purely domestic trade on the Mississippi River absent the Jones Act? Almost certainly not. But it seems perfectly plausible that foreign ships already sailing between U.S. ports as part of international voyages—a frequent occurrence—could engage in cabotage movements without hiring U.S. crews. Take, for example, APL’s Eagle Express X route that stops in Los Angeles, Honolulu, and Dutch Harbor as well as Asian ports. Without the Jones Act, it’s reasonable to believe that ships operating on this route could transport goods from Los Angeles to Honolulu before continuing on to foreign destinations.
But if the Jones Act fails to meet U.S. national security benefits while imposing substantial costs, how to explain its continued survival? Hendrickson avers that the law’s longevity reflects its utility. We believe, however, that the answer lies in the application of public choice theory. Simply put, the law’s costs are both opaque and dispersed across the vast expanse of the U.S. economy while its benefits are highly concentrated. The law’s de facto subsidy is also vastly oversupplied, given that the vast majority of vessels under its protection are smaller craft such as tugboats and barges with trivial value to the country’s sealift capability. This has spawned a lobby aggressively dedicated to the Jones Act’s preservation. Washington, D.C. is home to numerousindustrygroupsandlabororganizations that regard the law’s maintenance as critical, but not a single one that views its repeal as a top priority.
It’s instructive in this regard that all four senators from Alaska and Hawaii are strongJonesActsupporters despite their states being disproportionatelyburdened by the law. This seeming oddity is explained by these states also being disproportionately home to maritime interest groups that support the law. In contrast, Jones Act critics Sen. Mike Lee and the late Sen. John McCain both hailed from land-locked states home to few maritime interest groups.
Disagreements, but also Common Ground
For all of our differences with Hendrickson, however, there is substantial common ground. We are in shared agreement that the Jones Act is suboptimal policy, that its ability to achieve its goals is unclear, and that its U.S.-built requirement is particularly ripe for removal. Where our differences lie is mostly in the scale of gains to be realized from the law’s reform or repeal. As such, there is no reason to maintain the failed status quo. The Jones Act should be repealed and replaced with targeted, transparent, and explicit subsidies to meet the country’s sealift needs. Both the country’s economy and national security would be rewarded—richly so, in our opinion—from such policy change.
The European Commission this week published its proposed Artificial Intelligence Regulation, setting out new rules for “artificial intelligence systems” used within the European Union. The regulation—the commission’s attempt to limit pernicious uses of AI without discouraging its adoption in beneficial cases—casts a wide net in defining AI to include essentially any software developed using machine learning. As a result, a host of software may fall under the regulation’s purview.
The regulation categorizes AIs by the kind and extent of risk they may pose to health, safety, and fundamental rights, with the overarching goal to:
Prohibit “unacceptable risk” AIs outright;
Place strict restrictions on “high-risk” AIs;
Place minor restrictions on “limited-risk” AIs;
Create voluntary “codes of conduct” for “minimal-risk” AIs;
Establish a regulatory sandbox regime for AI systems;
Set up a European Artificial Intelligence Board to oversee regulatory implementation; and
Set fines for noncompliance at up to 30 million euros, or 6% of worldwide turnover, whichever is greater.
AIs That Are Prohibited Outright
The regulation prohibits AI that are used to exploit people’s vulnerabilities or that use subliminal techniques to distort behavior in a way likely to cause physical or psychological harm. Also prohibited are AIs used by public authorities to give people a trustworthiness score, if that score would then be used to treat a person unfavorably in a separate context or in a way that is disproportionate. The regulation also bans the use of “real-time” remote biometric identification (such as facial-recognition technology) in public spaces by law enforcement, with exceptions for specific and limited uses, such as searching for a missing child.
The first prohibition raises some interesting questions. The regulation says that an “exploited vulnerability” must relate to age or disability. In its announcement, the commission says this is targeted toward AIs such as toys that might induce a child to engage in dangerous behavior.
The ban on AIs using “subliminal techniques” is more opaque. The regulation doesn’t give a clear definition of what constitutes a “subliminal technique,” other than that it must be something “beyond a person’s consciousness.” Would this include TikTok’s algorithm, which imperceptibly adjusts the videos shown to the user to keep them engaged on the platform? The notion that this might cause harm is not fanciful, but it’s unclear whether the provision would be interpreted to be that expansive, whatever the commission’s intent might be. There is at least a risk that this provision would discourage innovative new uses of AI, causing businesses to err on the side of caution to avoid the huge penalties that breaking the rules would incur.
The prohibition on AIs used for social scoring is limited to public authorities. That leaves space for socially useful expansions of scoring systems, such as consumers using their Uber rating to show a record of previous good behavior to a potential Airbnb host. The ban is clearly oriented toward more expansive and dystopian uses of social credit systems, which some fear may be used to arbitrarily lock people out of society.
The ban on remote biometric identification AI is similarly limited to its use by law enforcement in public spaces. The limited exceptions (preventing an imminent terrorist attack, searching for a missing child, etc.) would be subject to judicial authorization except in cases of emergency, where ex-post authorization can be sought. The prohibition leaves room for private enterprises to innovate, but all non-prohibited uses of remote biometric identification would be subject to the requirements for high-risk AIs.
Restrictions on ‘High-Risk’ AIs
Some AI uses are not prohibited outright, but instead categorized as “high-risk” and subject to strict rules before they can be used or put to market. AI systems considered to be high-risk include those used for:
Safety components for certain types of products;
Remote biometric identification, except those uses that are banned outright;
Safety components in the management and operation of critical infrastructure, such as gas and electricity networks;
Dispatching emergency services;
Educational admissions and assessments;
Employment, workers management, and access to self-employment;
Evaluating credit-worthiness;
Assessing eligibility to receive social security benefits or services;
A range of law-enforcement purposes (e.g., detecting deepfakes or predicting the occurrence of criminal offenses);
Migration, asylum, and border-control management; and
Administration of justice.
While the commission considers these AIs to be those most likely to cause individual or social harm, it may not have appropriately balanced those perceived harms with the onerous regulatory burdens placed upon their use.
As Mikołaj Barczentewicz at the Surrey Law and Technology Hub has pointed out, the regulation would discourage even simple uses of logic or machine-learning systems in such settings as education or workplaces. This would mean that any workplace that develops machine-learning tools to enhance productivity—through, for example, monitoring or task allocation—would be subject to stringent requirements. These include requirements to have risk-management systems in place, to use only “high quality” datasets, and to allow human oversight of the AI, as well as other requirements around transparency and documentation.
The obligations would apply to any companies or government agencies that develop an AI (or for whom an AI is developed) with a view toward marketing it or putting it into service under their own name. The obligations could even attach to distributors, importers, users, or other third parties if they make a “substantial modification” to the high-risk AI, market it under their own name, or change its intended purpose—all of which could potentially discourage adaptive use.
Without going into unnecessary detail regarding each requirement, some are likely to have competition- and innovation-distorting effects that are worth discussing.
The rule that data used to train, validate, or test a high-risk AI has to be high quality (“relevant, representative, and free of errors”) assumes that perfect, error-free data sets exist, or can easily be detected. Not only is this not necessarily the case, but the requirement could impose an impossible standard on some activities. Given this high bar, high-risk AIs that use data of merely “good” quality could be precluded. It also would cut against the frontiers of research in artificial intelligence, where sometimes only small and lower-quality datasets are available to train AI. A predictable effect is that the rule would benefit large companies that are more likely to have access to large, high-quality datasets, while rules like the GDPR make it difficult for smaller companies to acquire that data.
High-risk AIs also must submit technical and user documentation that detail voluminous information about the AI system, including descriptions of the AI’s elements, its development, monitoring, functioning, and control. These must demonstrate the AI complies with all the requirements for high-risk AIs, in addition to documenting its characteristics, capabilities, and limitations. The requirement to produce vast amounts of information represents another potentially significant compliance cost that will be particularly felt by startups and other small and medium-sized enterprises (SMEs). This could further discourage AI adoption within the EU, as European enterprises already consider liability for potential damages and regulatory obstacles as impediments to AI adoption.
The requirement that the AI be subject to human oversight entails that the AI can be overseen and understood by a human being and that the AI can never override a human user. While it may be important that an AI used in, say, the criminal justice system must be understood by humans, this requirement could inhibit sophisticated uses beyond the reasoning of a human brain, such as how to safely operate a national electricity grid. Providers of high-risk AI systems also must establish a post-market monitoring system to evaluate continuous compliance with the regulation, representing another potentially significant ongoing cost for the use of high-risk AIs.
The regulation also places certain restrictions on “limited-risk” AIs, notably deepfakes and chatbots. Such AIs must be labeled to make a user aware they are looking at or listening to manipulated images, video, or audio. AIs must also be labeled to ensure humans are aware when they are speaking to an artificial intelligence, where this is not already obvious.
Taken together, these regulatory burdens may be greater than the benefits they generate, and could chill innovation and competition. The impact on smaller EU firms, which already are likely to struggle to compete with the American and Chinese tech giants, could prompt them to move outside the European jurisdiction altogether.
Regulatory Support for Innovation and Competition
To reduce the costs of these rules, the regulation also includes a new regulatory “sandbox” scheme. The sandboxes would putatively offer environments to develop and test AIs under the supervision of competent authorities, although exposure to liability would remain for harms caused to third parties and AIs would still have to comply with the requirements of the regulation.
SMEs and startups would have priority access to the regulatory sandboxes, although they must meet the same eligibility conditions as larger competitors. There would also be awareness-raising activities to help SMEs and startups to understand the rules; a “support channel” for SMEs within the national regulator; and adjusted fees for SMEs and startups to establish that their AIs conform with requirements.
These measures are intended to prevent the sort of chilling effect that was seen as a result of the GDPR, which led to a 17% increase in market concentration after it was introduced. But it’s unclear that they would accomplish this goal. (Notably, the GDPR contained similar provisions offering awareness-raising activities and derogations from specific duties for SMEs.) Firms operating in the “sandboxes” would still be exposed to liability, and the only significant difference to market conditions appears to be the “supervision” of competent authorities. It remains to be seen how this arrangement would sufficiently promote innovation as to overcome the burdens placed on AI by the significant new regulatory and compliance costs.
Governance and Enforcement
Each EU member state would be expected to appoint a “national competent authority” to implement and apply the regulation, as well as bodies to ensure high-risk systems conform with rules that require third party-assessments, such as remote biometric identification AIs.
The regulation establishes the European Artificial Intelligence Board to act as the union-wide regulatory body for AI. The board would be responsible for sharing best practices with member states, harmonizing practices among them, and issuing opinions on matters related to implementation.
As mentioned earlier, maximum penalties for marketing or using a prohibited AI (as well as for failing to use high-quality datasets) would be a steep 30 million euros or 6% of worldwide turnover, whichever is greater. Breaking other requirements for high-risk AIs carries maximum penalties of 20 million euros or 4% of worldwide turnover, while maximums of 10 million euros or 2% of worldwide turnover would be imposed for supplying incorrect, incomplete, or misleading information to the nationally appointed regulator.
Is the Commission Overplaying its Hand?
While the regulation only restricts AIs seen as creating risk to society, it defines that risk so broadly and vaguely that benign applications of AI may be included in its scope, intentionally or unintentionally. Moreover, the commission also proposes voluntary codes of conduct that would apply similar requirements to “minimal” risk AIs. These codes—optional for now—may signal the commission’s intent eventually to further broaden the regulation’s scope and application.
The commission clearly hopes it can rely on the “Brussels Effect” to steer the rest of the world toward tighter AI regulation, but it is also possible that other countries will seek to attract AI startups and investment by introducing less stringent regimes.
For the EU itself, more regulation must be balanced against the need to foster AI innovation. Without European tech giants of its own, the commission must be careful not to stifle the SMEs that form the backbone of the European market, particularly if global competitors are able to innovate more freely in the American or Chinese markets. If the commission has got the balance wrong, it may find that AI development simply goes elsewhere, with the EU fighting the battle for the future of AI with one hand tied behind its back.
In the battle of ideas, it is quite useful to be able to brandish clear and concise debating points in support of a proposition, backed by solid analysis. Toward that end, in a recent primer about antitrust law published by the Mercatus Center, I advance four reasons to reject neo-Brandeisian critiques of the consensus (at least, until very recently) consumer welfare-centric approach to antitrust enforcement. My four points, drawn from the primer (with citations deleted and hyperlinks added) are as follows:
First, the underlying assumptions of rising concentration and declining competition on which the neo-Brandeisian critique is largely based (and which are reflected in the introductory legislative findings of the Competition and Antitrust Law Enforcement Reform Act [of 2021, introduced by Senator Klobuchar on February 4, lack merit]. Chapter 6 of the 2020 Economic Report of the President, dealing with competition policy, summarizes research debunking those assumptions. To begin with, it shows that studies complaining that competition is in decline are fatally flawed. Studies such as one in 2016 by the Council of Economic Advisers rely on overbroad market definitions that say nothing about competition in specific markets, let alone across the entire economy. Indeed, in 2018, professor Carl Shapiro, chief DOJ antitrust economist in the Obama administration, admitted that a key summary chart in the 2016 study “is not informative regarding overall trends in concentration in well-defined relevant markets that are used by antitrust economists to assess market power, much less trends in concentration in the U.S. economy.” Furthermore, as the 2020 report points out, other literature claiming that competition is in decline rests on a problematic assumption that increases in concentration (even assuming such increases exist) beget softer competition. Problems with this assumption have been understood since at least the 1970s. The most fundamental problem is that there are alternative explanations (such as exploitation of scale economies) for why a market might demonstrate both high concentration and high markups—explanations that are still consistent with procompetitive behavior by firms. (In a related vein, research by other prominent economists has exposed flaws in studies that purport to show a weakening of merger enforcement standards in recent years.) Finally, the 2020 report notes that the real solution to perceived economic problems may be less government, not more: “As historic regulatory reform across American industries has shown, cutting government-imposed barriers to innovation leads to increased competition, strong economic growth, and a revitalized private sector.”
Second, quite apart from the flawed premises that inform the neo-Brandeisian critique, specific neo-Brandeisian reforms appear highly problematic on economic grounds. Breakups of dominant firms or near prohibitions on dominant firm acquisitions would sacrifice major economies of scale and potential efficiencies of integration, harming consumers without offering any proof that the new market structures in reshaped industries would yield consumer or producer benefits. Furthermore, a requirement that merging parties prove a negative (that the merger will not harm competition) would limit the ability of entrepreneurs and market makers to act on information about misused or underutilized assets through the merger process. This limitation would reduce economic efficiency. After-the-fact studies indicating that a large percentage of mergers do not add wealth and do not otherwise succeed as much as projected miss this point entirely. They ignore what the world would be like if mergers were much more difficult to enter into: a world where there would be lower efficiency and dynamic economic growth because there would be less incentive to seek out market-improving opportunities.
Third, one aspect of the neo-Brandeisian approach to antitrust policy is at odds with fundamental notions of fair notice of wrongdoing and equal treatment under neutral principles, notions that are central to the rule of law. In particular, the neo-Brandeisian call for considering a multiplicity of new factors such as fairness, labor, and the environment when enforcing policy is troublesome. There is no neutral principle for assigning weights to such divergent interests, and (even if weights could be assigned) there are no economic tools for accurately measuring how a transaction under review would affect those interests. It follows that abandoning antitrust law’s consumer-welfare standard in favor of an ill-defined multifactor approach would spawn confusion in the private sector and promote arbitrariness in enforcement decisions, undermining the transparency that is a key aspect of the rule of law. Whereas concerns other than consumer welfare may of course be validly considered in setting public policy, they are best dealt with under other statutory schemes, not under antitrust law.
Fourth, and finally, neo-Brandeisian antitrust proposals are not a solution to widely expressed concerns that big companies in general, and large digital platforms in particular, are undermining free speech by censoring content of which they disapprove. Antitrust law is designed to prevent businesses from creating impediments to market competition that reduce economic welfare; it is not well-suited to policing companies’ determinations regarding speech. To the extent that policymakers wish to address speech censorship on large platforms, they should consider other regulatory institutions that would be better suited to the task (such as communications law), while keeping in mind First Amendment limitations on the ability of government to control private speech.
In light of these four points, the primer concludes that the neo-Brandeisian-inspired antitrust “reform” proposals being considered by Congress should be rejected:
[E]fforts to totally reshape antitrust policy into a quasi-regulatory system that arbitrarily blocks and disincentivizes (1) welfare-enhancing mergers and (2) an array of actions by dominant firms are highly troubling. Such interventionist proposals ignore the lack of evidence of serious competitive problems in the American economy and appear arbitrary compared to the existing consumer-welfare-centric antitrust enforcement regime. To use a metaphor, Congress and public officials should avoid a drastic new antitrust cure for an anticompetitive disease that can be handled effectively with existing antitrust medications.
Let us hope that the serious harm associated with neo-Brandeisian legislative “deformation” (a more apt term than reformation) of the antitrust laws is given a full legislative airing before Congress acts.
[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.
Thomas W. Hazlett is the H.H. Macaulay Endowed Professor of Economicsat Clemson University.]
Disclosure: The one time I met Ajit Pai was when he presented a comment on my book, “The Political Spectrum,” at a Cato Institute forum in 2018. He was gracious, thorough, and complimentary. He said that while he had enjoyed the volume, he hoped not to appear in upcoming editions. I took that to imply that he read the book as harshly critical of the Federal Communications Commission. Well, when merited, I concede. But it left me to wonder if he had followed my story to its end, as I document the success of reforms launched in recent decades and advocate their extension. Inclusion in a future edition might work out well for a chairman’s legacy. Or…
While my comment here focuses on radio-spectrum allocation, there was a notable reform achieved during the Pai FCC that touches on the subject, even if far more general in scope. In January 2018, the commission voted to initiate an Office of Economics and Analytics.[1] The organizational change was expeditiously instituted that same year, with the new unit stood up under the leadership of FCC economist Giulia McHenry.[2] I long proposed an FCC “Office of Economic Analysis” on the grounds that it had a reasonable prospect of improving evidence-based policymaking, allowing cost-benefit calculations to be made in a more professional, independent, and less political context.[3] I welcome this initiative by the Pai FCC and look forward to the empirical test now underway.[4]
Big Picture
Spectrum policy had notable triumphs under Chairman Pai but was—as President Carter dubbed the Vietnam War—an “incomplete success.” The main cause for celebration was the campaign to push spectrum-access rights into the marketplace. Pai’s public position was straightforward: “Our spectrum strategy calls for making low-band, mid-band, and high-band airwaves available for flexible use,” he wrote in an FCC blog post on June 19, 2018. But the means used by regulators to pursue that policy agenda repeatedly, historically prove determinative. The Pai FCC traveled pathways both effective and ineffective, and we should learn from either. The basic theme is that regulators do better when they seek to create new rights that enable social coordination and entrepreneurial innovation, rather than enacting rules that specify what they find to be the “best” technologies or business models. The traditional spectrum-allocation approach is to permit exactly what the FCC finds to be the best use of spectrum, but this assumes knowledge about the value of alternatives the regulator does not possess. Moreover, it assumes away the costs of regulators imposing their solutions over and above a competitive process that might have less direction but more freedom. In a 2017 notice, the FCC displayed the progress we have made in departing from administrative control, when it sought guidance from private sector commenters this way:
“Are there opportunities to incentivize relocation or repacking of incumbent licensees to make spectrum available for flexible broadband use?
We seek comment on whether auctions … could be used to increase the availability of flexible use spectrum?”
By focusing on how rights—not markets—should be structured, the FCC may side-step useless food fights and let social progress flow.[5]
Progress
Spectrum-allocation results were realized. Indeed, when one looks at the pattern in licensed and unlicensed allocations for “flexible use” under 10 GHz, the recent four-year interval coincides with generous increases, both absolutely and from trend. See Figure 1. These data feature expansions in bandwidth via liberal licenses that include 70 MHz for CBRS (3.5 GHz band), with rights assigned in Auction 105 (2020), and 280 MHz (3.7 – 3.98 GHz) assigned in Auction 107 (2020-21, soon to conclude). The 70 MHz added via Auction 1002 (600 MHz) in 2017 was accounted for during the previous FCC, but substantial bandwidth in Auctions 101, 102, and 103 was added in the millimeter wave bands (not shown in Figure 1, which focuses on low- and mid-band rights).[6] Meanwhile, multiple increments of unlicensed spectrum allocations were made in 2020: 30 MHz shifted from the Intelligent Transportation Services set-aside (5.9 GHz) in 2020, 80 MHz of CBRS in 2020, and 1,200 MHz (6 GHz) dedicated to Wi-Fi type services in 2020.[7] Substantial millimeter wave frequency space was previously set aside for unlicensed operations in 2016.[8]
Source: FCC and author’s calculations.
First, that’s not the elephant in the room. Auction 107 has assigned licenses allocated 280 MHz of flexible-use mid-band spectrum, producing at least $94 billion in gross bids (of which about $13 billion will be paid to incumbent satellite licensees to reconfigure their operations so as to occupy just 200 MHz, rather than 500 MHz, of the 3.7 – 4.2 GHz band).[9] This crushes previous FCC sales; indeed, it constitutes about 42% of all auction receipts:
FCC auction receipts, 2020 (Auctions 103 and 105): $12.1 billion
FCC auction winning bids, 2020 (Auction 107): $94 billion (gross bids including relocation costs, incentive payments, and before Assignment Phase payments)
The addition of the 280 MHz to existing flexible-use spectrum suitable for mobile (aka, Commercial Mobile Radio Services – CMRS) is the largest increment ever released. It will compose about one-fourth of the low- and mid-band frequencies available via liberal licenses. This constitutes a huge advance with respect to 5G deployments, but going much further—promoting competition, innovation in apps and devices, the Internet of Things, and pushing the technological envelope toward 6G and beyond. Notably, the U.S. has uniquely led this foray to a new frontier in spectrum allocation.
The FCC deserves praise for pushing this proceeding to fruition. So, here it is. The C-Band is a very big deal and a major policy success. And more: in Auction 107, the commission very wisely sold overlay rights. It did not wait for administrative procedures to reconfigure wireless use, tightly supervising new “sharing” of the band, but (a) accepted the incumbents’ basic strategy for reallocation, (b) sold new prospective rights to high bidders, subject to protection of incumbents, (c) used a fraction of proceeds to fund incumbents cooperating with the reallocation, plussing-up payments when hitting deadlines, and (d) implicitly relied on the new licensees to push the relocation process forward.
Challenges
It is interesting that the FCC sort of articulated this useful model, and sort of did not:
For a successful public auction of overlay licenses in the 3.7-3.98 GHz band, bidders need to know before an auction commences when they will get access to that currently occupied spectrum as well as the costs they will incur as a condition of their overlay license. (FCC C-Band Order [Feb. 7, 2020], par. 110)
A germ of truth, but note: Auction 107 also demonstrated just the reverse. Rights were sold prior to clearing the airwaves and bidders—while liable for “incentive payments”—do not know with certainty when the frequencies will be available for their use. Risk is embedded, as it is widely in financial assets (corporate equity shares are efficiently traded despite wide disagreement on future earnings), and yet markets perform. Indeed, the “certainty” approach touted by the FCC in their language about a “successful public auction” has long deterred efficient reallocations, as the incumbents’ exiting process holds up arrival of the entrants. The central feature of the C-Band reallocation was not to create certainty, but to embed an overlay approach into the process. This draws incumbents and entrants together into positive-sum transactions (mediated by the FCC are party-to-party) where they cooperate to create new productive opportunities, sharing the gains.
The inspiration for the C-Band reallocation of satellite spectrum was bottom-up. As with so much of the radio spectrum, the band devoted to satellite distribution of video (relays to and from an array of broadcast and cable TV systems and networks) was old and tired. For decades, applications and systems were locked in by law. They consumed lots of bandwidth while ignoring the emergence of newer technologies like fiber optics (emphasis to underscore that products launched in the 1980s are still cutting-edge challenges for 2021 Spectrum Policy). Spying this mismatch, and seeking gains from trade, creative risk-takers petitioned the FCC.
In a mid-2017 request, computer chipmaker Intel and C-Band satellite carrier Intelsat (no corporate relationship) joined forces to ask for permission to expand the scope of satellite licenses. The proffered plan was for license holders to invest in spectrum economies by upgrading satellites and earth stations—magically creating new, unoccupied channels in prime mid-band frequencies perfect for highly valuable 5G services. All existing video transport services would continue, while society would enjoy way more advanced wireless broadband. All regulators had to do was allow “change of use” in existing licenses. Markets would do the rest: satellite operators would make efficient multi-billion-dollar investments, coordinating with each other and their customers, and then take bids from new users itching to access the prime 4 GHz spectrum. The transition to bold, new, more valuable applications would compensate legacy customers and service providers.
This “spectrum sharing” can spin gold – seizing on capitalist discovery and demand revelation in market bargains. Voila, the 21st century, delivered.
Well, yes and no. At first, the FCC filing was a yawner, the standard bureaucratic response. But this one took off took off when Chairman Pai—alertly, and in the public interest—embraced the proposal, putting it on the July 12, 2018 FCC meeting agenda. Intelsat’s market cap jumped from about $500 million to over $4.5 billion—the value of the spectrum it was using was worth far more than the service it was providing, and the prospect that it might realize some substantial fraction of the resource revaluation was visible evidence.[11]
While the Pai FCC leaned in the proper policy direction, politics soon blew the process down. Congress denounced the “private auction” as a “windfall,” bellowing against the unfairness of allowing corporations (some foreign-owned!) to cash out. The populist message was upside-down. The social damage created by mismanagement of spectrum—millions of Americans paying more and getting less from wireless than otherwise, robbing ordinary citizens of vast consumer surplus—was being fixed by entrepreneurial initiative. Moreover, the public gains (lower prices plus innovation externalities spun off from liberated bandwidth) was undoubtedly far greater than any rents captured by the incumbent licensees. And a great bonus to spur future progress: rewards for those parties initiating and securing efficiency-enhancing rights will unleash vastly more productive activity.
But the populist winds—gale force and bipartisan—spun the FCC.
It was legally correct that Intelsat and its rival satellite carriers did not own the spectrum allocated to the C-Band. Indeed, that was root of the problem. And here’s a fatal catch: in applying for broader spectrum property rights, they revealed a valuable discovery. The FCC, posing as referee, turned competitor and appropriated the proffered business plan on behalf of its client (the U.S. government), and then auctioned it to bidders. Regulators did tip the incumbents, whose help was still needed in reorganizing the C-Band, setting $3.3 billion as a fair price for “moving costs” (changing out technology to reduce their transmission footprints) and dangled another $9.7 billion in “incentive payments” not to dilly dally. In total, carriers have bid some $93.9 billion, or $1.02 per MHz-Pop.[12] This is 4.7 times the price paid for the Priority Access Licenses (PALs) allocated 70 MHz in Auction 105 earlier in 2020.
The TOTM assignment was not to evaluate Ajit Pai but to evaluate the Pai FCC and its spectrum policies. On that scale, great value was delivered by the Intel-Intelsat proposal, and the FCC’s alert endorsement, offset in some measure by the long-term losses that will likely flow from the dirigiste retreat to fossilized spectrum rights controlled by diktat.
Sharing Nicely
And that takes us to 2020’s Auction 105 (Citizens Broadband Radio Services, CBRS). The U.S. has lagged much of the world in allocating flexible-use spectrum rights in the 3.5 GHz band. Ireland auctioned rights to use 350 MHz in May 2017 and many countries did likewise between then and 2020, distributing far more than the 70 MHz allocated to the Priority Access Licenses (PALs); 150 MHz to 390 MHz is the range. The Pai FCC can plausibly assign the lag to “preexisting conditions.” Here, however, I will stress that the Pai FCC did not substantially further our understanding of the costs of “spectrum sharing” under coordinating devices imposed by the FCC.
All commercially valuable spectrum bands are shared. The most intensely shared, in the relevant economic sense, are those bands curated by mobile carriers. These frequencies are complemented by extensive network capital supplied by investors, and permit millions of users—including international roamers—to gain seamless connectivity. Unlicensed bands, alternatively, tend to separate users spatially, powering down devices to localize footprints. These limits work better in situations where users desire short transmissions, like a Bluetooth link from iPhone to headphone or when bits can be handed off to a wide area network by hopping 60 feet to a local “hot spot.” The application of “spectrum sharing” to imply a non-exclusive (or unlicensed) rights regime is, at best, highly misleading. Whenever conditions of scarcity exist, meaning that not all uses can be accommodated without conflict, some rationing follows. It is commonly done by price, behavioral restriction, or both.
In CBRS, the FCC has imposed three layers of “priority” access across the 3550-3700 MHz band. Certain government radars are assumed to be fixed and must be protected. When in use, these systems demand other wireless services stay silent on particular channels. Next in line are PAL owners, parties which have paid for exclusivity, but which are not guaranteed access to a given channel. These rights, which sold for about $4.5 billion, are allocated dynamically by a controller (a Spectrum Access System, or SAS). The radios and networks used automatically and continuously check in to obtain spectrum space permissions. Seven PALs, allocated 10 MHz each, have been assigned, 70 MHz in total. Finally, General Access Authorizations (GAA) are given without limit or exclusivity to radio devices across the 80 MHz remaining in the band plus any PALs not in use. Some 5G phones are already equipped to use such bands on an unlicensed basis.
We shall see how the U.S. system works in comparison to alternatives. What is important to note is that the particular form of “spectrum sharing” is neither necessary nor free. As is standard outside the U.S., exclusive rights analogous to CMRS licenses could have been auctioned here, with U.S. government radars given vested rights.
One point that is routinely missed is that the decision to have the U.S. government partition the rights in three layers immediately conceded that U.S. government priority applications (for radar) would never shift. That is asserted as though it is a proposition that needs no justification, but it is precisely the sort of impediment to efficiency that has plagued spectrum reallocations for decades. It was, for instance, the 2002 assumption behind TV “white spaces”—that 402 MHz of TV Band frequencies was fixed in place, that the unused channels could never be repackaged and sold as exclusive rights and diverted to higher-valued uses. That unexamined assertion was boldly run then, as seen in the reduction of the band from 402 MHz to 235 MHz following Auctions 73 (2008) and 1001/1002 (2016-17), as well as in the clear possibility that remaining TV broadcasts could today be entirely transferred to cable, satellite, and OTT broadband (as they have already, effectively, been). The problem in CBRS is that the rights now distributed for the 80 MHz of unlicensed, with its protections of certain priority services, does not sprinkle the proper rights into the market such that positive-sum transitions can be negotiated. We’re stuck with whatever inefficiencies this “preexisting condition” of the 3.5 GHz might endow, unless another decadelong FCC spectrum allocation can move things forward.[13]
Already visible is that the rights sold as PALs in CBRS are only about 20% of the value of rights sold in the C-Band. This differential reflects the power restrictions and overhead costs embedded in the FCC’s sharing rules for CBRS (involving dynamic allocation of the exclusive access rights conveyed in PALs) but avoided in C-Band. In the latter, the sharing arrangements are delegated to the licensees. Their owners reveal that they see these rights as more productive, with opportunities to host more services.
There should be greater recognition of the relevant trade-offs in imposing coexistence rules. Yet, the Pai FCC succumbed in 5.9 GHz and in the 6 GHz bands to the tried-and-true options of Regulation Past. This was hugely ironic in the former, where the FCC had in 1999 imposed unlicensed access under rules that favored specific automotive informatics—Dedicated Short-Range Communications (DSRC)—that proved a 20-year bust. In diagnosing this policy blunder, the FCC then repeated it, splitting off a 45 MHz band with Wi-Fi-friendly unlicensed rules, and leaving 30 MHz to continue as the 1999 set-aside for DSRC. A liberalization of rights that would have allowed for a “private auction” to change the use of the band would have been the preferred approach. Instead, we are left with a partition of the band into rival rule regimes again established by administrative fiat.
This approach was then again imposed in the large 1.2 GHz unlicensed allocation surrounding 6 GHz, making a big 2020 splash. The FCC here assumed, categorically, that unlicensed rules are the best way to sponsor spectrum coordination. It ignores the costs of that coordination. And the commission appears to forget the progress it has made with innovative policy solutions, pulling in market forces through “overlay” licenses. These useful devices were used, in one form or another, to reallocate spectrum in for 2G in Auction 4, AWS in Auction 66, millimeter bands in Auctions 102 and 103, the “TV Incentive Auction,” the satellite C-Band in Auction 107, and have recently appeared as star players in the January 2021 FCC plan to rationalize the complex mix of rights scattered around the 2.5 GHz band.[14] Too complicated for administrators to figure out, it could be transactionally more efficient to let market competitors figure this out.
The Future
The re-allocations in 5.9 GHz and the 6 GHz bands may yet host productive services. One can hope. But how will regulators know that the options allowed, and taken, are superior to what alternatives—suppressed by law for the next five, 10, 20 years—might have emerged had competitors had the right to test business models or technologies disfavored by the regulators best laid plans. That is the thinking that locked in the TV band, the C-Band for Satellites, and the ITS Band. It’s what we learned to be problematic throughout the Political Radio Spectrum. We shall see, as Chairman Pai speculated, what future chapters these decisions leave for future editions.
[3] Thomas Hazlett, Economic Analysis at the Federal Communications Commission: A Simple Proposal to Atone for Past Sins, Resources for the Future Discussion Paper 11-23(May 2011);David Honig, FCC Reorganization: How Replacing Silos with Functional Organization Would Advance Civil Rights, 3 University of Pennsylvania Journal of Law and Public Affairs 18 (Aug. 2018).
[4] It is with great sadness that Jerry Ellig, the 2017-18 FCC Chief Economist who might well offer the most careful analysis of such a structural reform, will not be available for the task – one which he had already begun, writing this recent essay with two other FCC Chief Economists: Babette Boliek, Jerry Ellig and Jeff Prince, Improved economic analysis should be lasting part of Pai’s FCC legacy, The Hill (Dec. 29, 2020). Jerry’s sudden passing, on January 21, 2021, is a deep tragedy. Our family weeps for his wonderful wife, Sandy, and his precious daughter, Kat.
[6] In 2018-19, FCC Auctions 101 and 102 offered licenses allocated 1,550 MHz of bandwidth in the 24 GHz and 28 GHz bands, although some of the bandwidth had previously been assigned and post-auction confusion over interference with adjacent frequency uses (in 24 GHz) has impeded some deployments. In 2020, Auction 103 allowed competitive bidding for licenses to use 37, 39, and 47 GHz frequencies, 3400 MHz in aggregate. Net proceeds to the FCC in 101, 102 and 103 were: $700.3 million, $2.02 billion, and $7.56 billion, respectively.
[7] I estimate that some 70 MHz of unlicensed bandwidth, allocated for television white space devices, was reduced pursuant to the Incentive Auction in 2017. This, however, was baked into spectrum policy prior to the Pai FCC.
[8] Notably, 64-71 GHz was allocated for unlicensed radio operations in the Spectrum Frontiers proceeding, adjacent to the 57-64 GHz unlicensed bands. See Use of Spectrum Bands Above 24 GHz For Mobile Radio Services, et al., Report and Order and Further Notice of Proposed Rulemaking, 31 FCC Rcd 8014 (2016), 8064-65, para. 130.
[9] The revenues reflect bids made in the Clock phase of Auction 107. An Assignment Phase has yet to occur as of this writing.
[10] The 2021 FCC Budget request, p. 34: “As of December 2019, the total amount collected for broader government use and deficit reduction since 1994 exceeds $117 billion.”
[11] Kerrisdale Management issued a June 2018 report that tied the proceeding to a dubious source: “to the market-oriented perspective on spectrum regulation – as articulated, for instance, by the recently published book The Political Spectrum by former FCC chief economist Thomas Winslow Hazlett – [that] the original sin of the FCC was attempting to dictate from on high what licensees should or shouldn’t do with their spectrum. By locking certain bands into certain uses, with no simple mechanism for change or renegotiation, the agency guaranteed that, as soon as technological and commercial realities shifted – as they do constantly – spectrum use would become inefficient.”
[12] Net proceeds will be reduced to reflect bidding credits extended small businesses, but additional bids will be received in the Assignment Phase of Auction 107, still to be held. Likely totals will remain somewhere around current levels.
[13] The CBRS band is composed of frequencies at 3550-3700 MHz. The top 50 MHz of that band was officially allocated in 2005 in a proceeding that started years earlier. It was then curious that the adjacent 100 MHz was not included.
[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.
Geoffrey A. Manne is the president and founder of the International Center for Law and Economics.]
I’m delighted to add my comments to the chorus of voices honoring Ajit Pai’s remarkable tenure at the Federal Communications Commission. I’ve known Ajit longer than most. We were classmates in law school … let’s just say “many” years ago. Among the other symposium contributors I know of only one—fellow classmate, Tom Nachbar—who can make a similar claim. I wish I could say this gives me special insight into his motivations, his actions, and the significance of his accomplishments, but really it means only that I have endured his dad jokes and interminable pop-culture references longer than most.
But I can say this: Ajit has always stood out as a genuinely humble, unfailingly gregarious, relentlessly curious, and remarkably intelligent human being, and he deployed these characteristics to great success at the FCC.
Ajit’s tenure at the FCC was marked by an abiding appreciation for the importance of competition, both as a guiding principle for new regulations and as a touchstone to determine when to challenge existing ones. As others have noted (and as we have written elsewhere), that approach was reflected significantly in the commission’s Restoring Internet Freedom Order, which made competition—and competition enforcement by the antitrust agencies—the centerpiece of the agency’s approach to net neutrality. But I would argue that perhaps Chairman Pai’s greatest contribution to bringing competition to the forefront of the FCC’s mandate came in his work on media modernization.
Fairly early in his tenure at the commission, Ajit raised concerns with the FCC’s failure to modernize its media-ownership rules. In response to the FCC’s belated effort to initiate the required 2010 and 2014 Quadrennial Reviews of those rules, then-Commissioner Pai noted that the commission had abdicated its responsibility under the statute to promote competition. Not only was the FCC proposing to maintain a host of outdated existing rules, but it was also moving to impose further constraints (through new limitations on the use of Joint Sales Agreements (JSAs)). As Ajit noted, such an approach was antithetical to competition:
In smaller markets, the choice is not between two stations entering into a JSA and those same two stations flourishing while operating completely independently. Rather, the choice is between two stations entering into a JSA and at least one of those stations’ viability being threatened. If stations in these smaller markets are to survive and provide many of the same services as television stations in larger markets, they must cut costs. And JSAs are a vital mechanism for doing that.
The efficiencies created by JSAs are not a luxury in today’s digital age. They are necessary, as local broadcasters face fierce competition for viewers and advertisers.
Under then-Chairman Tom Wheeler, the commission voted to adopt the Quadrennial Review in 2016, issuing rules that largely maintained the status quo and, at best, paid tepid lip service to the massive changes in the competitive landscape. As Ajit wrote in dissent:
The changes to the media marketplace since the FCC adopted the Newspaper-Broadcast Cross-Ownership Rule in 1975 have been revolutionary…. Yet, instead of repealing the Newspaper-Broadcast Cross-Ownership Rule to account for the massive changes in how Americans receive news and information, we cling to it.
And over the near-decade since the FCC last finished a “quadrennial” review, the video marketplace has transformed dramatically…. Yet, instead of loosening the Local Television Ownership Rule to account for the increasing competition to broadcast television stations, we actually tighten that regulation.
And instead of updating the Local Radio Ownership Rule, the Radio-Television Cross-Ownership Rule, and the Dual Network Rule, we merely rubber-stamp them.
The more the media marketplace changes, the more the FCC’s media regulations stay the same.
As Ajit also accurately noted at the time:
Soon, I expect outside parties to deliver us to the denouement: a decisive round of judicial review. I hope that the court that reviews this sad and total abdication of the administrative function finds, once and for all, that our media ownership rules can no longer stay stuck in the 1970s consistent with the Administrative Procedure Act, the Communications Act, and common sense. The regulations discussed above are as timely as “rabbit ears,” and it’s about time they go the way of those relics of the broadcast world. I am hopeful that the intervention of the judicial branch will bring us into the digital age.
In the interim, however, Ajit became Chairman of the FCC. And in his first year in that capacity, he took up a reconsideration of the 2016 Order. This 2017 Order on Reconsideration is the one that finally came before the Supreme Court.
Consistent with his unwavering commitment to promote media competition—and no longer a minority commissioner shouting into the wind—Chairman Pai put forward a proposal substantially updating the media-ownership rules to reflect the dramatically changed market realities facing traditional broadcasters and newspapers:
Today we end the 2010/2014 Quadrennial Review proceeding. In doing so, the Commission not only acknowledges the dynamic nature of the media marketplace, but takes concrete steps to update its broadcast ownership rules to reflect reality…. In this Order on Reconsideration, we refuse to ignore the changed landscape and the mandates of Section 202(h), and we deliver on the Commission’s promise to adopt broadcast ownership rules that reflect the present, not the past. Because of our actions today to relax and eliminate outdated rules, broadcasters and local newspapers will at last be given a greater opportunity to compete and thrive in the vibrant and fast-changing media marketplace. And in the end, it is consumers that will benefit, as broadcast stations and newspapers—those media outlets most committed to serving their local communities—will be better able to invest in local news and public interest programming and improve their overall service to those communities.
Ajit’s approach was certainly deregulatory. But more importantly, it was realistic, well-reasoned, and responsive to changing economic circumstances. Unlike most of his predecessors, Ajit was unwilling to accede to the torpor of repeated judicial remands (on dubious legal grounds, as we noted in our amicus brief urging the Court to grant certiorari in the case), permitting facially and wildly outdated rules to persist in the face of massive and obvious economic change.
Like Ajit, I am not one to advocate regulatory action lightly, especially in the (all-too-rare) face of judicial review that suggests an agency has exceeded its discretion. But in this case, the need for dramatic rule change—here, to deregulate—was undeniable. The only abuse of discretion was on the part of the court, not the agency. As we put it in our amicus brief:
[T]he panel vacated these vital reforms based on mere speculation that they would hinder minority and female ownership, rather than grounding its action on any record evidence of such an effect. In fact, the 2017 Reconsideration Order makes clear that the FCC found no evidence in the record supporting the court’s speculative concern.
…In rejecting the FCC’s stated reasons for repealing or modifying the rules, absent any evidence in the record to the contrary, the panel substituted its own speculative concerns for the judgment of the FCC, notwithstanding the FCC’s decades of experience regulating the broadcast and newspaper industries. By so doing, the panel exceeded the bounds of its judicial review powers under the APA.
Key to Ajit’s conclusion that competition in local media markets could be furthered by permitting more concentration was his awareness that the relevant market for analysis couldn’t be limited to traditional media outlets like broadcasters and newspapers; it must include the likes of cable networks, streaming video providers, and social-media platforms, as well. As Ajit put it in a recent speech:
The problem is a fundamental refusal to grapple with today’s marketplace: what the service market is, who the competitors are, and the like. When assessing competition, some in Washington are so obsessed with the numerator, so to speak—the size of a particular company, for instance—that they’ve completely ignored the explosion of the denominator—the full range of alternatives in media today, many of which didn’t exist a few years ago.
When determining a particular company’s market share, a candid assessment of the denominator should include far more than just broadcast networks or cable channels. From any perspective (economic, legal, or policy), it should include any kinds of media consumption that consumers consider to be substitutes. That could be TV. It could be radio. It could be cable. It could be streaming. It could be social media. It could be gaming. It could be still something else. The touchstone of that denominator should be “what content do people choose today?”, not “what content did people choose in 1975 or 1992, and how can we artificially constrict our inquiry today to match that?”
For some reason, this simple and seemingly undeniable conception of the market escapes virtually all critics of Ajit’s media-modernization agenda. Indeed, even Justice Stephen Breyer in this week’s oral argument seemed baffled by the notion that more concentration could entail more competition:
JUSTICE BREYER: I’m thinking of it solely as a — the anti-merger part, in — in anti-merger law, merger law generally, I think, has a theory, and the theory is, beyond a certain point and other things being equal, you have fewer companies in a market, the harder it is to enter, and it’s particularly harder for smaller firms. And, here, smaller firms are heavily correlated or more likely to be correlated with women and minorities. All right?
The opposite view, which is what the FCC has now chosen, is — is they want to move or allow to be moved towards more concentration. So what’s the theory that that wouldn’t hurt the minorities and women or smaller businesses? What’s the theory the opposite way, in other words? I’m not asking for data. I’m asking for a theory.
Of course, as Justice Breyer should surely know—and as I know Ajit Pai knows—counting the number of firms in a market is a horrible way to determine its competitiveness. In this case, the competition from internet media platforms, particularly for advertising dollars, is immense. A regulatory regime that prohibits traditional local-media outlets from forging efficient joint ventures or from obtaining the scale necessary to compete with those platforms does not further competition. Even if such a rule might temporarily result in more media outlets, eventually it would result in no media outlets, other than the large online platforms. The basic theory behind the Reconsideration Order—to answer Justice Breyer—is that outdated government regulation imposes artificial constraints on the ability of local media to adopt the organizational structures necessary to compete. Removing those constraints may not prove a magic bullet that saves local broadcasters and newspapers, but allowing the rules to remain absolutely ensures their demise.
Tom Wheeler, Pai’s predecessor at the FCC, claimed that his personal mantra was “competition, competition, competition.” His greatest legacy, in that regard, was in turning over the agency to Ajit.
[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.
Thomas B. Nachbar is a professor of law at the University of Virginia School of Law and a senior fellow at the Center for National Security Law.]
It would be impossible to describe Ajit Pai’s tenure as chair of the Federal Communications Commission as ordinary. Whether or not you thought his regulatory style or his policies were innovative, his relationship with the public has been singular for an FCC chair. His Reese’s mug, alone, has occupied more space in the American media landscape than practically any past FCC chair. From his first day, he has attracted consistent, highly visible criticism from a variety of media outlets, although at least John Oliver didn’t describe him as a dingo. Just today, I read that Ajit Pai single handedly ruined the internet, which when I got up this morning seemed to be working pretty much the same way it was four years ago.
I might be biased in my view of Ajit. I’ve known him since we were law school classmates, when he displayed the same zeal and good-humored delight in confronting hard problems that I’ve seen in him at the commission. So I offer my comments not as an academic and student of FCC regulation, but rather as an observer of the communications regulatory ecosystem that Ajit has dominated since his appointment. And while I do not agree with everything he’s done at the commission, I have admired his single-minded determination to pursue policies that he believes will expand access to advanced telecommunications services. One can disagree with how he’s pursued that goal—and many have—but characterizing his time as chair in any other way simply misses the point. Ajit has kept his eye on expanding access, and he has been unwavering in pursuit of that objective, even when doing so has opened him to criticism, which is the definition of taking political risk.
The decision to include SpaceX is at one level unremarkable. SpaceX proposes to offer broadband internet access through low-Earth-orbit satellites, which is the kind of thing that is completely amazing but is becoming increasingly un-amazing as communications technology advances. SpaceX’s decision to use satellites is particularly valuable for initiatives like the RDOF, which specifically seek to provide services where previous (largely terrestrial) services have not. That is, in fact, the whole point of the RDOF, a point that sparked fiery debate over the FCC’s decision to focus the first phase of the RDOF on areas with no service rather than areas with some service. Indeed, if anything typifies the current tenor of the debate (at the center of which Ajit Pai has resided since his confirmation as chair), it is that a policy decision over which kind of under-served areas should receive more than $16 billion in federal funding should spark such strongly held views. In the end, SpaceX was awarded $885.5 million to participate in the RDOF, almost 10% of the first-round funds awarded.
But on a different level, the decision to include SpaceX is extremely remarkable. Elon Musk, SpaceX’s pot-smoking CEO, does not exactly fit regulatory stereotypes. (Disclaimer: I personally trust Elon Musk enough to drive my children around in one of his cars.) Even more significantly, SpaceX’s Starlink broadband service doesn’t actually exist as a commercial product. If you go to Starlink’s website, you won’t find a set of splashy webpages featuring products, services, testimonials, and a variety of service plans eager for a monthly assignation with your credit card or bank account. You will be greeted with a page asking for your email and service address in case you’d like to participate in Starlink’s beta program. In the case of my address, which is approximately 100 miles from the building where the FCC awarded SpaceX over $885 million to participate in the RDOF, Starlink is not yet available. I will, however, “be notified via email when service becomes available in your area,” which is reassuring but doesn’t get me any closer to watching cat videos.
That is perhaps why Chairman Pai was initially opposed to including SpaceX in the low-latency portion of the RDOF. SpaceX was offering unproven technology and previous satellite offerings had been high-latency, which is good for some uses but not others.
But then, an even more remarkable thing happened, at least in Washington: a regulator at the center of a controversial issue changed his mind and—even more remarkably—admitted his decision might not work out. When the final order was released, SpaceX was allowed to bid for low-latency RDOF funds even though the commission was “skeptical” of SpaceX’s ability to deliver on its low-latency promise. Many doubted that SpaceX would be able to effectively compete for funds, but as we now know, that decision led to SpaceX receiving a large share of the Phase I funds. Of course, that means that if SpaceX doesn’t deliver on its latency promises, a substantial part of the RDOF Phase I funds will fail to achieve their purpose, and the FCC will have backed the wrong horse.
I think we are unlikely to see such regulatory risk-taking, both technically and politically, in what will almost certainly be a more politically attuned commission in the coming years. Even less likely will be acknowledgments of uncertainty in the commission’s policies. Given the political climate and the popular attention policies like network neutrality have attracted, I would expect the next chair’s views about topics like network neutrality to exhibit more unwavering certainty than curiosity and more resolve than risk-taking. The most defining characteristic of modern communications technology and markets is change. We are all better off with a commission in which the other things that can change are minds.
[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.
Jerry Ellig was a research professor at The George Washington University Regulatory Studies Center and served as chief economist at the Federal Communications Commission from 2017 to 2018. Tragically, he passed away Jan. 20, 2021. TOTM is honored to publish his contribution to this symposium.]
One significant aspect of Chairman Ajit Pai’s legacy is not a policy change, but an organizational one: establishment of the Federal Communications Commission’s (FCC’s) Office of Economics and Analytics (OEA) in 2018.
Prior to OEA, most of the FCC’s economists were assigned to the various policy bureaus, such as Wireless, Wireline Competition, Public Safety, Media, and International. Each of these bureaus had its own chief economist, but the rank-and-file economists reported to the managers who ran the bureaus – usually attorneys who also developed policy and wrote regulations. In the words of former FCC Chief Economist Thomas Hazlett, the FCC had “no location anywhere in the organizational structure devoted primarily to economic analysis.”
Establishment of OEA involved four significant changes. First, most of the FCC’s economists (along with data strategists and auction specialists) are now grouped together into an organization separate from the policy bureaus, and they are managed by other economists. Second, the FCC rules establishing the new office tasked OEA with reviewing every rulemaking, reviewing every other item with economic content that comes before the commission for a vote, and preparing a full benefit-cost analysis for any regulation with $100 million or more in annual economic impact. Third, a joint memo from the FCC’s Office of General Counsel and OEA specifies that economists are to be involved in the early stages of all rulemakings. Fourth, the memo also indicates that FCC regulatory analysis should follow the principles articulated in Executive Order 12866 and Office of Management and Budget Circular A-4 (while specifying that the FCC, as an independent agency, is not bound by the executive order).
While this structure for managing economists was new for the FCC, it is hardly uncommon in federal regulatory agencies. Numerous independent agencies that deal with economic regulation house their economists in a separate bureau or office, including the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Surface Transportation Board, the Office of Comptroller of the Currency, and the Federal Trade Commission. The SEC displays even more parallels with the FCC. A guidance memo adopted in 2012 by the SEC’s Office of General Counsel and Division of Risk, Strategy and Financial Innovation (the name of the division where economists and other analysts were located) specifies that economists are to be involved in the early stages of all rulemakings and articulates best analytical practices based on Executive Order 12866 and Circular A-4.
A separate economics office offers several advantages over the FCC’s prior approach. It gives the economists greater freedom to offer frank advice, enables them to conduct higher-quality analysis more consistent with the norms of their profession, and may ultimately make it easier to uphold FCC rules that are challenged in court.
Independence. When I served as chief economist at the FCC in 2017-2018, I gathered from conversations that the most common practice in the past was for attorneys who wrote rules to turn to economists for supporting analysis after key decisions had already been made. This was not always the process, but it often occurred. The internal working group of senior FCC career staff who drafted the plan for OEA reached similar conclusions. After the establishment of OEA, an FCC economist I interviewed noted how his role had changed: “My job used to be to support the policy decisions made in the chairman’s office. Now I’m much freer to speak my own mind.”
Ensuring economists’ independence is not a problem unique to the FCC. In a 2017 study, Stuart Shapiro found that most of the high-level economists he interviewed who worked on regulatory impact analyses in federal agencies perceive that economists can be more objective if they are located outside the program office that develops the regulations they are analyzing. As one put it, “It’s very difficult to conduct a BCA [benefit-cost analysis] if our boss wrote what you are analyzing.” Interviews with senior economists and non-economists who work on regulation that I conducted for an Administrative Conference of the United States project in 2019 revealed similar conclusions across federal agencies. Economists located in organizations separate from the program office said that structure gave them greater independence and ability to develop better analytical methodologies. On the other hand, economists located in program offices said they experienced or knew of instances where they were pressured or told to produce an analysis with the results decision-makers wanted.
The FTC provides an informative case study. From 1955-1961, many of the FTC’s economists reported to the attorneys who conducted antitrust cases; in 1961, they were moved into a separate Bureau of Economics. Fritz Mueller, the FTC chief economist responsible for moving the antitrust economists back into the Bureau of Economics, noted that they were originally placed under the antitrust attorneys because the attorneys wanted more control over the economic analysis. A 2015 evaluation by the FTC’s Inspector General concluded that the Bureau of Economics’ existence as a separate organization improves its ability to offer “unbiased and sound economic analysis to support decision-making.”
Higher-quality analysis. An issue closely related to economists’ independence is the quality of the economic analysis. Executive branch regulatory economists interviewed by Richard Williams expressed concern that the economic analysis was more likely to be changed to support decisions when the economists are located in the program office that writes the regulations. More generally, a study that Catherine Konieczny and I conducted while we were at the FCC found that executive branch agencies are more likely to produce higher-quality regulatory impact analyses if the economists responsible for the analysis are in an independent economics office rather than the program office.
Upholding regulations in court. In Michigan v. EPA, the Supreme Court held that it is unreasonable for agencies to refuse to consider regulatory costs if the authorizing statute does not prohibit them from doing so. This precedent will likely increase judicial expectations that agencies will consider economic issues when they issue regulations. The FCC’s OGC-OEA memo cites examples of cases where the quality of the FCC’s economic analysis either helped or harmed the commission’s ability to survive legal challenge under the Administrative Procedure Act’s “arbitrary and capricious” standard. More systematically, a recent Regulatory Studies Center working paper finds that a higher-quality economic analysis accompanying a regulation reduces the likelihood that courts will strike down the regulation, provided that the agency explains how it used the analysis in decisions.
Two potential disadvantages of a separate economics office are that it may make the economists easier to ignore (what former FCC Chief Economist Tim Brennan calls the “Siberia effect”) and may lead the economists to produce research that is less relevant to the practical policy concerns of the policymaking bureaus. The FCC’s reorganization plan took these disadvantages seriously.
To ensure that the ultimate decision-makers—the commissioners—have access to the economists’ analysis and recommendations, the rules establishing the office give OEA explicit responsibility for reviewing all items with economic content that come before the commission. Each item is accompanied by a cover memo that indicates whether OEA believes there are any significant issues, and whether they have been dealt with adequately. To ensure that economists and policy bureaus work together from the outset of regulatory initiatives, the OGC-OEA memo instructs:
Bureaus and Offices should, to the extent practicable, coordinate with OEA in the early stages of all Commission-level and major Bureau-level proceedings that are likely to draw scrutiny due to their economic impact. Such coordination will help promote productive communication and avoid delays from the need to incorporate additional analysis or other content late in the drafting process. In the earliest stages of the rulemaking process, economists and related staff will work with programmatic staff to help frame key questions, which may include drafting options memos with the lead Bureau or Office.
While presiding over his final commission meeting on Jan. 13, Pai commented, “It’s second nature now for all of us to ask, ‘What do the economists think?’” The real test of this institutional innovation will be whether that practice continues under a new chair in the next administration.
[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.”
Other Reforms
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.
Joshua D. Wright is university professor and executive director of the Global Antitrust Institute at George Mason University’s Scalia Law School. He served as a commissioner of the Federal Trade Commission from 2013 through 2015.]
Much of this symposium celebrates Ajit’s contributions as chairman of the Federal Communications Commission and his accomplishments and leadership in that role. And rightly so. But Commissioner Pai, not just Chairman Pai, should also be recognized.
I first met Ajit when we were both minority commissioners at our respective agencies: the FCC and Federal Trade Commission. Ajit had started several months before I was confirmed. I watched his performance in the minority with great admiration. He reached new heights when he shifted from minority commissioner to chairman, and the accolades he will receive for that work are quite appropriate. But I want to touch on his time as a minority commissioner at the FCC and how that should inform the retrospective of his tenure.
Let me not bury the lead: Ajit Pai has been, in my view, the most successful, impactful minority commissioner in the history of the modern regulatory state. And it is that success that has led him to become the most successful and impactful chairman, too.
I must admit all of this success makes me insanely jealous. My tenure as a minority commissioner ran in parallel with Ajit. We joked together about our fierce duel to be the reigning king of regulatory dissents. We worked together fighting against net neutrality. We compared notes on dissenting statements and opinions. I tried to win our friendly competition. I tried pretty hard. And I lost; worse than I care to admit. But we had fun. And I very much admired the combination of analytical rigor, clarity of exposition, and intellectual honesty in his work. Anyway, the jealousy would be all too much if he weren’t also a remarkable person and friend.
The life of a minority commissioner can be a frustrating one. Like Sisyphus, the minority commissioner often wakes up each day to roll the regulatory (well, in this case, deregulatory) boulder up the hill, only to watch it roll down. And then do it again. And again. At times, it is an exhausting series of jousting matches with the windmills of Washington bureaucracy. It is not often that a minority commissioner has as much success as Commissioner Pai did: dissenting opinions ultimately vindicated by judicial review; substantive victories on critical policy issues; paving the way for institutional and procedural reforms.
It is one thing to write a raging dissent about how the majority has lost all principles. Fire and brimstone come cheap when there aren’t too many consequences to what you have to say. Measure a man after he has been granted power and a chance to use it, and only then will you have a true test of character. Ajit passes that test like few in government ever have.
This is part of what makes Ajit Pai so impressive. I have seen his work firsthand. The multitude of successes Ajit achieved as Chairman Pai were predictable, precisely because Commissioner Pai told the world exactly where he stood on important telecommunications policy issues, the reasons why he stood there, and then, well, he did what he said he would. The Pai regime was much more like a Le’Veon Bell run, between the tackles, than a no-look pass from Patrick Mahomes to Tyreek Hill. Commissioner Pai shared his playbook with the world; he told us exactly where he was going to run the ball. And then Chairman Pai did exactly that. And neither bureaucratic red tape nor political pressure—or even physical threat—could stop him.
Here is a small sampling of his contributions, many of them building on groundwork he laid in the minority:
Focus on Economic Analysis
One of Chairman Pai’s most important contributions to the FCC is his work to systematically incorporate economic analysis into FCC decision-making. The triumph of this effort was establishing the Office of Economic Analysis (OEA) in 2018. The OEA focus on conducting economic analyses of the costs, benefits, and economic impacts of the commission’s proposed rules will be a critical part of agency decision-making from here on out. This act alone would form a legacy any agency head could easily rest their laurels on. The OEA’s work will shape the agency for decades and ensure that agency decisions are made with the oversight economics provides.
This is a hard thing to do; just hiring economists is not enough. Structure matters. How economists get information to decision-makers determines if it will be taken seriously. To this end, Ajit has taken all the lessons from what has made the economists at the FTC so successful—and the lessons from the structural failures at other agencies—and applied them at the FCC.
Structural independence looks like “involving economists on cross-functional teams at the outset and allowing the economics division to make its own, independent recommendations to decision-makers.”[1] And it is necessary for economics to be taken seriously within an agency structure. Ajit has assured that FCC decision-making will benefit from economic analysis for years to come.
Narrowing the Digital Divide
Chairman Pai made helping the disadvantaged get connected to the internet and narrowing the digital divide the top priorities during his tenure. And Commissioner Pai was fighting for this long before the pandemic started.
As businesses, schools, work, and even health care have moved online, the need to get Americans connected with high-speed broadband has never been greater. Under Pai’s leadership, the FCC has removed bureaucratic barriers[2] and provided billions in funding[3] to facilitate rural broadband buildout. We are talking about connections to some 700,000 rural homes and businesses in 45 states, many of whom are gaining access to high-speed internet for the first time.
Ajit has also made sure to keep an eye out for the little guy, and communities that have been historically left behind. Tribal communities,[4] particularly in the rural West, have been a keen focus of his, as he knows all-too-well the difficulties and increased costs associated with servicing those lands. He established programs to rebuild and expand networks in the Virgin Islands and Puerto Rico[5] in an effort to bring the islands to parity with citizens living on the mainland.
You need not take my word for it; he really does talk about this all the time. As he said in a speech at the National Tribal Broadband Summit: “Since my first day in this job, I’ve said that closing the digital divide was my top priority. And as this audience knows all too well, nowhere is that divide more pronounced than on Tribal lands.“ That work is not done; it is beyond any one person. But Ajit should be recognized for his work bridging the divide and laying the foundation for future gains.
And again, this work started as minority commissioner. Before he was chairman, Pai proposed projects for rural broadband development; he frequently toured underserved states and communities; and he proposed legislation to offer the 21st century promise to economically depressed areas of the country. Looking at Chairman Pai is only half the picture.
Keeping Americans Connected
One would not think that the head of the Federal Communications Commission would be a leader on important health-care issues, but Ajit has made a real difference here too. One of his major initiatives has been the development of telemedicine solutions to expand access to care in critical communities.
Beyond encouraging buildout of networks in less-connected areas, Pai’s FCC has also worked to allocate funding for health-care providers and educational institutions who were navigating the transition to remote services. He ensured that health-care providers’ telecommunications and information services were funded. He worked with the U.S. Department of Education to direct funds for education stabilization and allowed schools to purchase additional bandwidth. And he granted temporary additional spectrum usage to broadband providers to meet the increased demand upon our nation’s networks. Oh, and his Keep Americans Connected Pledge gathered commitment from more than 800 companies to ensure that Americans would not lose their connectivity due to pandemic-related circumstances. As if the list were not long enough, Congress’ January coronavirus relief package will ensure that these and other programs, like Rip and Replace, will remain funded for the foreseeable future.
I might sound like I am beating a dead horse here, but the seeds of this, too, were laid in his work in the minority. Here he is describing his work in a 2015 interview, as a minority commissioner:
My own father is a physician in rural Kansas, and I remember him heading out in his car to visit the small towns that lay 40 miles or more from home. When he was there, he could provide care for people who would otherwise never see a specialist at all. I sometimes wonder, back in the 1970s and 1980s, how much easier it would have been on patients, and him, if broadband had been available so he could provide healthcare online.
Agency Transparency and Democratization
Many minority commissioners like to harp on agency transparency. Some take a different view when they are in charge. But Ajit made good on his complaints about agency transparency when he became Chairman Pai. He did this through circulating draft items well in advance of monthly open meetings, giving people the opportunity to know what the agency was voting on.
You used to need a direct connection with the FCC to even be aware of what orders were being discussed—the worst of the D.C. swamp—but now anyone can read about the working items, in clear language.
These moves toward a more transparent, accessible FCC dispel the impression that the agency is run by Washington insiders who are disconnected from the average person. The meetings may well be dry and technical—they really are—but Chairman Pai’s statements are not only good-natured and humorous, but informative and substantive. The public has been well-served by his efforts here.
Incentivizing Innovation and Next-Generation Technologies
Chairman Pai will be remembered for his encouragement of innovation. Under his chairmanship, the FCC discontinued rules that unnecessarily required carriers to maintain costly older, lower-speed networks and legacy voice services. It streamlined the discontinuance process for lower-speed services if the carrier is already providing higher-speed service or if no customers are using the service. It also okayed streamlined notice following force majeure events like hurricanes to encourage investment and deployment of newer, faster infrastructure and services following destruction of networks. The FCC also approved requests by companies to provide high-speed broadband through non-geostationary orbit satellite constellations and created a streamlined licensing process for small satellites to encourage faster deployment.
This is what happens when you get a tech nerd at the head of an agency he loves and cares for. A serious commitment to good policy with an eye toward the future.
Restoring Internet Freedom
This is a pretty sensitive one for me. You hear less about it now, other than some murmurs from the Biden administration about changing it, but the debate over net neutrality got nasty and apocalyptic.
It was everywhere; people saying Chairman Pai would end the internet as we know it. The whole web blacked out for a day in protest. People mocked up memes showing a 25 cent-per-Google-search charge. And as a result of this over-the-top rhetoric, my friend, and his family, received death threats.
That is truly beyond the pale. One could not blame anyone for leaving public service in such an environment. I cannot begin to imagine what I would have done in Ajit’s place. But Ajit took the threats on his life with grace and dignity, never lost his sense of humor, and continued to serve the public dutifully with remarkable courage. I think that says a lot about him. And the American public is lucky to have benefited from his leadership.
Now, for the policy stuff. Though it should go without saying, thelight-touch framework Chairman Pai returned us to—as opposed to the public utility one—will ensure that the United States maintains its leading position on technological innovation in 5G networks and services. The fact that we have endured COVID—and the massive strain on the internet it has caused—with little to no noticeable impact on internet services is all the evidence you need he made the right choice. Ajit has rightfully earned the title of the “5G Chairman.”
Conclusion
I cannot give Ajit all the praise he truly deserves without sounding sycophantic, or bribed. There are any number of windows into his character, but one rises above the rest for me. And I wanted to take the extra time to thank Ajit for it.
Every year, without question, no matter what was going on—even as chairman—Ajit would come to my classes and talk to my students. At length. In detail. And about any subject they wished. He stayed until he answered all of their questions. If I didn’t politely shove him out of the class to let him go do his real job, I’m sure he would have stayed until the last student left. And if you know anything about how to judge a person’s character, that will tell you all you need to know.
[3] Press Release, Connect America Fund Auction to Expand Broadband to Over 700,000 Rural Homes and Businesses: Auction Allocates $1.488 Billion to Close the Digital Divide, Fed. Commc’ns Comm’n, https://docs.fcc.gov/public/attachments/DOC-353840A1.pdf.
[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.
Justin “Gus” Hurwitz is associate professor of law, the Menard Director of the Nebraska Governance and Technology Center, and co-director of the Space, Cyber, and Telecom Law Program at the University of Nebraska College of Law. He is also director of law & economics programs at the International Center for Law & Economics.]
I was having a conversation recently with a fellow denizen of rural America, discussing how to create opportunities for academics studying the digital divide to get on-the-ground experience with the realities of rural telecommunications. He recounted a story from a telecom policy event in Washington, D.C., from not long ago. The story featured a couple of well-known participants in federal telecom policy as they were talking about how to close the rural digital divide. The punchline of the story was loud speculation from someone in attendance that neither of these bloviating telecom experts had likely ever set foot in a rural town.
And thus it is with most of those who debate and make telecom policy. The technical and business challenges of connecting rural America are different. Rural America needs different things out of its infrastructure than urban America. And the attitudes of both users and those providing service are different here than they are in urban America.
Federal Communications Commission Chairman Aji Pai—as I get to refer to him in writing for perhaps the last time—gets this. As is well-known, he is a native Kansan. He likely spent more time during his time as chairman driving rural roads than this predecessor spent hobnobbing at political fundraisers. I had the opportunity on one of these trips to visit a Nebraska farm with him. He was constantly running a bit behind schedule on this trip. I can attest that this is because he would wander off with a farmer to look at a combine or talk about how they were using drones to survey their fields. And for those cynics out there—I know there are some who don’t believe in the chairman’s interest in rural America—I can tell you that it meant a lot to those on the ground who had the chance to share their experiences.
Rural Digital Divide Policy on the Ground
Closing the rural digital divide is a defining public-policy challenge of telecommunications. It’s right there in the first sentence of the Communications Act, which established the FCC:
For the purpose of regulating interstate and foreign commerce in communication by wire and radio so as to make available, so far as possible, to all the people of the United States…a rapid, efficient, Nation-wide, and world-wide wire and radio communication service[.]
Depending on how one defines broadband internet, somewhere between 18 and 35 million Americans lack broadband internet access. No matter how you define it, however, most of those lacking access are in rural America.
It’s unsurprising why this is the case. Looking at North Dakota, South Dakota, and Nebraska—three of the five most expensive states to connect each household in both the 2015 and 2018 Connect America Fund models—the cost to connect a household to the internet in these states was twice that of connecting a household in the rest of the United States. Given the low density of households in these areas, often less than one household per square mile, there are relatively fewer economies of scale that allow carriers to amortize these costs across multiple households. We can add that much of rural America is both less wealthy than more urban areas and often doesn’t value the benefits of high-speed internet as highly. Taken together, the cost of providing service in these areas is much higher, and the demand for them much less, than in more urban areas.
On the flip side are the carriers and communities working to provide access. The reality in these states is that connecting those who live here is an all-hands-on-deck exercise. I came to Nebraska with the understanding that cable companies offer internet service via cable and telephone companies offer internet service via DSL or fiber. You can imagine my surprise the first time I spoke to a carrier who was using a mix of cable, DSL, fiber, microwave, and Wi-Fi to offer service to a few hundred customers. And you can also imagine my surprise when he started offering advice to another carrier—ostensibly a competitor—about how to get more performance out of some older equipment. Just last week, I was talking to a mid-size carrier about how they are using fixed wireless to offer service to customers outside of their service area as a stopgap until fiber gets out to the customer’s house.
Pai’s Progress Closing the Rural Digital Divide
This brings us to Chairman Pai’s work to close the rural digital divide. Literally on his first day on the job, he announced that his top priority was closing the digital divide. And he backed this up both with the commission’s agenda and his own time and attention.
On Chairman Pai’s watch, the commission completed the Connect America Fund Phase II Auction. More importantly, it initiated the Rural Digital Opportunity Fund (RDOF) and the 5G Fund for Rural America, both expressly targeting rural connectivity. The recently completed RDOF auction promises to connect 10 million rural Americans to the internet; the 5G Fund will ensure that all but the most difficult-to-connect areas of the country will be covered by 5G mobile wireless. These are top-line items on Commissioner Pai’s resume as chairman. But it is important to recognize how much of a break they were from the commission’s previous approach to universal service and the digital divide. These funding mechanisms are best characterized by their technology-neutral, reverse-auction based approach to supporting service deployment.
This is starkly different from prior generations of funding, which focused on subsidizing specific carriers to provide specific levels of service using specific technologies. As I said above, the reality on the ground in rural America is that closing the digital divide is an all-hands-on-deck exercise. It doesn’t matter who is offering service or what technology they are using. Offering 10 mbps service today over a rusty barbed wire fence or a fixed wireless antenna hanging off the branch of a tree is better than offering no service or promising fiber that’s going to take two years to get into the ground. And every dollar saved by connecting one house with a lower-cost technology is a dollar that can be used to connect another house that may otherwise have gone unconnected.
The combination of the reverse-auction and technology-neutral approaches has made it possible for the commission to secure commitments to connect a record number of houses with high-speed internet over an incredibly short period of time.
Then there are the chairman’s accomplishments on the spectrum and wireless–internet fronts. Here, he faced resistance from both within the government and industry. In some of the more absurd episodes of government in-fighting, he tangled withprotectionist interestswithin the governmentto free up CBRS and other mid-band spectrum and to authorize new satellite applications. His support of fixed and satellite wireless has the potential to legitimately shake up the telecom industry. I honestly have no idea whether this is going to prove to be a good or bad bet in the long term—whether fixed wireless is going to be able to offer the quality and speed of service its proponents promise or whether it instead will be a short-run misallocation of capital that will require clawbacks and re-awards of funding in another few years—but the embrace of the technology demonstrated decisive leadership and thawed a too limited and ossified understanding of what technologies could be used to offer service. Again, as said above, closing the rural digital divide is an all-hands-on-deck problem; we do ourselves no favors by excluding possible solutions from our attempts to address it.
There is more that the commission did under Chairman Pai’s leadership, beyond the commission’s obvious order and actions, to close the rural digital divide. Over the past two years, I have had opportunities to work with academic colleagues from other disciplines on a range of federal funding opportunities for research and development relating to next generation technologies to support rural telecommunications, such as programs through the National Science Foundation. It has been wonderful to see increased FCC involvement in these programs. And similarly, another of Chairman Pai’s early initiatives was to establish the Broadband Deployment Advisory Committee. It has been rare over the past few years for me to be in a meeting with rural stakeholders that didn’t also include at least one member of a BDAC subcommittee. The BDAC process was a valuable way to communicate information up the chair, to make sure that rural stakeholders’ voices were heard in D.C.
But the BDAC process had another important effect: it made clear that there was someone in D.C. who was listening. Commissioner Pai said on his first day as chairman that closing the digital divide was his top priority. That’s easy to just say. But establishing a committee framework that ensures that stakeholders regularly engage with an appointed representative of the FCC, putting in the time and miles to linger with a farmer to talk about the upcoming harvest season, these things make that priority real.
Rural America certainly hopes that the next chair of the commission will continue to pay us as much attention as Chairman Pai did. But even if they don’t, we can rest with some comfort that he has set in motion efforts—from the next generation of universal service programs to supporting research that will help develop the technologies that will come after—that will serve us will for years to come.
[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.
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