Topic: Regulatory Studies

FCC’s Net Neutrality Rules

On May 15 the FCC announced a proposed rule that would govern the relationship between content providers and internet service providers.  Consumer groups argued the proposed rule was not strong enough because it did not ban differential arrangements between them.

The underlying economic issues are several.  Should the government concern itself with the relationship between the “creators” of things and the “transporters” of them?  In particular should economic profits go just to the creators of things?  Is it “wrong” for the transporters to extract some as well?  What if a creator of content and a transporter want to vertically integrate or enter into a long-term contract to end the costly dispute between them over the division of any economic profits?  Should such arrangements be forbidden because of the possibility such an entity would refuse to transport the content of a different creator?

These issues are not new.  In fact they first arose between railroads and the creators of “content” i.e. farmers, mines, steel mills etc. in the 19th century.  The political resolution of these issues was the Interstate Commerce Act of 1887.  It took about one hundred years for the experiment in transportation common carrier rate regulation to end.  Scholars have concluded that rate regulation raised rather than lowered transportation prices.  And the public has come to the same conclusion because in the quarter century since the end of transportation rate regulation, prices have decreased dramatically.  For a discussion of the rise and fall of transportation regulation see this article by Thomas Gale Moore.

In “Antecedents to Net Neutrality” Bruce Owen explicitly makes the link between the concerns of traditional transportation common carrier regulation and the contemporary notion of “Internet neutrality.”  Net neutrality policies could be implemented only through detailed price regulation, an approach that failed to improve consumer welfare in the transportation sector. History thus counsels against adoption of most versions of net neutrality.  Christopher Yoo has written a detailed history of how difficult common carriage regulation was to implement in traditional telecommunications regulation.  A shorter version will appear in the summer issue of Regulation.

The public debate over net neutrality also does not reflect the increased variation in the price and quality of its services that already exists.  Innovations such as private peering, multihoming, secondary peering, server farms, and content delivery networks have caused the Internet’s traditional one-size-fits-all architecture to be replaced by one that is more heterogeneous. Related, network providers have begun to employ an increasingly varied array of business arrangements and pricing. These changes reflect network providers’ attempts to reduce cost, manage congestion, and maintain quality of service. Policy proposals to constrain this variation risk harming these beneficial developments.

Would You Prefer Cronyism or Paternalism With Your Government Potatoes?

Government has so many ignoble tendencies, it’s often difficult to guess which ones are driving any particular policy choice.  For example, how does the government decide which products are available for purchase using WIC benefits?  As reported today in DC political newspaper, The Hill:

A new rider to the 2014 funding bill for the Agriculture Department forbids the agency from excluding “any variety of fresh, whole, or cut vegetables, except for vegetables with added sugars, fats, or oils, from being provided as supplemental foods” under the Women, Infants and Children nutrition program

Rep. Mike Simpson (R-Idaho) is a lead sponsor of the language and can be expected to defend it from attacks during a full committee markup of the bill. 

The Agriculture Department excluded white potatoes from its list of approved items in 2009 because it argued they do not contain enough nutritional value and people shouldn’t be encouraged to buy them. Lawmakers fighting the exclusion are predominantly from the largest potato-growing areas such as Idaho and Maine.

I’m hopeful that Congress and the USDA will figure out just the right mix of paternalism and cronyism needed to ensure the effectiveness of federal food assistance programs.

Signs of Progress in Marijuana Reform

Exactly as Cato adjunct Jeffry Miron suggested, American marijuana reform has been bringing big changes to Mexico:

Farmers in the storied “Golden Triangle” region of Mexico’s Sinaloa state, which has produced the country’s most notorious gangsters and biggest marijuana harvests, say they are no longer planting the crop. Its wholesale price has collapsed in the past five years, from $100 per kilogram to less than $25.

“It’s not worth it anymore,” said Rodrigo Silla, 50, a lifelong cannabis farmer who said he couldn’t remember the last time his family and others in their tiny hamlet gave up growing mota. “I wish the Americans would stop with this legalization.”

That’s actually great news: along with the big profits, marijuana brought northern Mexico tens of thousands of murders. We can all do without those. 

One possible negative consequence has been an observed increase in Mexican opium production, although it may be too soon to say whether opiate use is really on the rise, and if so, whether it’s been driven by a greater availability of heroin, or by the government cracking down harder on prescription opiate addicts.

Of course, the answer to that problem resembles the answer to our marijuana problem, and both resemble the way we finally stopped bootleggers under alcohol Prohibition: legalize, establish relatively sensible regulations, and let addicts get treatment in an environment free of fear and threat. One doesn’t have to be a Harvard economist to see why that approach makes sense.

The Limitations of State-Level Marijuana Legalizations

Vox has a nice piece on the difficulties faced by Colorado marijuana businesses due to the continued Federal prohibition of marijuana:

Even after legalization, it’s still very difficult — and potentially dangerous — to operate a marijuana business in Colorado.

The big problem: pot shops and producers still can’t work with banks, which see marijuana as too risky of a business due to federal prohibition. This is true in Colorado, where state law says marijuana is legal but federal law says it’s not.

This means marijuana businesses can’t take conventional loans, and they have to operate with only cash. And although several levels of government have tried to address the issue, they’ve had no success so far.

None of this is surprising, but it emphasizes that true legalization requires repeal of the federal ban. State-level legalizations are valuable, partly because they put pressure on the feds, but they are not enough.  Remember that during Prohibition, many states (including New York, New Jersey, and Pennsylvania) never banned alcohol, yet the federal prohibition did substantial harm, including in those states.

The Cost of Regulation

Gordon Crovitz has a nice piece in the Wall Street Journal, Monday May 5, titled “The end of the permissionless web” which sparks several thoughts.

What has made the Internet revolutionary is that it’s permissionless. No one had to get approval from Washington or city hall to offer Google searches, Facebook  profiles or Apple  apps, as Adam Thierer of George Mason University notes in his new book, “Permissionless Innovation.” [Available free and ungated here. - JC]

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

This brings to mind a recent discussion I’ve had with Glen Weyl and Eric Posner on their proposal for a financial FDA, in which financial companies have to get prior approval for any new products (here and here). I don’t think I ever expressed well just how much it strangles growth and innovation for companies to have to prove ahead of time, to the satisfaction of discretionary regulators and politicians, that their products are good. The following examples make the point forcefully.

The Case for Fishery Property Rights

In the last few days, some commentators have praised the role of federal regulation in enhancing the health of fishing stocks. Brad Plumer at Vox.com, Paul Krugman at the New York Times, and Kevin Grier at Cherokee Gothic, have all weighed in.

The current issue of Regulation features a cover story that offers insight into what government interventions work and what doesn’t in the management of fisheries.

Authors Jonathan Adler and Nathaniel Stewart argue that fisheries are a classic example of what economists call the “Tragedy of the Commons.” Open access resources such as fishing stocks are overharvested because no one owns the rights to the harvest. Instead, everyone has an incentive to grab what fish they can before another boat does.

The traditional policy response to the commons problem has been regulating the length of the fishing season or limiting the total amount of fish that can be caught. The problem is these policies don’t change the incentives that lead fishermen to race after and grab as many fish as they can. For example, codfish quotas in the Gulf of Maine and Georges Bank were cut 77% and 61%, respectively in 2013. Such regulations do not fix the problem because the incentives for boats to get faster or bigger remain.

A better solution would be a system of Individual Transferable Quotas. These quotas assign to individuals a right to a small portion of the total allowed catch in a fishery. This “catch share” ends the incentive to race and grab because a fisher owns the rights to a defined amount of fish, and no one can take that right from him. A 2012 study of 15 catch-share programs in the United States and Canada found that, because the programs worked so well, fishinging seasons were lengthened from 63 to 245 days. And the introduction of the catch-share systems allowed fish populations to recover from previous overharvesting. After five years of catch share implementation, catch limits increased 13 percent on average.

Fishery property rights a vast improvement over traditional fisheries regulation.

FERC’s Prosecutorial Tactics

Joseph Rago of the Wall Street Journal reports on an outrageous enforcement action by the Federal Energy Regulatory Commission against brothers, Rich and Kevin Gates.  Excerpt:

[FERC] began demanding information and taking depositions in fall 2010. At first, the Gates brothers tried to adhere to the insider playbook and hired an attorney from White & Case, a D.C.-based law firm that does frequent business in front of FERC. The insular Washington energy bar trafficks in political connections, but those aren’t so useful for clients who maintain their innocence.

Things started to turn for Kevin Gates, he recalls, during his second full-day deposition with the lead FERC enforcement lawyers on the Powhatan matter, Steven Tabackman and Thomas Olson. “I would suggest that it was intimidation tactics, aggressive behavior, which I guess is natural for a federal prosecutor, maybe what you would expect,” he says. “But there were also a lot of questions asked and behavior that suggested to me that we were seeing the world very differently and—I would suggest—they didn’t know what they were talking about.”

Mr. Gates was asked to leave the room and sat in the hallway while his lawyer conferred with the feds. The lawyer emerged to relate what the FERC enforcement team had proposed: “Kevin’s a businessman, isn’t he? He knows that it’s cheaper to settle than it is to fight this investigation.” Right then, Mr. Gates says, “I realized that we had a big problem on our hands. This was unlike anything we’d ever seen before at a regulatory agency.”

The Gates brothers fired the white-shoe practice and brought on Bill McSwain of Drinker Biddle, a Philadelphia-area lawyer who “didn’t interface much with FERC. He also used to be a Marine sniper, so he had a different approach to the world.” Mr. McSwain introduced himself to FERC by calling their conduct contrary to “established law, as well as common sense,” and that was one of his subtler letters…

[FERC’s regulators] have specialized in retroactive punishments for conduct that was legal at the time. Most of these cases never go to court and end with settlements against politically disfavored defendants like J.P. Morgan (that one, like Powhatan, was led by Mr. Olson). Most companies roll over because their future business interests depend on preserving good regulatory graces and favorable FERC rulings. The Gates brothers are unusual in that their livelihoods are elsewhere, but the illogic, intimidation tactics and erosion of due process in their investigation are typical. [Emphasis added].

Read the whole thing.  As the article notes, most business people surrender to the bullying tactics of regulators.  By taking their case public and fighting back, the Gates brothers may not only win their case, but might establish some favorable legal precedents that will help others in the future.  And for that, they deserve our thanks.

For related Cato work on the erosion of due process, go here, here, here, and here.