Cato White Papers and Miscellaneous Reports
Multiple Levels of Policy: International, National, State --Or
None of the Above?
This paper was prepared for The White House Workshop on Priorities for
Federal Innovation Reform
September 13, 1999
by Solveig Singleton and Dan Griswold
In an age of international commerce, which governments should determine
the rules of the game? Municipalities, states, national governments, and
international bodies jostle for control over many areas, including
taxation of electronic commerce;
copyright and trademark issues;
mergers and competition;
genetically manipulated plants
Too many layers of regulation imposed by different jurisdictions create
will stifle innovation around the world. Our understanding of this familiar
problem at the state level is driving us rapidly towards federal and international
regulatory regimes. But there are drawbacks to federal and international
involvement as well. These are less familiar, but can be no less serious.
This paper outlines these problems and offers guidelines towards a long
run solution. What is the best policy for an age when jurisdiction not
just by every, but by any jurisdiction is very costly? Global markets
will generate the greatest benefits for innovation when it is most free
of regulation--at all levels.
Problems with Multiple Jurisdictions
This section outlines some of the familiar problems with regulation sponsored
by multiple jurisdictions. The high-tech sector most obviously afflicted
by these has been communications, which is regulated at the state and
local level as well as the federal level. But there is no reason that
any other innovative sector would be immune.
Cost, in time and money, to businesses that must learn how any plans
or developments will mesh with the regulations of 50 different states
or 200 different nations.
Inconsistency of laws.
Discrimination against "foreign" interests. A corporation based in
Florida might not get a fair deal before a commission in Texas, in
a conflict with a Texas corporation (this is purely hypothetical--there's
no reason to think Texas would be any worse than any place else).
Irrelevance. Does it make sense to tie those operating in the environment
of the Internet, for example, to any particular geographic jurisdiction.
Enforcement. With more global transactions, how could national laws
be enforced as a practical matter?
What makes these problems more severe for high-tech? For many high-tech
sectors--genetics, E-commerce, and so on, the problem is more acute simply
because almost every single transaction raises the problem of "what the
law?" and "which jurisdiction?"
In the communications sector, the problem is even more acute because
there is so much regulation. There is everything from mandatory price
averaging across regions under universal service, to price caps and other
forms of interstate and intrastate price regulation—some "protecting"
consumers, some "protecting" smaller carriers and resellers—to
wireless service licensing, and state and federal reviews of mergers.
And much of this regulation isn’t "law" at all, that is, "law"
meaning rules set down in writing somewhere, knowable and certain, even
if they are different from those in the next state. Much of telecommunications
regulation is an endless series of decrees and Benthamite calculations
of social utility, and the lobbying that comes with such a level of bureaucratic
activism. The bother of dealing with lack of uniformity of law in ordinary
commerce is multiplied a thousand-fold in a heavily regulated sector.
Current Trends: The Federal Approach.
As noted above, the problem of multiple jurisdictions is perhaps most
familiar to us in communications, from networks to copyright law. The
solution most familiar to us, therefore, has been the telecommunications
approach--to increasingly move regulation to the federal level.
This has worked well in telecommunications--historically. But will it
continue to work well? Will it work well for other innovative sectors?
In stepping in over the past several decades the Federal Communications
Commission or Congress has preempted state or municipal laws and regulations--until
the 1990s, with the positive result of deregulation overall. Because state
regulation was preempted but not replaced with federal restrictions, the
federal government became something of a hero of deregulation.
Because of this history, when state and local taxation of the Internet
loomed, no one wanted to wait for the onslaught of local measures to become
a reality. Congress stepped in as a prophylactic measure, imposing a moratorium
on state and local taxation of the Internet. At least with communications,
then, the "obvious" answer to the problem of multiple jurisdictions is,
increasingly, to regulate at the federal level.
At the same time, however, the federal commitment to deregulation has
lagged. From universal service to interconnection, market forces are subsumed
to political goals, and micro-managed competition, not deregulation, is
the order of the day.
It is, therefore, be time to ask whether more federal preemption is necessarily
the answer to the problem of multiple jurisdictions across the high-tech
sector. What are the drawbacks of the federal approach.
Drawbacks of the Federal Approach
Competition between jurisdictions has benefits often overlooked.
Competition among the 50 states in high-tech regulation offers companies
and consumers more choices. Such competition would produce natural
pressures towards minimal regulation and free markets, as it has with
corporate law. This is sometimes called the "race to the bottom,"
but it doesn't deserve such a pejorative term. In ordinary commerce,
the states’ voluntary adoption of the Uniform Commercial Code shows
that states, at least, will not be needlessly perverse in refusing
to accommodate the needs of business for certainty and uniformity.
Regulation, even carefully crafted with the best of intentions, is
expensive. It adds to the costs that companies bear and to the costs
that consumers pay. The more regulation, the more costs. Whenever the
benefits do not succeed the costs, companies and customers should be
free to opt out by moving their operations to another place.
When a single federal regime is imposed from the top down, the range
of choices becomes narrower. Opportunities for different states to experiment
with new ideas are closed off. An importance source of pressure on bureaucracies
to cut ineffective and wasteful rules is eliminated. What remains is
the natural tendency of bureaucracies to expand their own mission. If
a program fails to get the results we want, the logic of the regulator
says, we must devote more resources to it--stricter rules, more enforcement,
more funding. The idea that this might be doing more harm than good
is lost entirely.
Policy Becomes Politics. Under the federal spotlight inside
the Beltway, policy issues become occasions for grandstanding and
power politics. The debate over whether we need universal service
subsidies, or how to fund them, for example--a serious problem--has
been abandoned. Even the moderate policy supported by many economists--funding
universal service out of general tax revenues and targeting them only
to low-income users--is no longer under discussion for political reasons.
Playing to the national press lowers the level of debate about these
The fewer jurisdictions, the more power the remaining jurisdictions
enjoy. As today in telecommunications, because more is at stake in federal
regulatory battles than before, the harder companies will try to turn
the agency's efforts to their own benefit. No company can rationally
devote itself to arguing in favor of neutral rules that will provide
the most opportunities for everyone in the long run. To take
the long run view is to lose the regulatory battle in the short run.
But this means that the FCC hears nothing but arguments about
short-run benefits. It is no wonder that the FCC has abandoned the drive
towards deregulation. A federal agency that hears frequent appeals for
relief from state regulation will gain, not lose, institutional credibility
by striking them down. But a federal agency that sponsors regulation
itself may be reluctant to admit it has made a mistake.
A single federal policymaker will become the focus of lobbying,
and more liable to "capture."
Why stop with federal law? For E-commerce or internationally
traded goods like software, genetically modified foods, and so on,
there are still too many national jurisdictions. From one standpoint,
federal regulation doesn't go far enough.
Until recently, then, federal policymaking happened to work out for telecommunications.
But it by no means should unquestionably be adopted for every new issue
or technology. Competition between jurisdictions is very important.
Additional Drawbacks of the Internationalization
The logic that leads us to look to the federal government as a leader
in high-tech policy issues leads inexorably towards regulation of telecommunications
at the international level. If dozens of states are intolerable, why are
dozens of nations any better? Businesses frustrated by conflicting national
regimes have begun to increase pressure for internationalization. National
governments irritated by the ease with high-tech escapes national regulations
will be tempted to impose controls at an international level. Internationalization
has all of the same problems of federalization, and many new problems
of its own.
Internationalization pressures reflect, in part, a conflict of
interest between government and citizens. Much of the pressure
for "harmonization" at the international level comes from business.
But governments are driving the movement, too. It would be wonderful
(for a governmental standpoint) if one need no longer fear business
taking off for greener pastures in other nations. Competition between
different national legal (and tax) regimes could be decreased as countries
enact treaties for uniform law. This, in the long run, helps preserve
the status quo, but it won't do anything for innovation.
International decision making is an undemocratic process.
International lawmaking is an obscure, elite process little understood
by most ordinary people. Lobbying at the international level is expensive
and often corrupt. It would not be desirable for resolution of key
policy issues to be moved away from Congress into ITU, WIPO, or other
Vastly different societies will only reach consensus on a few basic
rules--or, more alarmingly, on meaningless sets of vague principles.
In some ways, this could be the worst of all possible worlds--a world
of uniform baffling uncertainty, exploited by the most politically adept
players to gain regulatory protection.
Global agreements, when reached, are likely to be hopeless vague.
It is inconceivable, for example--and very lucky--that most countries
will ever agree about what content on the Internet should be censored.
Holocaust revisionism is anathema in Germany, but constitutionally
protected political speech in the United States. Sexually explicit
speech is frowned upon in the United States, but much more acceptable
in Denmark. Thus "harmonization" in many areas will be impossible--fortunately,
instead, innovation markets will enjoy new freedom.
For example, the United States is now facing pressure from the European
Union to impose something like Europe's regulatory privacy regime. Such
a regime would make it harder for businesses to use information about
consumers to develop new products, reach their first customers, and
cut costs. Little or no attention has been paid as to how this would
hurt consumers. Our best policy here is to support the U.S. tradition
of freedom of information.
Global harmonization may turn the United States from leader to
follower. In some areas, such as telecommunications deregulation,
the United States has been an international leader. Our economy is
not plagued by the stifling bureaucracies or oppressive regimes that
harm innovation in many other countries. Perhaps because of our success,
other nations may resent U.S. attempts to take the lead in guiding
the substance of a harmonized innovation policy. The United States'
will have to compromise substantially to bring its laws into harmony
with those of other nations. The result could be disastrous for our
Avoid harmonization for its own sake. Harmonization is of some
practical value, but it has costs, as well.
Suggested Policy Approaches
This section describes the best alternative to devoting tremendous
efforts to international harmonization--increasing trade with other nations.
Welcome trade. Expanding trade drives innovation. The dynamic
impact of trade can be seen readily in places such as the Interstate
85 corridor that runs through Virginia, the Carolinas and Alabama.
In the last five years, the region has lost an estimated 35,000 jobs
in the apparel, furniture, and textile industries. But that is less
than half the story. Today, according to a recent report in the Wall
Street Journal, "the corridor is booming with semiconductor plants,
pharmaceutical companies, auto-assembly operations and new steel mills
that export to markets around the globe. In all, the corridor has
added about 65,000 new manufacturing jobs despite the losses in textiles
What about trade deficits? By almost any measure, America's
economy has performed better in years in which the trade deficit rose
compared to years in which it shrank. During years of rising deficits,
the growth of real gross domestic product averaged 3.2 percent per
year, compared to 2.3 percent during years of shrinking deficits.
If trade deficits really are a drag on growth, why does the economy
grow so much faster when the trade deficit is getting bigger?
On the issue of jobs, the story is much the same. During those dark
and troubling years of rising trade deficits, the unemployment rate
has, on average fallen by 0.4 percentage points. During those bright
and happy years of "improving" trade deficits, the unemployment rate
has, on average, jumped 0.4 percentage points.
Without a trade deficit, Americans could not import the capital we
need to finance our rising level of investment in plants and new equipment,
including the latest computer technology. The strong dollar helps keep
a lid on inflation while lower import prices raise the real wages of
the vast majority of American workers.
In this deregulated world, what would protect consumers? Choice. Freedom
of Information over the Internet. The amazing power of markets to deliver
a better product at a lower price than any known system of distributing
The less law, the better. In innovative markets, regulation
by any jurisdiction imposes high costs. Regulators move too
slowly, and they don't know better than entrepreneurs. This is yet
another reason to begin to strip the existing regulatory regimes--local,
state, federal, and international--down to a bare minimum. The fewer
rules there are, the less it matters if some of them vary slightly
from state to state or nation to nation.