Net neutrality is the wrong way for Congress to go.
Network neutrality sounds wonderful and protective — making sure that everybody gets the same prices and services. Who could be opposed to something as benign as making sure of neutrality in a network?
Unfortunately, real-world networks don’t operate neutrally. Freight transport, personal travel, even poles-and-wires telephony all allow for sophisticated contracts in which one can pay for the right combination of “content” (speed, comfort, reliability) and speed.
Finally, what abouttraditional poles-and-wires-telephony? Even in those networks many consumers have the option — and parents of teenagers typically pursue it — of paying more for greater capacity: call waiting. Why should broadband networks be different?
More sophisticated pro-regulatory arguments are now circulating that place less of an emphasis on rigid mandates, and more on transparency, greater anti-trust powers for the FCC, a mandated minimum for broadband access, and tax incentives for network investment.
It’s still the wrong way for Congress to go.
These approaches start out on the wrong foot by “solving” a presumed problem where there is no evidence that one exists. If this were not damaging enough, it goes about its business in the wrong way, involving tax and other policies where none are necessary or appropriate. Finally, it does not have a realistic grounding in actual practice, inviting excessive litigation that would result in degraded — not improved — Internet performance and the risk of unintended consequences.
What problem is being solved? Even the most laissez faire economists recognize that markets require a solid legal grounding and the government policies may appropriately correct visible and significant market failures. But what market failure does this proposal address? What evidence exists of damaging, illegal business practice? What consumer choices have been impaired by the current regulatory regime? What innovation has been suppressed? The Internet is flourishing and there is no evidence of inappropriate discrimination by broadband providers or abusive exploitation of market power.
Inappropriate use of tax and other government policies
The authors correctly recognize that sufficient investment in network capacity is the key issue facing the United States. However, this is not the taxpayers’ problem. Given sufficient flexibility to recover costs, market participants will have the incentive to upgrade networks on a continuous basis. When will the day arrive when analysts rediscover the purpose of the tax code: to collect the (minimum necessary) tax revenues in a manner that does not distort economic incentives?
The potential for crippling litigation
On the surface, the transparency — say, open statement and adherence to firm-specific access policies — and “best effort” requirement seem benign, even desirable. But dig a bit deeper and flaws accumulate rapidly.
First, it is far from obvious that the proposed policy could be enforced given the nature of the commercial relationships that underlie the Internet. What constitutes “the” access policy in a world of specific, detailed, firm-to-firm contractual arrangements? Further, given the fluid and ever-changing nature of these agreements, it is more than likely that the FCC would remain forever a step behind the changing nature of these agreements. In these circumstances, FCC penalties would be capricious and damaging.
Worse, imposition of the policy would have unforeseen impacts on those commercial negotiations that would affect how the Internet evolves over time. Contracts based on informed bargaining are the foundation of economic efficiency. Putting on a set of regulatory handcuffs can only worsen the performance of those involved. The combination of transparency and “best efforts” is an invitation for litigation, which would be wasteful in its own right and likely inhibit incentives to improve performance.
Likelihood of unintended consequences
Regulatory intervention would assuredly affect market behavior. However, in the absence of a clearly demonstrated problem, the only impacts will be the unforeseen. Consider the recent history of the FCC’s efforts to jump start competition in local telephone marketsby dictating terms and conditions of interconnection agreements between incumbent and competitive local exchange carriers. The attempt to substitute political driven mandates for market driven agreements ultimately failed. Today’s Internet is characterized by business relationships (e.g. Internet peering and transit) that are extremely efficient. The attempt to mandate a form for these contracts will lead only to problems.
Could there never be a federal role regarding the prospects for new business models and consumer products on the Internet? No. If evidence of abusive monopoly power accumulates, it must be forcefully countered. Transparency is desirable when deceptive consumer practices preclude informed choice. But inventing a federal role in the form of unwarranted, rigid mandates of private transactions is a wrong turn on the Internet.
Douglas Holtz-Eakin is the former director of the Congressional Budget Office and currently a Fellow at the Council on Foreign Relations and a telecommunications consultant.
