The Real Story Behind Internet Regulation

The Real Story Behind Internet Regulation
AP Photo/Andrew Harnik, File

In an era of “fake news” and “alternative facts,” it is harder than ever for policymakers and the public to make informed decisions. Partisans have grown so skilled at constructing their own realities that the very idea of weighing competing claims and resolving issues on the merits has come to seem old fashioned or quaint.

But the consequences of making policy in an “all spin zone” can be dire. From health care and taxes to environmental regulation, Washington’s decisions affect real lives. And without real facts to guide them, policymakers are ultimately shooting in the dark — with the life, liberty, and economic well-being of our citizens potentially in the line of fire. 

The never-ending debate over Internet regulation provides a perfect example. 

One of the key goals of Internet policymakers is to promote investment in new networks, creating jobs, connecting new communities, and helping citizens accomplish more online.

When the FCC imposed complex and archaic “utility regulation” on broadband as part of its broader package of regulation on net neutrality in 2015, one of the key questions was what these burdensome utility rules would do to Internet investment. 

Groups supporting heavy Internet regulation churned out paper after paper explaining how the switch to utility rules would spur “massive investment” and supercharge the economy. Market analysts and others opposed to the switch warned that the uncertainty and friction of the obsolete utility regime would “slow if not pause completely” investment in new networks. 

This kind of rhetorical tit-for-tat offers little help to policymakers. Even worse, it provides a sort of à la carte menu where politicians can simply stick with their preconceptions and partisan instincts and pluck whatever data or analyses they find to support their view. No peer review, no scientific rigor, no consequences for being wrong — other than cost to our economy. You wouldn’t run a junior college economics department like that; and it’s no way to regulate the world’s largest economy!

What is needed is real data and rigorous economic analysis — empirical analysis using proven methods to give decision-makers a concrete sense of the real-world consequences of their actions. That’s what my recent paper “Net Neutrality, Reclassification and Investment” attempts to offer.

The findings are stark. We looked at a five year period when utility regulation was under active consideration at the FCC. During this period, which began with then FCC Chairman Genachowski’s announcement that utility regulation was on the table, the industry was factoring the regulatory threat into its decision-making.  This was reflected in a whopping 10 percent drop in telecom stocks in the days after the FCC announcement. 

We then compared broadband investment during this period to a control group of investment in other industries that, historically, have closely tracked the rate of investment in Internet services (such as computer and electronics manufacturing, transportation, and plastics). In other words, we looked at a group of sectors where investment has historically moved in concert with broadband to see if the announcement of utility rules caused broadband investment to diverge. It did — massively. 

During those five years, investment in broadband was roughly 20 percent below what would have been predicted if it had simply moved along with the “control” industries as it had before. That amounts to roughly $35 billion a year in depressed investment and a total of $160–$200 billion lost over the five-year period. For comparison purposes, the total budget for the entire FCC is less than half a billion dollars a year. This is a massive loss in jobs and economic growth due to these 1930s era rules and regulations. 

Significantly, these data also make clear that a principled approach to net neutrality does not have an adverse effect on investment. Indeed, from 2005 to 2009, when the FCC had basic net neutrality principles in place without the overhang of common carrier regulation, we saw no comparable drop off in investment. Only the constricting public utility regime drags down investment in this way. Our conclusion? We can certainly protect net neutrality without stifling much-needed infrastructure investment. 

Policymakers care about more than investment, of course, and some may feel the cost in jobs and network building is worth sacrificing to achieve other policy goals. But with these new data on the table, no one can pretend anymore that utility regulation doesn’t hurt investment and jobs. Policymakers who continue to support such regulation must admit that they do so despite these harms.

Dr. George S. Ford is the Chief Economist of the Phoenix Center for Advanced Legal & Economic Public Policy Studies (www.phoenix-center.org), a non-profit 501(c)(3) research organization that studies broad public-policy issues related to governance, social and economic conditions, with a particular emphasis on the law and economics of the digital age.

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