Blagnet.net

Tim Swanson on the harm of State regulation of telecom

Tim Swanson has written a collection of masterful columns for the Mises Institute, one in 2006 and two in the past week, about the harm already done to consumers by State intervention in the telecommunications industry and the harm that more State intervention will cause.

I will try to amalgamate and summarize his thorough research and well-argued points, but it might take a few posts and a few re-writes because of the complexity of the issues, my unfamiliarity with some of them, and the vast number of resources he cites that I should read.

To get the overall idea of his columns and this blag post, keep this question and its answer in mind: What shortcomings exist in our broadband-ethernet world, or, in other words, why is any (additional) State intervention asked for? Answer: the desire for coerced “net neutrality” and the desire for affordable, reliable high-speed internet to be available to (nearly?) all Americans in the near future.

My purpose is to detail how federal government policies and actions over the last century have created the very situations that supposedly require State solutions, and without past or future State interference in the telecommunications industry, the issues of net neutrality and paucity of good broadband internet would not even exist.

I would recommend reading B.K. Marcus’s The spectrum should be private property: the economics, history, and future of wireless technology and the three Swanson columns at hand (Who owns the internet?, Against a national broadband policy, and The spectrum swindle) if you really want a good primer on the harm done by past, present, and future State regulation of telecommunications, especially the internet. The point of this long blag post is to reiterate some of Swanson’s points and clarify them in my own mind, so that they might be clarified to some extent in yours, too.

The first column, Who owns the internet?, is almost entirely about net neutrality. Net neutrality is a principle that would be applied to internet service providers, saying different types of data and communications of different importance should not be treated any differently by ISP’s, such that each exchange carries the same price and receives the same level of priority.

First, as this is a blag of libertarianism and we are philosophically principled, let us start with the issue of private property rights:

The main issue is not a matter of bit discrimination, multiple tiers, or even denial-of-service; rather it is a fight over private property and who owns the cornucopia of wires, cables, fibers and network infrastructure spanning the continent. Unfortunately due in large part to State intervention throughout the past century, this is a somewhat vague and nebulous area with many seemingly gray regions.

In his second column, Against a national broadband policy, he reiterates this argument:

Here is the scenario: you are a Tier 1 ISP. You purchase or rent land and place miles of fiber optics or radio antennas throughout a city. You also purchase routers, switches and servers. However, with “net neutrality” legislation the owners of the hardware would no longer be allowed to do whatever they want with their own property.

Regardless of the status of these companies as State-created monopolies and their use of anti-capitalist rent-seeking, State retraction of their property rights is not the answer. As Swanson and I will detail later, and as has been detailed hundreds of times by hundreds of libertarian economists, the answer to State-created problems is not more State intervention. Rather, the answer is to end the favors, exemptions, legal protection, tax handouts, and outright monopoly status granted to these companies to begin with.

There is another, even bigger issue that I would place under the philosophy category, though it concerns both practical and philosophical matters: State surveillance of internet communications and inhibitions of privacy and free speech. From “Who owns the internet?”:

Similarly, if the legal monopolies protecting service providers continue without deregulation, then the censorship fears imagined by some could become a reality.

In column #2, he reiterates this:

Let us ignore the scarcity involved in transporting bits of data across switches and routers: the consumers would end up being taxed to enforce these provisions, their data would be snooped on by at least one government agency (what happened to the cries against the NSA wiretapping?)….

In other words, not only will State interference in an industry not accomplish what it should and will in fact accomplish the exact opposite (worse products at higher prices for consumers), it will lead to an entirely unrelated and unintended consequence, that of State surveillance and interference with commerce, privacy, and free speech. It is funny how supposed advocates of civil liberties on the left and supposed supporters of limited government on the right all favor net neutrality legislation despite the absolute metaphysical certainty that it will result in more freedom-reducing surveillance powers for the federal government. If you doubt this, you are an unrealistic idealogue and a utopian loon. Just consider: how is the State going to ensure enforcement of net neutrality unless it observes and catalogs a certain percentage of exchanges that happen over the internet and records how the ISP’s treat them? More importantly, how are federal agents going to resist the temptation to do so when net neutrality legislation, combined with anti-terrorism legislation, permits and in fact encourages them to?

Swanson focuses much more on the practical (economic) impacts of State interference with the telecom market over the last century, and does a wonderful job of detailing how bad it’s been and how bad it will be. I feel that this does a better job of swaying opinion against State-socialist direction of telecommunications policies. A lot of perfectly sensible and knowledgeable people scoff at our fixation on principles and philosophy because they, and even I, need concrete examples of good intentions, harmful policies, resultant sub-optimal “market” conditions, and the calls for even more State intervention to fix the problems it caused in the first place. This is usually how State interference in an economy goes.

The only reason AT&T (formerly SBC), BellSouth, Cox Communications, and other incumbents have the large user bases they currently do is because they were granted geographic monopolies for communications. They were legally insulated from outside competition for much of the past century. And, by and large, this protected status still continues unabated, shielded by the current FCC regulatory regime.

In two footnotes, Swanson notes the inconsistency and hypocrisy the State demonstrates in its granting of geographical monopolies to telecom companies. The Sherman Anti-Trust Act is supposed to prevent monopolies, but the federal government uses that very legislation to protect companies of its choosing and grant them outright monopolies. He goes on to note that one justification for granting companies monopolies and simply giving them millions of taxpayer dollars was for “universal service”: they would receive huge subsidies, from tax money, if they promised to extend high-quality service to poor and rural areas (thereby ensuring universal service, because apparently complete equality of telecom service is a new right, kind of like universal health care). Unsurprisingly, such universal service has never happened, but no company has been asked to give back the tax money it was given.

Later he mentions two successful instances of businesses and customers agreeing to variable pricing systems: cell phone minutes and sporting event tickets/seating.

There is no shortage of empirical examples illustrating profitable business models that embrace variable pricing [which is the opposite of net neutrality—John]. However, it is neither the job nor obligation of the taxpayer to finance, or in any manner subsidize, any business entity. The chief concern for both individuals and corporations alike has been the role of the State. If either side had their druthers, the State would intervene; it is a win-win situation for government intervention—a role whose legitimate jurisdiction has been left unquestioned.In reality, both sides are at fault. If the legislative proposals lobbied by the content providers [as opposed to service providers, who mostly oppose net neutrality—John] are enacted, the FCC will ultimately be allowed to regulate and intervene more than it currently does. It will be setting a foreboding precedent and granting a level of authority that Leviathan has historically been reluctant to relinquish.

So far, I’ve mainly quoted Swanson’s first column, showing the fallacy of certain government policies (though not necessarily specific laws). Mainly, the Federal Communications Commission grants geographical monopolies to companies so that they are the only cable, telephone, or internet provider in a given area. Second, they utilize policies that create “barriers to entry” in the industry, allowing only the companies that have become big and rich to compete for government contracts or handouts, such as frequencies on the radio dial and the aforementioned protected monopoly status. More on this later.

Swanson’s second column, Against a national broadband policy, is much more detailed and specific. It is a veritable treasure trove of FCC/telecom resources and a chronicle of State mismanagement of an industry, leading to defects in the “market” that are used to justify even more State interference!

Not only do presidential candidates such as Barack Obama seek to subsidize technological rollouts at the expense of coerced taxpayers, but, along with Representative Ed Markey, they want to regulate what network property owners do with their own infrastructure. All of this is done under the guise of the new populistic policy called network neutrality.And while the political rhetoric will almost certainly pick up pace throughout the election year in 2008, the joke is once again on statolatrists: it has already been tried numerous times.

He starts in 1907, when AT&T was granted geographical monopolies by many states for various reasons, “national security” and standards of service among them. He cites a study by Diane Katz of the Mackinac Center for Public policy, who explains that utility monopolies don’t remotely resemble the fruits of capitalism but are explicit creations of the State.

For example, a 1921 report by the Michigan Public Service Commission concluded that “competition resulted in duplication of investment,” and that states were justified in denying requests by rivals to deploy new lines. A report that same year from the U.S. House of Representatives likewise concluded that “there is nothing to be gained by local competition in the telephone business.”

(So, good intentions led to State interventions.)

The same view was also misapplied to electric power supply and water treatment, triggering creation of a massive regulatory structure to temper government-sanctioned monopoly power. In hindsight, competition could have restrained utility monopolies by generating new technologies and applications that instead took decades to achieve. …By 1925, telecom rate regulation was in effect across most of the nation, and competition was either discouraged or explicitly prohibited. …

In enacting the Communications Act of 1934, Congress authorized the new agency to impose service requirements priced at regulated rates. Any deviations in product or service required government approval, a laborious process then as now.

Some key words in that passage are service requirements and regulated rates. The State thought it was ensuring higher standards and fair prices by directing this segment of the economy in the most socialist way it could, when in fact it was limiting the arising of new, smaller, less advanced companies that couldn’t meet the standards enforced by the FCC but might be more appropriate to small businesses or poor homes over the decades. Instead of letting the profit-and-loss sytem of an open market dictate what services were provided at what prices, the government decided on its own, severely limiting the possibility of new technologies and ideas being innovated. (Libertarians make a similar argument regarding energy and environmental regulation: companies tend to do what they must to meet State mandates instead of doing what they could to gain advantages in the market and win more customers.) And instead of letting the monopoly charge whatever it wanted, or letting competition between companies dictate prices, it forced AT&T and some others to charge certain prices and handed them taxpayer money to ensure a satisfactory profit margin.

Swanson continues,

This insulation from competition also took place under the auspices of federal legislation including the Mann-Elkins Act of 1910 and the calculating Kingsbury Commitment of 1913. These edicts effectively cemented AT&T’s role as the central telecom firm for the entire country.In addition, for 70+ years AT&T’s international long-distance business was also protected by federal laws. Yet despite the landmark “break-up” of AT&T in 1982, the Baby Bells were and are still given many of the same monopolistic perks that were enjoyed by their predecessor. [emphasis added]

These last two passages have cited specific laws and positions that created or helped secure monopolies for AT&T across nearly the entire nation. It is impossible to know what beneficial products, services, and simple diversity of companies could have arisen in the United States without such socialist intervention in a major industry, but it is clear that these examples of State interference have given us monopolies and few choices, not many smaller businesses and more choices.

Why wasn’t breaking up Ma Bell the solution? Because it created multiple companies with protected monopolies, taxpayer subsidies, and other (unknown to me) legal protections, instead of just one!

Neither Congress nor the FCC would even need to take anything physical away. No need to “break” them up or “force” them to unbundle (i.e., offer a la carte services). Just stop protecting them, insulating them, subsidizing them (loans and handouts from taxpayers), stop giving them preferential treatment and no-compete geographies. Decriminalize all competition.

This still hasn’t happened and won’t happen with politicians like Barack Obama, Hillary Clinton, Ed Markey, and police-state-loving Republicans receiving popular support.

The National Information Initiative, supported by then-Senator Al Gore (post-deregulation, obviously), was supposed to take money from taxpayers and give it to giant telecom companies so that they would develop new, affordable technologies. $200 billion of tax money was given to these big businesses so they would deploy multi-gigabit ethernet service to nearly every home in the nation. Not only has that not happened, it isn’t close to happening because they haven’t even tried, and further, they haven’t had to give one dime of the money back.

This is probably the tenth or twelfth example I’ve read this year of big businesses being favored with tax exemptions, some type of legal exemption, or outright handouts from taxpayers, when small businesses (as if there were any in telecom) can’t attract that kind of attention or can’t afford the bribes that it takes to secure a position in a heavily regulated market. For another example, see this article about Warren Buffett and Geico. I think such examples are extremely important because they illustrate how, as James Ostrowski says, the system is designed to protect the rich and powerful and screw the little guy.

Swanson then links to the aforementioned chronicle by B.K. Marcus of the missteps the FCC has taken over the decades, leading to fewer choices, less competition, higher prices, and retardation of technological advancement.

Why talk about the FCC’s histroy and its debacles in the radio and television industries? Why care about radio anymore? Because its philosophy—of interfering with the market, blaming the resultant problems on “capitalism,” and then prescribing even more State interference to fix the very problems it created—will be at least as disastrous for the internet, a far, far more important informational and commercial medium than radio ever has been or, certainly, ever will be.

Swanson:

Again, an ISP in a free market has every incentive to attract as many customers as its capacity can handle. In order to remain profitable, it would have to satisfy their wants.

By “satisfy their wants,” he means give them high-speed internet at a good price and don’t discriminate too heavily against them just because they’re buying books and downloading pron, as opposed to conducting business or whatever else would be deemed higher-priority or worth more money. Many freedom skeptics and proponents of at least some State regulation doubt that unfettered telecom companies would actually give customers what they want, i.e., something close to voluntary net neutrality. But the mistake here is to assume that the telecom industry would be similar to its current state in the absence of federal interference. It would not. The first and foremost benefit conferred upon consumers by the elimination of governmental favors (tax handouts, legal exemptions, State-enforced monopolies, bribery that only huge companies can afford) would be the appearance of dozens if not hundreds of new companies offering the same services that AT&T, Comcast, Adelphia, and others offer.

Now we can see how the monopolies and tax handouts granted to various telecom (radio, telephone) companies in the first part of the 20th century is having even more unexpected consequences than libertarians first predicted back then: the small number of huge companies that exist as a result of FCC policies, protected and dependent on that protection, are the only ones present to supply our broadband internet connections for us, so we are left with very few choices as a result.

If there were many more companies, small, medium, or large, and there had been competition for prices, services, and technologies, the FCC would not have needed to bribe them with $200 billion to expand and advance their ethernet technologies because these would already exist. The presence of competition and absence of State guidelines would have fostered faster innovation, as it typically has in other industries. If there were no paradigm of State subsidies and bribes, and no hundred-billion-dollar companies to win the subsidies all for themselves, then $200 billion would not have been taken from people who earned it and given to companies that didn’t, with no result whatsoever and no criticisms from non-libertarians. It wouldn’t even be thinkable. The Universal Service Fund continues to take income from taxpayers and gave it to monopolistic firms, and results in nothing. Algore’s National Information Initiative took income from taxpayers and gave it to monopolistic firms, and resulted in nothing.

If there had been dozens or hundreds of internet providers and telecom companies where there are only a handful now, and there was no issue of State protection and monopolization, then cries for enforcement of net neutrality would be unimagineable. If your service was slow, you were denied, you were dropped off, or you were charged too much, you would end your business with that company and choose any of a dozen more. Businesses would cater to their customers or they would go broke. They would get no favors, no exemptions, no legal settlements from the State, no bankruptcy protection, and no second chances. They would die immediately and customer preferences would reign. Observe how fervent are the proponents of net neutrality, out there on blags and discussion forums. If they directed their fervor away from the promotion of legislation and towards the exposure of too-discriminatory ISP’s, do you think the ISP’s would be able to live it down? Do you think they would survive? If they did, it would be because enough customers chose them; if they did not, it would be because customers chose against them. The State would have no part in any of it, but the profit-and-loss system would be swift and unforgiving.

So we can see how State interference, which led to few choices and big monopolies, begets cries for even more State interference to fix the problems it created! If supporters of continued federal involvement in telecom doubt that the big ISP’s would be very customer-friendly, then clearly the only solution is to deregulate the entire industry and to oppose, in hindsight, the socialist regulation that has resulted in the existence of a “net neutrality” issue at all! Without geographic monopolies and favors given to only the biggest companies, there would be a plethora of options and the only worry you’d have about net neutrality is which of a dozen companies you should switch to to get the service you want!

Every piece of legislation under the banner of “net neutrality” would be a gigantic step backwards for the industry. And while independent ISPs would certainly be in the losing category, the biggest losers would again be consumers. …One wonders why politicians like Obama do not endorse increasing capacity via free-market competition. The taxpayer does not have to finance it and only those that want the services have to pay for it.

Instead of advocating new entrants and innovative technologies to expand scarce bandwidth—i.e., increase the size of the pie—the political class is merely focusing on the pie itself. It is this notable misdirected emphasis that gives rise to a key question: does it really understand the technical underpinnings of the infrastructure

Typical socialist thinking: the issue is how to divide up the existing pie, instead of releasing your constraints to allow the pie to grow bigger for all. Continued State involvement in internet activities will serve to restrict the growth of whatever “pie” one is talking about.

Swanson’s third column, The spectrum swindle, is about State seizure and auctioning of radio frequencies, which is surprisingly relevant to our 21st-century internet-focused world. The thing about radio frequencies is that, being a natural resource, the State declared that they were the equal property of everyone, and it therefore seized legal control of them so that they couldn’t be owned by just anyone. (Try applying that principle to other natural resources, such as land, and see where that leads you.)

The first part of B.K. Marcus’s anti-FCC masterpiece details the history of the various laws and policies of the federal government in the early history of the radio. Its first mistake was to claim, in the 1912 Radio Act, about half of the useable radio spectrum for itself, leaving the other half for private individuals and businesses to claim, as long as they got a license from the Department of Commerce. Since Commerce was unable to deny, regulate, or refuse renewal of licenses, this was a relatively free and open system that hadn’t caused any harm yet.

Skipping ahead to 1925, Secretary of Commerce Herbert Hoover decided that the radio band was practically full, and started refusing licenses. Marcus says,

The Zenith Radio Corporation—later Zenith Electronics—was unhappy with their assigned schedule and priority. …Zenith chose to ignore the restrictions on their license, and criminal proceedings were taken against them for violation of federal law.In April, 1926—United States v. Zenith Radio Corp.—the court again denied Hoover the authority to regulate licensure and this time—contrary to Intercity [a previous case]—they explicitly denied him discretion over time and wavelength assignment as well. Because the Intercity and Zenith decisions conflicted, Hoover turned to the acting Attorney General of the United States for an interpretation of the law. The Attorney General declared that the federal government had no authority to define any rights to spectrum.

Tim Swanson says,

There you have it. Over 80 years ago, the court system was effectively able to assign property rights without reverting to new positive law. Furthermore, [quoting B.K. Marcus]

[I]n the fall of 1926 the precedent for defining and defending those rights had been established in an Illinois court: Tribune Co. v. Oak Leaves Broadcasting Station. Writes Hazlett, “the classic interference problem was encountered, litigated, and overcome, using no more than existing common-law precedent.”

But Big Government and Big Business weren’t happy with this situation, so they created a law to generate more State control over the airwaves and more favoritism of large, rich, powerful companies.

As mediocre economist Adam Smith noted in The Wealth of Nations, collusions between businesses and governments ought to receive the utmost distrust. “The proposal of any new law or regulation which comes from [businessmen], ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.” And, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

If we research how things unfolded after the 1927 Federal Radio Act, we can see why big businesses favored not radio capitalism but radio regulation and protectionism. The aforementioned Thomas Hazlett and the ever-relevant Murray Rothbard argued that the general homesteading principle—whoever was there first, claiming and using property without inhibiting others from using their just property—is the only fair system to use in determining radio-frequency ownership. The 1926 Tribune Co. v. Oak Leaves Broadcasting Station case did exactly that. That’s Swanson’s point: enforcement of the libertarian principle of homesteaded property rights is not only sufficient, it is the only way of ensuring rightful use and ownership of radio frequencies.

The huge Tribune Co. and several other incumbents, and certainly power-hungry megalomaniacs like Herbert Hoover, did not hold this position. So in the 1927 Federal Radio Act,

The airwaves were declared public property and put under the guardianship of the Commission, which was given the authority to issue temporary licenses to those who were willing to broadcast “in the public interest”—just as the Big Broadcasters had proposed two years earlier.

Who, does history show us, benefitted from this seizure-and-reselling (re-licensing) policy? The large, wealthy companies who could afford to buy political favors and radio frequencies.

The system is designed to protect the rich and powerful and screw the little guy.

(I don’t know that small companies like Oak Leaves were stripped of their frequencies or that these were sold to wealthier companies (though Marcus does recount several instances of the FCC punishing and decommisioning several radio stations it disapproved of…it’s near the beginning of his long article, so you should check it out). However, this regulatory climate created insurmountable advantages for Big Business in perpetuity.)

This is the legacy created by the FCC that has led to a small number of large, rich, and influential telecom companies, who provide Ethernet service in the 21st century. The FCC didn’t stop with telephone monopolies and radio restrictions. It carried its corruption and incompetence into cable television and the internet. Please read all of B.K. Marcus’s masterpiece to learn all the details of this unjust and wasteful arm of the Leviathan.

One thing I said I’d get back to is the creation of barriers to entry by various levels of government, in this industry and all industries. Now, a legal geographic monopoly is certainly a huge barrier to entry for hypothetical upstart companies—the biggest, for none can (legally) arise to challenge the existing behemoth. But there are others. This is from the main text and footnote #10 of Swanson’s third column:

So while the multibillion-dollar price tag [to purchase political favors, exemptions, and the frequencies themselves] is seemingly stratospheric, telcos have and will continue to support an FCC-like system. It is a small price for them to pay as it prevents true competitive forces and enables them to hold on to their market share without threat of displacement. …The FCC is directly responsible for impeding competition over the years. Along with suppressing the adoption and use of FM, Declan McCullagh notes that

The FCC rejected long-distance telephone service competition in 1968, banned Americans from buying their own non-Bell telephones in 1956, dragged its feet in the 1970s when considering whether video telephones would be allowed and did not grant modern cellular telephone licenses until 1981—about four decades after Bell Labs invented the technology. Along the way, the FCC has preserved monopolistic practices that would have otherwise been illegal under antitrust law.

The system is designed to protect the rich and powerful and screw the little guy—oh, and limit technological advancement to the standards arbitrarily dictated by ignorant, uninterested, and often unelected officials.

Swanson then talks about something that seems important but that I’d never heard of: buildouts. These are requirements that the winners of frequency auctions must agree to fulfill if they purchase the frequencies. The long and short of it is that compliance with these requirements often entails building many new towers and base stations, covering certain percentages of a target population, reserving some bandwidth for emergency services (that the government and only the government will use), and paying for the rebuilding and maintenance of existing infrastructure.

In the long run, these types of handouts act as artificial stumbling blocks for upstart entrepreneurs in every city. Thus, the buildouts inadvertently create the need for media consolidation due to capital constraints—because only large firms can accrue and raise the necessary funds to bid in the auction and deploy the required network.

The system is designed to protect the rich and powerful and screw the little guy.

The rest of Swanson’s third column is about some other policies that generate waste and explicitly restrict competition, including an interesting account of how Lyndon and Lady Bird Johnson manipulated the Texas radio and television market.

His conclusion is the same as mine:

This is not a call for a privatization or reformation of the FCC; it is a recommendation for its abolition. Along with alternative arbitration venues, the current court system could handle any disputes arising from this action.The FCC should not be in the business of gerrymandering the electromagnetic spectrum; rather, it should be left to private firms to homestead the infinitesimal frequencies and solve any and all problems in courts: just like property disputes on parcels of land.

The FCC sells something it neither created nor homesteaded and has historically been found incompetent at managing. Worse, it has necessarily been partisan in its actions. In addition, the Treasury Department (through the FCC) stands to make billions of dollars for something they never made, never homesteaded, and have shown gross incompetence at managing.

New, different, or better government is not the solution; it will just create new, different, and not necessarily better problems, which only abolition of the FCC and other regulatory agencies could solve.

Returning, once more, to my overarching question of this post, Why is (further) State intervention in the telecommunications industry asked for?, and its answer, To force (monopolistic) companies to adhere to net neutrality and to foster the provision of broadband ethernet in (nearly?) every American home—I hope it is clear that the explicit outlawing of competition, other anti-competitive policies, favoring of wealthy incumbents, blatant tax-money handouts, direct and indirect restriction of technological advancements, and decisions made for political and not economic reasons—in short, State intervention in the telecommunications inustry—has been and will continue to be the cause of the very problems it is called upon to solve. As always.