Life In The Sausage Factory

On of my favorite die-hard Libertarian writers these days is David Friedman. Part of that is because we have known each other 20 years or so (albeit in a somewhat different context), and it is in part because if he can teach law and economics without either a law degree or economics degree, I can do law and economic policy without a degree in economics (I do have a law degree). But the real reason is because Friedman actually makes the argument for Libertarianism in his new book Future Imperfect that I think is the strongest argument and that no one in policy land ever has the guts to make. Friedman argues that while you may get utterly wretched results from a deregulated market and no regulatory authority, you have a better chance of getting a good result than if you centralize the decisionmaking in a government agency.

I happen to think David is wrong about which process will make worse decisions, but I think his approach is basically correct. As regular readers know, most free market enthusiasts I encounter in policy land insist that deregulation is the pathway to salvation and that while regulation will always prove disastrous in the end, the true path of deregulation will only bring joy and happiness. Simply let the market be, and the Competition Fairy will bring wonderful low prices and innovative new services to market. Try to regulate, and the Blessed Competition Fairy will turn her face against you and smite you with higher prices, worse service and a plague of villainous bureaucrats. So finding a Libertarian willing to admit that we may actually end up with crappy outcomes in a deregulated world — even if he thinks deregulation improves the odds for a better outcome — is rather refreshing.

I agree with David that we live in a messy world where we will have a lot of problems and crappy outcomes no matter what we try. But for a lot of reasons I have gone on at length about elsewhere, I think we will end up with at least a chance for better outcomes if we have regulatory structures in place that provide needed oversight and protection against the inevitable exercise of disproprtionate power and information asymtery that promotes real bad outcomes (like, say, a total meltdown of the financial markets). Sure, things can go very badly wrong with a regulatory regime. The problems of agency capture by incumbents and the cost of regulation are real. But using real economics to look at how markets behave tells me I’m screwed for sure if I embrace the Libertarian approach, whereas trying to come up with a well constructed regulatory scheme gives me a fighting chance of actually getting good results from time to time.

I indulge in this lengthy preamble to set up my primary argument for Larry Lessig’s piece in Newsweek to abolish the existing FCC an replace it with an innovation environmental protection agency (iEPA). Larry believes the iEPA, free of the 1930s ideology of regulated monopoly that shaped the FCC’s underlying statutes and designed to encourage innovation, would end up producing superior policies that would do things like encourage new uses of spectrum against the wishes of exclusive licensees, protect us from abuse of market power by enforcing network neutrality rules in a fashion similar to the Comcast/BitTorrent complaint, without stifling everything in tariffs and restrictions that incumbents can manipulate as they have throughout the FCC’s 70 year history.

Maybe. But I think it more likely things would turn out like they did with ICANN. Despite moving management of the DNS out of government into a non-profit supposedly managed by engineers and limited to “voluntary coordination” and “bottom up processes,” ICANN has proven as prone to abuse and capture by incumbents as any federal agency — possibly more so because it lacks judicial oversight or mandatory procedural safeguards (it has adopted some, but they are ultimately voluntary). As I observed in my last post, ICANN didn’t end up like it did because it was designed by bad people. It happened because we live in a messy world and expecting that good intentions and trustworthy actors with the best interest of the “Internet community” at heart could magically overcome the realities of stakeholder incentives and econonmic and political realities is as much a fantasy as the Gods of the Marketplace and the Competition Fairy.

I’m also frankly not so convinced that the FCC we have is such an awful thing. Sure, I can think of a lot I would change if I ran the zoo — both in terms of underlying statutes and how the FCC operates. And I get Larry’s point about how the “DNA” of an agency effects what it can and can’t do. But I also think the FCC has become the thing everyone loves to hate in telecom land, with that delightful air of sophistication when everyone important agrees that it is so obvious that things are wrong that no one could seriously defend the FCC and the only real question is how to fix it and whether it is politically possible to fix. But we in policy wonk land tend to focus on a handful of hard issues where anyone of us, given the power of philosopher king, could naturally make a better job of it. We ignore that most of the business of the FCC is pretty prosaic — such as certifying devices under Part 15, processing requests for license modifications, investigating slamming complaints — and that the rank and file employees at the FCC do their jobs with the same reasonable assortment of hard workers, slackers, geniuses, morons and just plain folks as found in any other corporate headquarters. And while few folks these days think much about such archaic things as tariffs and ensuring that rates for basic voice service are just and reasonable, a lot of us would notice if even the minimal levels of regulation left suddenly vanished. Transforming the FCC’s policy functions to be about “promoting innovation” rather than regulating government monopolies might seem real attractive to us in wonkland, but the actual functions of the FCC need to happen somewhere — and I am fairly certain that outsourcing them or eliminating them are not magic tickets to the Land Flowing With Milk and Competition promised by the Holy Prophets from the University of Chicago.

Finally, I grant Lessig’s point that underlying statutes — the regulatory DNA — matter. It made all the world of difference when we changed the Atomic Energy Commission with its role of promoting nuclear power to the Nuclear Regulatory Commission with the job of making sure nuclear power plants were safe. But even in its fundamental statutes, I think the FCC does better than most people credit. For one thing, I think the fact that the FCC is an independent agency with members of both parties making decisions is a criticaly important safety mechanism for the agency that controls how we receive news and communicate with one another. Given how the Bush Administration has used the IRS and the DoJ to intimidate political opponents, the Office of Management and Budget to veto regulations it doesn’t like, and the Government Services Administration to award patronage and further political ends with a blatancy not seen since we abolished the “spoils” system, the fact that the Commissioners are immune to direct political influence by the President is not nearly so trivial a matter as cynics like to presume. I also think the FCC has alot of good, progressive stuff in its DNA that — all too often — gets lost in implementation. Look at Section 1 of the Act, which talks about developing a state of the art communications system by wire and wireless accessible to all people of the United States regardless of race or gender, or Section 257 reaffirming the purpose of the policy of the United States “favoring diversity of media voices, vigorous economic competition, technological advancement, and promotion of the public interest, convenience, and necessity.” Or Section 201 and 202, declaring all unreasonable discrimination or unreasonable practices in deployment of communications services illegal.

Yes, the FCC was born in an era when it seemed communications was about regulating government monopolies. But it was also born in a a progressive era when Congress understood that government had a role in protecting everyday citizens from the abuse possible in an unregulated market, and that government had a role in ensuring that everyone benefited from advances in communications technology and had access to vital services. Those aren’t bad building blocks for creating a telecommunications regulator that will encourage innovation and prevent a few huge companies from exercising market power.

So, contrarian that I am, I think that for our messy complicated world, the FCC muddles through pretty well, all things considered. It gets more right than wrong in its underlying DNA, and many of its problems come from nature, not nurture. We cannot hope to cure the underlying problem that people often make bad decisions when confronted with complex problems, because it derives from the overall messiness of the world. Rather than try to create an iEPA that will have its own problems, why not make the FCC we have work right. Yes, the old philosophy that Congress should delegate to an expert agency that would somehow resist human weakness and make decisions based only on merit — or even that all reasonable people could agree on the “right” expert answer — now seems hopelessly naive. But the notion that we should junk the whole flawed apparatus because “the market always knows better than some elitists in Washington” has proven equally naive.

Rather than try again to create some perfect system that will always produce the right answer, I say stick to the more realistic goal of making the current FCC work better. With the political winds shifting back in line with the FCC’s more progressive DNA, let’s seize the day and make what we have work for us. It’s fun to blame the FCC for all that’s wrong in the world, and imagine that we can set up some kind of philosopher king who will make only good regulations that neither “favor incumbents” nor “impose undue regulatory costs.” But I think that is about as likely as the Competition Fairy.

Stay tuned . . . . .