They Chose to Praise Spectrum Ownership When They Should Have Buried It

The Cato Institute a solid bastion of neo-conservative economic thought (i.e., I disagree with them, but they aren’t industry sock puppets) has released a paper by Dale Hatfield and Phil Weiser on the difficulty in creating a property regime in spectrum property.

This should have been a hard-hitting indictment of the “property school” and its belief (as advocated by such champions as Evan Kwerel) that a transition from the current “comand and control” allocation to a property rights regime offers a quick and easy way to get new spectrum services deployed, and we should therefore move as quickly as possible to adopt the “property” model instead of the “commons” model. (See my now old but still vaguely useful primer on the spectrum reform debate if you are wondering what these terms mean.)

Instead, it assumes that the benefits of a property regime are so obvious and well-proven that, regardless of the burden of devising a property regime, spectrum reformers need to “stay the course” and keep slogging ahead. After all, if we question the value of property rights in spectrum, the info commies win.

I happen to like both Dale and Phil and usually agree with what they write. In fact, I happen to agree with the central tenet of this paper: devising a true property-rights regime for spectrum raises more problems than advocates would like to believe. But I draw a rather different conclusion from their work. My conclusions (and a few trademark TotSF snarky observations on some of the hand-waving and rhetorical tricks used in the article) below.

For those just tuning in (and who didn’t follow the link above to my 2004 primer on the subject), a hot debate among policy wonks is “spectrum reform.” Specifically, how to allocate the use of radio frequencies in a way that encourages technological innovation and distributes economic and social benefits. Unsurprisingly, the people who brought you “the ownership society,” “privatized social security,” and “anything the government does the private sector can do better,” have advocated transforming existing licenses to use spectrum into a form of property wherein the licensee could do whatever it wanted with the spectrum it “owned.” (We call this the “property” school for rather obvious reasons.)

The other view, usually referred to as the “commons” school, argues that technology has reached a point where we can all use the electromagnetic spectrum without interfering with each other, and that managing spectrum access as a “commons” rather than as a set of discrete property rights produces all around better results. I incline towards commons myself, although I am more of a “gradual evolutionist” than a hard-core “death to exclusive licensing” kind of guy.

Still, like Treebeard the Ent, while I may not be altogether on anyone’s side, there are some sides I am altogether not on, a category into which I put propertization of spectrum licenses. I think creating permanent regional government monopolies on speech and conduct (which is what an exclusive license amounts to) is bad policy and contrary to the First Amendment. But that’s just me.

So imagine my surprise and disappointment when I heard Dale Hatfield and Phil Weiser, perfectly reasonable fellows who understand both technology and economics (and who jointly wrote a paper on the technical aspects of managing spectrum commons in 2003), came out in favor of transforming spectrum licenses into a species of property. Ah well. Reasonable minds can differ and all that. So I was extremely interested in seeing how such knowledgable folks had come to the property conclusion.

And hence my disapppointment with their recent paper “Toward Property Rights In Spectrum, The Difficult Policy Choices Ahead.” (Which, in fact, is rather similar to their 2005 paper Property Rights In Spectrum, Taking the Next Step.)

The paper itself makes a very persuasive case that creating a property scheme in spectrum licenses is damned difficult, because spectrum doesn’t behave like real property. Nor does it behave like other species of property, such as intellectual property. A spectrum license is a wholly artificial creature that exists solely as a product of government regulation, in an environment that exists wholly as a product of government regulation. Try to take the government out of the process in anything but the most trivial fashion (e.g., the buying and selling of licenses) and you find youself needing to resolve conflicts between rights of spectrum “owners” that institutions designed to address real property conflicts can’t solve.

For example, as the paper explains, property rights advocates want to give licensees the ability to determine transmission power and technology for “their” frequency band in a defined geographic area. But as a practical matter, that flexibility would make it extraordinarily difficult to contain radio frequency emissions so that they do not create interference with a neighbor. Recourse to common law actions of nuisance or suggesting that parties will simply negotiate a solution ignore the problem of increased transaction cost to the “property owner” and the potential incentives to engage in “green mail” or other forms of harassment of those seeking to exercise their spectrum rights.

Worse, actual spectrum propogation can vary significantly from predictive models or even from day to day in the same geographic area. Topography, atmospheric conditions, new construction, and other factors can all cause a transmitter’s propogation characteristics to change unpredictably, prompting a “spectrum owner” to “trespass” onto another spectrum owner’s property. Under the current regime, the FCC prevents this by exercising rigid control over licensees (or, in the case of unlicensed “commons” users, requiring them to accept interference). But the whole point of propertizing spectrum is to get the government out of this kind of “command and control” because of the percieved superiority of market-based mechanisms.

So, given this, why do Hatfield and Weiser nevertheless continue to insist on the superiority of a property-rights regime? Because, according to the article, “the merits for the case for property-like rights in spectrum are beyond dispute.” Oh, silly me. I guess someone forgot to inform Mark Cooper, Eli Noam, Yochai Benkler, Larry Lessig, David Reed, and the rest of the info commies.

I might regqard this argument by assertion as a forgivable lapse given the intended audience (it is a CATO publication, and they always say the first rule of writing is “know your audience”). But what raises my dander is the attempt to portray recent FCC, Congressional, and Supreme Court action as creating an invariable and unstoppable juggernaut toward “property-like rights” in spectrum.

It is this rather disingenuous argument from two scholars who, frankly, know better, that earns them a Colbert-esque “wag of the finger.”

To quote the offending paragraph (with some suitable asides to explain my ire):

>The conclusion that firms should be allowed to own property-like rights in spectrum is, however, increasingly beyond dispute. In 1997,
>Congress underscored its commitment to that policy by requiring an auction for all new spectrum licenses (citing 1997 Balanced Budget Act).

Actually, no. The 1997 Balanced Budget Act requires auctions to resolve mutually exclusive applications. And it excludes from the auction requirement all noncommercial allocations. In other words, the preferred method of distribution remains the free distribution of licenses that serve the public interest under the “public trustee” model that has been in place since the Federal Radio Act passed in 1927. But instead of spending hundreds of thousands of dollars in federal money to resolve conflicts between applicants, Congress decide to turn it into a mechanism to earn a quick buck. But, as the Second Circuit pointed out in Nextwave Communications in 1999, Congress’ decision to use auctions as a means of distributing licenses was never intended to change the basic principle that licenses aren’t property.

Finally, Congress was actually so concerned that people would try to draw the inference that auctions conveyed property-like rights in spectrum that it actually said twice (once explicitly and once more by implication), within two lines of each other, that distribution by auction does not give you property rights. Lets quote that section just to make sure we’ve flogged this horse enough, shall we:

Section 309(j)(6)- Nothing in this subsection, or in the use of competitive bidding, shall–
(A) Alter spectrum allocation criteria and procedures established by the other provisions of this Act;
(B) Limit or otherwise affect the requirements of subsection (h) of this section [which requires licensees to acknowledge that they have no property right or other right beyond that explicitly granted in the license], Section 301 [prohibitting ownership of licenses], 304 [reuiring all licensees to sign an explicit waiver of any claim to any right of ownership], 307 [making the public interest the determining factor in whether to grant a license], 310 [requiring Commission approval to transfer licenses, and permitting transfer only when transfer serves the public interest], or 706 [President can totally take your “property” under war powers] or any other provision of this Act (other than subsections (d)(2) and (e) of this section);
(C) diminish the authority of the Commission under the other provisions of this Act to regulate or reclaim spectrum licenses.

More importantly, and unmentioned by Hatfield and Weiser, the one time the FCC tried to back into property-rights through a back door in the name of getting broadcasters to return analog spectrum, Congress slammed them down hard. The Auction Reform Act of 2002 chided the FCC for creating an auction scheme that would have resulted in “unjust enrichment” of broadcasters and reaserted Congress’ interest in mantaining rigid control over spectrum use.

Hardly a Sherman-esque “March to the Sea” for property rights.

Moving back to the annoying mischaracterizations.

>In early 2003, the Supreme Court made clear that the policy limits how the FCC can treat licenses, invalidating an
>attempt to pull a license (based on its regulatory jurisdiction) from a party who had declared bankruptcy. (citing FCC v. Nextwave, 537 U.S. 293 >(2003).

Excuse me, but this is such an egregious mischaracterization of the holding in Nextwave v. FCC that it just blows my mind. The Nextwave case turned on whether a provision of the bankruptcy code that prohibitted the federal government from cancelling ANY federal license in possesion of a bankrupt (for non-payment). The FCC argued that it’s unique roll as regulator of the airwaves and the explicit statement in Section 309(j)(6)(C) that nothing in the spectrum auctions diminished the FCC’s power to reclaim licenses superceded the Bankruptcy Code. The Supreme Court (like the DC Circuit before it) said no. We do not have to intrepret 309(j)(C)(6) as trumping the bankruptcy code,so the plain language of the statute applying to all federal licenses prevails. If you, FCC, had wanted to be able to avoid this situation, you should have gotten payment up front before you issued the license (which, as a consequence, the FCC now does). But once you issue a license, it becomes a federal licenses like any other federal license and subject to the prohibition on cancellation contained in the bankruptcy code.

Again, hardly a ringing endorsement of property rights. To the contrary, the case turned on the federal character of a spectrum license, not on some sort of Congressional recognition of property rights in licenses.

>Since then, the FCC has indicated its commitment to promoting property-like rights in spectrum and has provided for increased licensee flexibility to
>allow greater trading in spectrum rights. (citing Secondary Markets Order)

Yeah, the Secondary Market order was yet another step toward property rights, and it did follow the Nextwave decision in that the FCC issued the Secondary Markets order after the Supreme Court issued Nextwave. But concluding that the Nextwave decision prompted the a change in attitude at the FCC and pushed it more toward property-like rights, as implied in the Hatfield & Weiser paper, is a classic example of taking two unrelated events and claiming one causes the other (rather like the old joke that keeping a statue of a plastic mouse in the lobby scares away elephants — after all, we haven’t had any elephants since we set up the statue of the mouse, have we?)

Fact is, Former FCC Chair Michael Powell was real hot for both property rights and commons, and actively pushed proceedings that promoted property rights (like secondary markets) and commons approaches. But the FCC also rejected proposals to increase property-like rights in spectrum, such as rejecting Evan Kwerel’s proposed “two-sided” auction as a means of reallocating licenses as property in the BRS and EBRS bands. (Also, the proposal for the Secondary Markets Order traces itself back to an initiative started by Bill Kennard in 2000, so it is rather difficult to maintain that Nextwave begat Secondary Markets.)

Again, we hardly find a linear progression demonstrating an increasing commitment to property-like rights. Which begs the question, why try to construct such an argument?

Apparently, the property school has grown nervous about the success of the revolution, and feels the need for good dose of “stay the course” rhetoric. Indeed, property rights supporters have increasingly bemoaned the derailment of the “property train” that appeared to be leaving the FCC station when Powell took over in 2001. Thomas Hazlett, for example, continues to complain at every opportunity that the FCC has shown a bias toward unlicensed since the Spectrum Task Force Report in 2002 (although, as Jim Snider points out, while the FCC has a number of pending proposals to liberalize unlicensed rules, it has actually allocated far more spectrum for traditional licensed uses since 2002).

This is, perhaps, why property school advocates have become so ardent in maintaining that they have momentum, and seek to portray themselves as the vanguard of an unstoppable property-like rights juggernaut. No doubt we shall soon hear of how “command and control” and the commons approach are “in their last throes” because property brings peace, freedom and economic development to Spectghanistan and Spectraq.

Stay tuned . . . .