Economics-Free’ Obamanet The White House and FCC acted on pure ideology. Cost-benefit analysis? What’s that?

President Obama with Tom Wheeler, his then-nominee to head the Federal Communications Commission, May 1, 2013.

President Obama with Tom Wheeler, his then-nominee to head the Federal Communications Commission, May 1, 2013.

Feb. 1, 2016

A Technology Policy Institute conference last month turned into something of a roast. Economist Tom Hazlett proposed a mischievous toast to “our friend, former FCC chief economist Tim Brennan, who wrote every word” of the Federal Communications Commission’s new regulations over the Internet. Mr. Brennan denied any involvement with the heavy-handed rules: “Nothing the FCC says necessarily represents the views of Tim Brennan or his staff.” He called the rules “an economics-free zone.”

That admission should interest the federal appeals judges now considering the legality of the regulations, which subject the Internet to regulations written for 19th-century railroads and the 1930s phone monopoly. Mr. Brennan has confirmed that the agency failed to conduct the cost-benefit analysis the Supreme Court requires for regulatory agencies to justify their rules. Mr. Hazlett, who served as the FCC’s chief economist during the George H.W. Bush administration, told me he was “not at all surprised that Tim Brennan, a thoughtful and honest economist, would distance himself” from the new regulations.

It’s no mystery why the FCC skipped the economic analysis. The commission had planned less-extreme regulations, but President Obama intervened at the last minute, driven by “net neutrality” poll numbers, to demand the Internet be regulated as a utility—an approach the FCC had rejected since the launch of the commercial Internet in the 1990s.

Congress rejected it, too. The bipartisan Telecommunications Act of 1996 was designed to “preserve the vibrant and competitive free market” for the Internet, “unfettered by federal or state regulation.” The Obamanet regulations are contrary at least to the spirit of the law.

Economic analysis would have predicted these regulations would suppress investment in broadband. That expectation has been borne out in the work of Hal Singer of the Progressive Policy Institute, who is tracking the dramatic decline in capital spending due to the uncertainty caused by the need for government approval.

The FCC also ignores economics by going after innovative pricing plans for broadband and wireless. The target is “zero rating” programs, which exempt selected data usage from monthly usage caps, giving consumers lower-price options.

Net-neutrality absolutists object to price and service differentiation.T-Mobile’s Binge On includes unlimited video from two dozen providers, including Netflix and ESPN, but not full Internet access.AT&T’s Sponsored Data lets companies pay the data bill for consumers to gain access to content such as online games and health records. Sponsors use Verizon’s FreeBee Data to subsidize access to movie trailers and magazine articles.

In November, FCC Chairman Tom Wheeler praised the Binge On offering as “highly innovative and highly competitive.” He chided his critics for predicting that the new regulations would force innovators to ask the FCC “Mother, may I?” before launching new pricing initiatives.

Then in December, Mr. Wheeler reversed himself. He ordered executives from T-Mobile and others offering zero-rating services to submit to FCC approval after all. In January, agency bureaucrats reported “productive” talks. The Republican FCC commissioners objected. Michael O’Rielly called commission bureaucrats “inquisitors,” while Ajit Pai said they are “micromanaging all kinds of business plans and hauling in companies to flyspeck whatever innovative service offerings they might choose to put out into the marketplace.”

Eight million customers switched to T-Mobile last year, many lured by the low-price offerings the FCC could now revoke. If these consumers like their new low-cost plans, will they be allowed to keep their plans? Mr. Wheeler’s bureaucrats get to decide.

Economists understand that when government mandates business practices, this limits consumer choice. “Zero rating is not price discrimination,” explained Roslyn Layton on the American Enterprise Institute’s Tech Policy Daily blog last week. “It is price differentiation, a practice that is the essence of competition.” Consumer-friendly pricing should be cheered, not banned. Even when the FCC micromanaged Ma Bell, regulators allowed zero rating through toll-free phone calls paid for by businesses.

The net-neutrality activists who got the White House to end 20 years of the unregulated Internet are now pushing their agenda globally. The government of India recently banned a zero-rating service fromFacebook that gave millions of Indians their first access to the Internet. Net-neutrality absolutists demand that poor people get no access if they can’t afford unlimited access.

The FCC’s former chief economist Mr. Brennan did a public service by admitting that Obamanet has no economic justification. Consumers around the world were better off with the open, permissionless Internet when no one had to beg government bureaucrats to let them offer new products, services or lower prices.

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