issue: Regulatory Reform

U.S. Investment Heroes of 2014: Investing at Home in a Connected World

Posted on by The Progressive Policy Institute

In this era of globalization, goods, services, money, people, and data all cross national borders with ease. Indeed, connectedness to the rest of the world is now essential for the data-driven economy we find ourselves in to thrive. It follows that our tax, trade, immigration, and regulatory policies must be oriented to encourage that connectedness.

But perhaps paradoxically, prospering in a connected world requires a dedication to investing at home. It is impossible to participate as a full partner in the global economy unless we are investing in digital communications networks, education, infrastructure, research, energy production, product development, content, and security domestically. Investment generates increased productivity, higher incomes, new jobs, and more opportunities for the economic mobility and growth that we all desire.

Such prosperity-enhancing investment comes in many flavors, both private and public. In this report, we focus on identifying the U.S.-based corporations with the highest levels of domestic capital expenditures, as defined by spending on plants, property, and equipment in the United States. Currently, accounting rules do not require companies to report their U.S. capital spending separately, although some do. We fill in this gap in available knowledge using a methodology outlined at the end of this paper, based on estimates derived from published data from nonfinancial Fortune 150 companies.

To understand which companies are betting on America’s future, we rank the top 25 companies by their estimated domestic investment. We believe this list can help inform good policy for encouraging continued and renewed investment domestically.

Download “2014.09 Carew_Mandel_US-Investment-Heroes-of-2014_Investing-at-Home-in-a-Connected-World“

The Data-Driven Economy and the FDA

Posted on by The Progressive Policy Institute

The shift to data-driven growth is the single most important reason why the U.S. economy is far outperforming the European economy these days. Online sales are up by 16 percent over the past year, and Americans are getting more and more of their information online, spending an average of 40 minutes per day on Facebook alone.

Yet regulators are struggling to keep up with the data-driven economy.  Regulatory assumptions designed for a slower, information-poor age are ill-suited for today’s information-rich environment, both failing to take advantage of new opportunities and failing to protect consumers against new threats.

Nowhere is this regulatory struggle clearer than the attitude of the Food and Drug Administration (FDA) towards social media. Rather than embracing the astonishing power of social media to inform the public, the FDA is proposing to protect consumers by greatly hobbling the ability of pharmaceutical companies to communicate directly with them. The FDA implicitly assumes that communications from pharma companies regarding prescription drugs and medical devices are likely to be promotional or marketing in nature.

Certainly the FDA is justified in its mission to protect consumers against false or misleading information. There are serious risks associated with prescription drugs and medical devices, some of which could be fatal.

But in its approach to protecting consumers, the FDA is ignoring the trade-off between consumer protection and promoting cost-saving healthcare innovation in an economy dependent on constant communication.

The FDA’s outmoded thinking threatens to hold back cost-saving innovation in healthcare design and delivery. Pharmaceutical companies don’t just produce drugs, they produce information that is useful to consumers, and not intended for promotional or marketing purposes. By restricting the transmission of information, the FDA is increasing costs and reducing productivity.  Consumers could greatly benefit from increased access to truthful and non-misleading healthcare information, but pharmaceutical companies need flexibility in how they can communicate.

For example, proposed January guidance would dictate that every interactive “promotional” communication – including items on blog sites, Facebook, and Twitter – must be submitted to the FDA. This would apply to any interactive communication that is owned, controlled, created, influenced, or operated by the company, regardless of the intended audience. Further, every month pharmaceutical companies would have to submit reports on interactive or real-time communications for any site in which they are actively engaged.

In June, subsequent draft guidance from the FDA would further restrict how drug companies can communicate online.The “Internet/Social Media Platforms with Character Space Limitations-Presenting Risk and Benefit Information for Prescription Drugs and Medical Devices” draft guidance requires that each communication must include detail about risk, established name, and dosage information, in addition to a clearly marked link to a more complete risk discussion. (A corresponding draft guidance would provide a narrow exception to the rules when correcting explicit cases of misinformation.) So comprehensive are the requirements, communicating information about prescription drugs and medical devices on sites like Twitter and Facebook would be very onerous.

The FDA should rethink its approach to communications regulation to embrace the data-driven economy. Pharmaceutical companies need more flexibility in their communications, not less. A greater ability to share information will enable these companies to reduce healthcare costs, through innovation in healthcare design and delivery. Moreover, it will promote gains in consumer welfare, as people are able to get better quality healthcare information faster online. Finally, such regulatory reform will actually better protect consumers against risk, because it will enable rules to remain effective in a constantly changing communications landscape.

Forbes: Want To Keep Telecom Investment Going Strong? Avoid Rate Regulation Under Title II

Posted on by The Progressive Policy Institute

Quants have been studying the million-plus comments submitted to the FCC during the Open Internet proceeding, and unsurprisingly, the vast majority favor net neutrality. But what does that mean?

Those pressing for heavy-handed regulations would like it to mean “support for Title II,” but the myriad comments that mentioned Title II were most likely form letters generated by advocacy groups: It is doubtful that ordinary citizens understand the legal nuances that distinguish the FCC’s authority to regulate Internet service providers (ISPs) under section 706 and Title II.

To understand which regulatory path to take, we need to clearly define what sort of conduct cannot be tolerated on the Internet. Consider the following offer (“Offer A”) by an ISP to a content provider: “If you don’t take my priority-delivery offering, I will degrade your connection speeds on my network.” Such repugnant conduct would diminish the absolute performance of any content provider who declined the offer.

Now consider a slightly different offer by an ISP (“Offer B”): “If you don’t take my priority-delivery offering, you will continue to receive the same connection speeds that you previously enjoyed. If you take it, however, your connection will be even faster.” In contrast to Offer A, this offer would not threaten the absolute performance of the content provider; the only impact for those who decline it would be a diminution in their performance relative to those who elected priority delivery.

A broad consensus has formed around the need for regulation to prevent the type of conduct associated with Offer A. There is also wide acceptance of rules that would bar ISPs from favoring affiliated websites over independents by, for example, slowing or blocking access to the competing content. Importantly, none of these regulations would require the FCC to engage in rate regulation. All would be achievable under the “light-touch” approach of section 706.

What section 706 cannot prevent, however, is the type of conduct associated with Offer B. The D.C. Circuit has said as much, ruling that any attempt to prevent ISPs and content providers from negotiating for priority delivery smacks of common-carriage regulation. In other words, if rates for priority delivery were set by regulatory fiat, then there would be no need for ISPs and content providers to negotiate over the rate.

Will FCC Chairman Tom Wheeler give a "thumbs up" to Title II?

Title II would not bar priority-delivery offerings out of the gate: Even under Title II, ISPs would be free to offer such services, so long as they did so in a non-discriminatory way—that is, each package would have to be available to all similarly situated websites. But Title II could empower the FCC to begin a rate proceeding for priority delivery, at which point interested parties could petition the agency for zero rates, which would effectively eliminate priority delivery from the marketplace.

Would it be a good thing to unleash rate regulation on ISPs to prevent the formation of priority delivery? Not if investment is the metric. In a new study released by the Progressive Policy Institute (PPI), Bob Litan and I analyzed the impact of rate regulation pursuant to Title II on the investment of incumbent telcos, entrants, and cable providers in the 1990s and early 2000s. The results should give regulators pause before dabbling in rate regulation again.

Telco entrants: The 1996 Telecom Act required the incumbent Regional Bell Operating Companies—the localized telephone monopolies that were part of the integrated AT&T before it was broken up by court order in 1984—to share or “unbundle” the pieces of their local exchange networks to telco entrants at regulated rates to allow the latter to begin breaking down the local monopolies. With two co-authors (including your fearless blogger), Bob Crandall of Brookings used cross-state variation in the price of constructing local phone lines relative to leasing unbundled loops at regulated rates to identify the sensitivity of the entrants’ investment in local lines to these regulated rates. The researchers found that facilities investment by telco entrants was actually greater in states with higher unbundling rates; in other words, the more generous the subsidy, the less facilities-based investment occurred by telco entrants.

Cable companies: Cable television providers were best positioned to challenge the telcos’ hegemony in voice and Internet services in the mid-1990s. But to enter, cable operators first had to upgrade their networks to support IP-based transmissions. Yet cable companies were reluctant to make such investments so long as regulators were providing a less expensive entry path to their competitors (the telco entrants). High margins in local telephony and Internet access were the signal for cable entry, but the FCC’s unbundling experiment was injecting unnecessary noise. It took a series of court orders that unwound the unbundling regime by 1999 for the cable operators to see the market signal through the noise. Using data from NCTA, we found that the average annual capital expenditure for cable operators during the three years following the 1996 Act was $6 billion. In comparison, the cable industry’s average annual capital expenditure during the three-year period after the unbundling rules were unwound was $15.1 billion.

Incumbent telcos: Perhaps the most pivotal regulatory decision concerning the fate of broadband occurred in 2003. In its Triennial Review Order, which became effective in October 2003, the FCC determined that there would be no unbundling requirement for fiber-to-the-home loops. Once the telcos understood that they were free of the obligation to lease their fiber-based networks to competitors at regulated rates, they entered into a race with their cable counterparts to begin building the broadband networks that are now transforming the telecom landscape. In the span of just five years, from the FCC’s adoption of a policy of regulatory forbearance for fiber and IP networks in 2003, the miles of optical fiber doubled from five to ten million. Annual wireline broadband investment by the telcos jumped to $15.5 billion by 2008.

Why should the FCC focus on investment when promulgating new Internet regulations? First, Congress instructed the agency to do so in section 706 of the Act. Second, and perhaps even more important, investment in the communications sector continues to play a pivotal roll in driving the U.S. economy.

This week, PPI released its third annual report on “U.S. Investment Heroes,”  authored by Diana Carew and Michael Mandel, which analyzes publicly available information to rank non-financial companies by their capital spending in the United States. Once again, AT&T and Verizon ranked first and second, respectively, with $21 and $15 billion in domestic investment in 2013. Comcast, Google, and Time Warner also made PPI’s top 25 list, each investing over $3 billion. The authors credit investment in the core of the network with sparking the rise of the “data-driven economy.”

In light of the results from prior experiments in rate regulation, the FCC should eschew calls to regulate ISPs under Title II. The incremental benefits (potentially barring fast lanes) are dubious, but the incremental costs (less investment at the core of the network) would be economically significant. Given its size and contribution to the U.S. economy in terms of jobs and productivity, even a small decline in core investment in response to rate regulation would impose social costs beyond the immediate harm to broadband consumers from an atrophying network.

Let’s not repeat the mistakes of the past. If we focus on what’s important—preventing an absolute decline in the welfare of content providers and preserving incentives to invest—we can nurture our precious Internet ecosystem at both the edge and the core.

PPI Report: ‘The Best Path Forward on Net Neutrality’ is to Focus on Investment, Case-by-Case Adjudication

Posted on by The Progressive Policy Institute

The Progressive Policy Institute (PPI) today released a new policy report providing evidence that the best possible resolution to the current “net neutrality” stalemate is for the FCC to avoid the heavy-handed approach of Title II regulation, and lean instead on its Section 706 authority to regulate potential abuses by Internet Service Providers (ISPs) on a case-by-case basis.  The report was also filed into the FCC’s official docket on the proposed rules for the Open Internet.

Co-authored by PPI Senior Fellow Hal Singer and Brookings Non-Resident Senior Fellow Robert Litan, The Best Path Forward on Net Neutrality argues that by relying on its Section 706 authority the FCC can promote greater investment across both edge and content providers compared to Title II. It will also allow the FCC to avoid any unintended consequences, such as creeping regulation, that encompasses content providers or other ISP services.

“Internet policy, including the resolution of the net neutrality debate, should be guided, in our view, by a simple rule: Pick the policy that maximizes total investment across the entire Internet ecosystem,” write Singer and Litan. “Investment by both core and edge providers is paramount to a properly functioning Internet ecosystem, and due to feedback effects, investment by one depends on the investment by the other.”

“Imposing public-utility style regulation on Internet access would dampen innovation and investment in more, faster broadband. We propose the FCC implement the same case-by-case process to adjudicate discrimination complaints it has established for cable companies to broadband providers.”

The report’s release comes at a critical time when the FCC is seeking public comment on the current role of the Internet’s openness in facilitating innovation, economic growth, free expression, civic engagement, competition, and broadband investment and deployment. The FCC’s open comment period on the proposed Open Internet rules is set to close on September 15.

Download The Best Path Forward on Net Neutrality.

The Hill: Looking Beyond the Minimum Wage

Posted on by The Progressive Policy Institute

The conversation surrounding economic inequality in the United States has risen from its usual steady drone to a headline-grabbing roar in recent weeks. Unlike in 2011, when protest movements such as Occupy Wall Street acted as the main catalysts of the discussion, today the debate erupts from all sides of the issue.

Billboards in San Francisco decry the efforts to raise the minimum wage as a job-killer, while many around the country begin their “live the wage campaign”. Nick Hanauer, self-proclaimed plutocrat, warns his fellow .01%ers that unless economic inequality is reduced soon, the proverbial pitchforks will come for them. Sen. Ted Cruz continues to predictably denounce “job-killing minimum wage legislation,” while the Obama administration continues its equally predictable relentless barrage of advertising insisting that the current minimum wage is not a living wage.

Read the full article at The Hill.

Reclaiming the most powerful tool of reform: Constitutional amendments

Posted on by The Progressive Policy Institute

At a time when observers across the political spectrum agree that the machinery of American government is broken, the single most powerful mechanism for repair appears to be effectively off the table: the passage of new amendments to the U.S. Constitution. Yet this might be the only solution that could bring about sustained change and reform.

Indeed, the amending process could be used to authoritatively address a range of persistent institutional challenges. Amendments could clarify ambiguities in presidential war powers and the use of recess appointments. They could reform or abolish the electoral college, allow naturalized citizens to run for president, enhance voting rights, and create a framework for campaign finance reform. They might enact congressional term limits, or curb lifetime tenure for Supreme Court justices at a time of ever-lengthening lifespans. The amending process could also be used to address thorny subjects such as the scope of social and economic rights and the nature of separation of church and state.

Of course, the immediate objection to the idea of amending the Constitution is that it is simply too hard to achieve in times of political division. And it’s true that the Framers did insulate their handiwork from quick or easy change. The most commonly used formula for amendment requires the support of two-thirds of each House of Congress and then ratification by three-quarters of the states. This high hurdle demands consensus that is both broad and deep, including bipartisan supermajorities in both Houses as well as the agreement at least 38 states. Continue reading “Reclaiming the most powerful tool of reform: Constitutional amendments” →

The Easiest Fix for Dark Money: Disclose Less Often

Posted on by The Progressive Policy Institute

“Politics has got so expensive that it takes lots of money to even get beat with nowadays.” —Will Rogers

Super PACs are unquestionably a scandal: The lightly regulated committees mean wealthy donors can funnel unlimited amounts of money into elections anonymously. But one of the remedies being proposed—early and frequent disclosure of super-PAC donors and expenses—would very likely make things worse.

Senate Democrats have proposed a bill, the DISCLOSE Act, that would require super PACs to publicly file lists of their donors and spending every 90 days during an election cycle. This sounds good—who is against transparency?—but it ignores the real-word dynamics of fundraising. In fact, ill-conceived disclosure requirements have already stimulated a campaign-spending arms race and made U.S. elections more expensive.

Let’s be clear: Transparency is vital to our democracy. Americans are rightly concerned about the cascade of “dark money” into U.S. elections. The question is not whether to disclose, but when and how. What the last decade shows is that early and frequent reporting of donations creates a perverse incentive to start the money chase earlier—and to raise more cash to pay for perpetual fundraising.

The most productive reform that could pass the House and Senate right now would be to mandate less frequent disclosure. Counterintuitively, it would great reduce the influence of money on the political system. It would condense the campaign season and allow members, candidates, and donors the freedom not to raise money and not to give money.

In Citizen United and more recently in April’s McCutcheon v. FEC decision, the Supreme Court has affirmed its belief that political money is free speech and the influence of money in politics does not cross the threshold of bribery. The Court’s view is a reaction to the flawed 2002 Bipartisan Campaign Reform Act, otherwise known as McCain-Feingold. The well-intentioned but poorly written campaign-reform law suffocated the party committees and created new, less-regulated vehicles for money like super PACs.

Continue reading at the Atlantic.

The FSOC Experiment

Posted on by The Progressive Policy Institute

Treasury Secretary Jack Lew is testifying before Congress on Tuesday and Wednesday on the Financial Stability Oversight Council (FSOC). The FSOC is charged with identifying “systemically important financial institutions” (SIFIs) that could under certain circumstances pose potential threats to the financial system, and taking appropriate action to reduce that threat. Clearly, in the aftermath of the financial crisis something like the FSOC was necessary and appropriate.

Yet the FSOC should be viewed as a regulatory experiment. No one knows how it will work in practice, or whether it even will. Moreover, an essential principle of pro-growth progressivism is that regulation, while essential, needs to be targeted appropriately in order to reduce unanticipated costs to consumers and businesses.

For example, the Sarbanes-Oxley Act of 2002 was conceived as a way of preventing corporate and accounting abuses at large companies such as Enron. But Sarbanes-Oxley turned out to impose relatively large costs on small start-up companies that were ready to go public by forcing them to set up overly complicated accounting systems, while doing nothing to prevent the financial crisis that started unrolling in 2007.

Today, the issue is how broadly the FSOC should construe its mandate. With excess debt at the heart of the financial crisis, the FSOC clearly needs to target the large highly-leveraged global banks.

But should large asset managers such as Vanguard or Fidelity be subject to the same intensified regulatory regime? There is one argument in favor of FSOC designating large asset managers as SIFIs, and two arguments against.

The argument in favor of SIFI designation of asset managers: Since regulators don’t know where the next financial crisis is going to come from, better to get all the big financial institutions under tighter control now. This might be called the “precautionary principle” of regulation—asset managers are not potential threats now, but they conceivably might be in the future, so let’s round them up now.

The two arguments against SIFI designation of asset managers: First, asset managers are a very small source of leverage and debt in the economy. To the degree that financial crises have historically been caused by excess debt, the fuel for the next crisis is unlikely to come from asset managers.  Indeed, if we were to tick off potential sources of the next crisis, our list would start with trouble spots such as student debt and state and local pension shortfalls (which represent an excess of liabilities over assets).

Perhaps more important, designating large asset managers as SIFIs may have the perverse effect of reducing both stability and growth.  Regulators will be stretched further, so less regulatory resources will be available to monitor the activities of the large global banks, the undeniable nexus of the most recent financial crisis.  At the same time, because the asset managers will be forced to follow an extra set of rules, their ability to direct capital to the areas of highest return will be impaired, lowering overall growth.

Wise regulation in the 21st century requires focusing on the most important problems. To regulate out of fear is to give up on the growth that we need.

In Its Dealings with ISPs, Netflix is Holding a Powerful Card

Posted on by The Progressive Policy Institute

By producing compelling online content and interfacing directly with its customers, Netflix is holding a powerful card—and I’m not talking about its Emmy-award-winning show. Rather than playing this card, Netflix is asking the Federal Communications Commission (FCC) to intervene in its dealings with Internet service providers (ISPs). Before delving into Netflix’s potential counter-strategy and the need (if any) for regulatory intervention, a bit of background is in order.

FCC Chairman Tom Wheeler announced last week that the agency is launching a new investigation of “interconnection” agreements, which as the name suggests, govern connections between Internet networks. Interconnection has taken center stage since Netflix struck deals with Comcast and Verizon in February; prior to those direct connections with ISPs, Netflix paid “transit” providers such as Cogent and Level 3 to obtain access to the ISPs’ networks. Presently, interconnection arrangements are governed by private contracts.

Interconnection issues are not implicated in the FCC’s pending Open Internet proceeding, which addresses the treatment of traffic within an ISP’s network, as opposed to on its doorstep. Yet some companies are trying to conflate the issues and leverage the religious fervor and grassroots political machines of the net neutrality movement. Adding to the drama is Netflix’s suggestion that it was forced to accept terms for direct connections at gunpoint; according to some accounts, the counter-parties were purposefully degrading the quality of the connection with Netflix until Netflix coughed up some cash.

Is there a constructive role for the regulator? The Progressive Policy Institute (a D.C. think tank with which I am affiliated) held a conference on interconnection last month, and invited Wharton Professor Kevin Werbach to make the case for FCC regulation of interconnection. At the conference and in his writings, Werbach cited some classic interconnection showdowns, including Comcast-Level 3 and Verizon-Cogent, as the basis for intervention: A benevolent referee could resolve these disputes quickly, Werbach argues, and get traffic flowing to Internet customers.

To evaluate the potential benefits of intervention, I looked into these disputes and was surprised by what I found: Based on historical frequencies, the likelihood of a dispute between networks is rare, and the likelihood of a dispute leading to a service outage for consumers is even rarer. By my count, there have been just six major interconnection disputes since 2002 (five of which involved Cogent)—about one every other year—and the average number of days without service across these disputes was close to zero. In other words, even when these disputes occur, traffic generally continues to flow pursuant to a standstill agreement while the dispute is worked out. Unless something has radically tipped the balance of power in the Internet ecosystem, history suggests that the benefits of the FCC’s intervening in these affairs—in terms of forgone service outages—are likely small.

On the other side of the ledger, inserting the FCC into these negotiations could impose significant costs on society. For example, mandatory interconnection at regulated rates could undermine the incentive of ISPs to expand or enhance broadband networks. Some have blamed mandatory roaming for certain wireless operators’ decision not to build out in high-cost areas (but rather rely on roaming). Moreover, the FCC’s assistance could discourage access-seeking networks, including transit providers and some large content providers such as Google, from expanding their networks into last-mile services. According to this cost-benefit analysis, the FCC should stay out of these affairs.

Two other considerations should give the Chairman pause about intervening on interconnection. First, for customers who are hooked on Netflix exclusive content, such as House of Cards or Orange Is the New Black, Netflix is the “must-have” network. I could access the Internet at super-fast speeds through my cable operator or my telephone provider (and soon through my mobile device), but there is no good substitute for what Netflix is producing. So if push came to shove, and my ISP started fooling with my Netflix connection, I would consider switching ISPs to see whether Frank Underwood maintains his presidency or Piper Chapman gets out of jail. Although this choice in super-fast connections is not available to all customers—by the FCC’s latest count, nearly three-quarters of U.S. households are served by two or more wireline ISPs with download speeds of at least 6 Mbps—the choice is available to enough households to make the ISPs think twice about degrading Netflix.

Second, Netflix has a potent counter-strategy that, if deployed, could be significantly more powerful in its dealing with ISPs than regulation: By charging its subscribers different prices based on their ISP, Netflix can gently steer its customers to “low-priced” ISPs—that is, ISPs that charge low or no interconnection fees. For example, Google Fiber, an ISP with a limited national footprint, recently announced that it would abstain from charging Netflix (or any content provider) an interconnection fee.

Like a credit card, Google Fiber is best understood as a “platform provider” that connects end users with content providers. When certain credit cards sought to impose relatively higher fees on merchants, merchants countered by imposing surcharges (or discounts) on the merchandise to steer customers to the lower-priced cards. Some large banks responded by imposing a “no-surcharge rule” on merchants, forcing merchants to charge the same price for goods regardless of which card was used. Following the abolition of no-surcharge rules in Australia (a similar movement is afoot in the United States), the number of merchants surcharging payment card transactions has increased steadily over time, leading to a significant reduction in merchant transaction fees.

Applying that lesson here, Netflix could charge Google’s customers a discount (say $6.99 per month as opposed to its standard $7.99 charge) for Netflix service. Alternatively, Netflix could charge customers of a high-priced ISP a surcharge (say $9.99 per month). By revealing to its subscribers the identity of the low-priced ISP, this counter-strategy could temper the interconnection charge of the high-priced ISP. Unlike cable networks, which rely on the cable operator to interface with the video customer, Netflix and other online providers are customer-facing and thus wield significantly greater bargaining power in their dealings with the platform provider—as long as they are willing to use it.

I asked a Netflix spokesperson at a recent Aspen Institute event whether Netflix has contemplated this counter-strategy. His answer, which begins at about 1:50:32 on the video, was (1) he has at least considered it, but (2) the interconnection fee charged by ISPs to date was “so small” in relation to Netflix’s content costs that a surcharge would not make sense. Admittedly, my question was tough, but this answer does not engender much sympathy for Netflix’s plight.

Before seeking further regulatory intervention, Netflix should avail itself of all potential counter-strategies in its dealings with ISPs. To do anything less is to ask the FCC to carry your water. As Frank Underwood put it, “There is but one rule: Hunt or be hunted.” Netflix is holding a powerful trump card that potentially obviates the need for regulation, but it seems disinclined to use it. Until Netflix has gone on the hunt and failed, the Chairman should shelve interconnection rules and focus his attention on the Open Internet rules now pending before him.

Twitter: @halsinger

This article was originally posted at Forbes.com

Surgery on a Healthy Patient

Posted on by The Progressive Policy Institute

As Congress considers new Internet openness rules to replace the “net neutrality” regulations recently struck down by the courts, critics of U.S. broadband have called for a major overhaul of how we regulate the net. At the extreme, they seek a complete “reclassification” of the Internet as nothing more than a juiced-up telephone, thereby moving it from modern rules that apply to information services to the “common carrier” rules that applied to the Bell system. They contend this would allow for stronger “open internet” protections and improve the speed of, and access to, the web.

This radical surgery is needed, they argue, because the American Internet is purportedly monopolized by a handful of providers and, as a result, is too slow and too expensive. If we don’t act now, some critics predict we’ll soon be “a third world country” online.

Is this radical surgery necessary? Or are the critics like the practitioners who intervene even when no treatment is needed? In a research paper published this week by the Progressive Policy Institute, I investigated the state of the U.S. Internet, and found it getting faster, more affordable, and more competitive. Whatever merit there may have been to such criticisms when they were first levied almost a decade ago, U.S. broadband has clearly left them in its tracks.

Continue reading at Roll Call.

The Hill: Cutting through the regulatory thicket

Posted on by The Progressive Policy Institute

Representatives Patrick Murphy (D-Fla.) and Mick Mulvaney (R-S.C.) wrote an op-ed for The Hill published today on their Regulatory Improvement Commission (RIC) bill.  PPI’s RIC proposal, written by Michael Mandel and Diana Carew in May 2013, was brought to the Senate floor as a bill last year, followed by the recent bill in the House of Representatives, in both cases garnering significant bi-partisan support.  As the op-ed explains:

According to the Progressive Policy Institute, there were 169,301 pages in the Federal Code of Regulations in 2011, an increase of almost 4,000 pages from just a year earlier. Expecting businesses, large or small, to comply with such a bloated body of rules detracts from their core function of producing better goods and services while creating jobs.

You can read about the RIC, the bill in the House, and the rest of the op-ed on The Hill’s website, here.

Mandatory Interconnection: Should the FCC Serve as Internet Traffic Cop?

Posted on by The Progressive Policy Institute

Since the agreement between Comcast and Netflix was struck in February 2014, several parties have called on the Federal Communications Commission (FCC) to regulate dealings between networks that comprise the Internet generally, and to dictate the terms of interconnection by Internet service providers (ISPs) in particular. This Policy Brief considers the costs and benefits to consumers if the FCC interferes with the terms under which ISPs connect with transit providers, content providers, and others. A key lesson from the economics literature that informs this question is that antitrust enforcement acts as a substitute for sector-specific interconnection obligations in industries that have made sufficient progress along the “deregulatory arc.” Because the communications sector was set on a deregulatory path nearly 20 years ago, has the time come to rely on antitrust to adjudicate interconnection disputes on the Internet?

Introduction
To date, interconnection agreements between the networks that comprise the Internet have been privately negotiated without a regulatory backstop. The vast majority of these negotiations have gone down without a hitch. Some notable interconnection disputes in the United States involved Cogent-AOL (2002), Cogent-Level 3 (2005), and Cogent-Sprint (2008). While transit companies such as Co-gent and Level 3 have complained about the quality of interconnection with certain Internet service providers (ISPs), consumers have largely been unaffected; rarely does a dispute turn into a prolonged service disruption for customers. Yet the question of the FCC’s role in dealings among these “core” networks is front and center inside the Beltway.

The interconnection controversy is playing out as the FCC grapples with new rules to “Protect and Promote an Open Internet,” which are designed to protect “edge” providers such as content providers, application providers, and device makers. In its May 2014 Notice of Proposed Rulemaking, the FCC tried to distinguish interconnection from so-called “net neutrality” issues:

Separate and apart from this connectivity [to the Internet by the ISP] is the question of interconnection (‘peering’) between the consumer’s net-work provider and the various networks that deliver to that ISP. That is a different matter that is better addressed separately. Today’s proposal is all about what happens on the broadband provider’s network and how the consumer’s connection to the Internet may not be interfered with or otherwise compromised.

Although the Open Internet proposals are designed to address the management of traffic within an ISP’s network, the FCC also seeks comment on how it can ensure that an ISP “would not be able to evade [its] open Internet rules by engaging in traffic exchange practices that would be outside the scope of the rules as pro-posed.” The issue is clearly timely and ripe for resolution.

Some scholars have advocated for greater FCC involvement in interconnection disputes. For example, Werbach (2014) suggests that the FCC’s mobile-data-roaming order could serve as a regulatory template for compelling interconnec-tion on the Internet. Under this approach, networks could negotiate terms for interconnection; where conflicts arise, the FCC would provide a backstop for dispute resolution. Narechana and Wu (2014) advocate that the FCC classify the ISP’s transfer of data from content providers to consumers as a telecommunications service, subject to “common carrier” regulation. The authors argue that “because such sender-side regulation focuses on incoming traffic, it also provides a useful framework for addressing interconnection disputes between broadband carriers and content providers.” This more invasive approach would give the FCC power to compel interconnection without need for voluntary negotiations, and interconnection rates could be set by regulatory fiat.

Missing from much of this debate is an analysis of the social costs and benefits associated with mandatory interconnection. This Policy Brief seeks to identify these effects from the consumers’ vantage and offers an economic principle that may guide policymakers to a narrowly tailored solution. In their review of inter-connection obligations across several network industries, Carlton and Picker (2006) explain that sector-specific interconnection obligations and antitrust enforcement serve as complements in partially deregulated industries; in fully de-regulated industries, antitrust enforcement acts as a substitute for sector-specific interconnection obligation. Because the communications sector was set on a deregulatory path nearly 20 years ago, has the time has come to rely on antitrust to adjudicate interconnection disputes on the Internet?

Download the complete brief.

Politic365: Government Investment Best Suited for Transportation Infrastructure

Posted on by The Progressive Policy Institute

In “Government Investment Best Suited for Transportation Infrastructure,” Jessica Washington of Politic365 discusses the recently released report by PPI economists Diana Carew and Dr. Michael Mandel. Washington summarizes the report and agrees that private companies are the best option to provide high-quality and dependable broadband, while the government would be better suited to focus on public interest by increasing transportation infrastructure.

A recently released report by Diana Carew and Dr. Michael Mandel of the Progressive Policy Institute says government investment is best spent on transportation infrastructure rather than on broadband buildout. For every $1 invested in roads, bridges, and public transit systems, the economy receives a $1.5 to $2 benefit.”

The rest of this article, along with Carew’s and Mandel’s report, can be found at Politic365.

The Hill: Panel to cut red tape gains Dem support

Posted on by The Progressive Policy Institute

On Tuesday, May 20 Will Marshall, PPI President, joined a bipartisan group of House members to announce a proposal for a Regulatory Improvement Commission that would weed out accumulated rules and modernize outdated federal regulations in an effort to spur growth and innovation. PPI was noted for its work on the proposed legislation in Benjamin Goad’s article for The Hill. Goad also quoted statements made by Marshall during Tuesday’s press conference.

Thus far, the push has attracted support from two dozen members of the House and Senate, including 10 Democrats. The Progressive Policy Institute (PPI) is also pressing the idea.

Officials from the group noted that every president from Jimmy Carter to President Obama has directed his administration to root out overly burdensome rules, though they said none has made sufficient progress toward addressing the accumulation of new rules, continuously layered upon the old ones.

“It’s not because we hate regulations,” PPI President Will Marshall said. “It’s because we love economic growth and innovation.”

Read the full article on The Hill’s website here.

A Politically and Technically Feasible Approach for Handling Regulatory Accumulation

Posted on by The Progressive Policy Institute

Regulatory accumulation threatens the pace of innovation and growth in America, yet previous attempts to address it have proven unsuccessful. That is why we propose a new approach through the creation of a Regulatory Improvement Commission, which we argue is both politically and technically feasible. This institutional innovation for paring down redundant and outdated rules is described more fully in a 2013 paper we co-authored, and it has now been introduced as very similar bills in both the Senate (by Senators Angus King (I-ME) and Roy Blunt (R-MO)) and the House (by Representatives Patrick Murphy (D-FL), Mick Mulvaney (R-SC), and 20 co-sponsors).

Each President since Jimmy Carter has ordered agencies to do a “retrospective review” of existing regulations in order to identify those that are duplicative, obsolete, or have failed to achieve their intended purpose. However, as a 2007 U.S. Government Accountability Office(GAO) study indicated, these retrospective reviews have fallen well short of identifying problematic regulations for a variety of reasons, including insufficient transparency and a lack of resources. It is extraordinarily expensive and time-consuming to properly evaluate the costs and benefits of any substantial part of any major regulation. Ultimately, an agency has no control over the original enabling legislation as written by Congress.

Rather than getting wrapped up in ideological issues such as big versus small government, we view the question of regulatory accumulation as a problem of institutional design. There is a well understood political and technical process for the creation of a regulation that involves both the executive and legislative branches of government. Presented in the simplest terms, the process starts with the approval of legislation by the House and Senate, which is then signed into law by the President. Next, the appropriate agency goes through a specified rulemaking procedure, which includes soliciting and answering public comments. For significant rules (those expected to have an annual impact on the economy of $100 million or more), agencies must also get approval from the Office of Management and Budget.

Although the process for new rulemaking is well specified under current law, our regulatory system offers no well-defined process for undoing or improving a specific regulation after it has been adopted. The only real option is to jump through the full set of political and procedural hoops described above that created the original regulation.

Our proposal for a Regulatory Improvement Commission (RIC, or the Commission) takes a more streamlined approach. Modeled after the Base Realignment and Closure (BRAC) Commission, the RIC would be approved by Congress for a limited period of time. The Commission would be staffed primarily with personnel “borrowed” from federal agencies, and RIC members would be appointed by the President and the congressional leaders of both parties. Further, the Commission would have clear objectives, be completely transparent, and follow a strict timeline.

The Commission would focus on a limited list of regulations – say, 15 or 20 – to be considered for repeal or improvement. It would base its proposals on suggestions submitted through public comment, coupled with public testimony and a quantitative and qualitative assessment of the rules in consideration. The RIC’s list of proposals would then go to Congress for an up or down vote with no amendments, and finally to the President for approval.

By including both the legislative and executive branches in reviewing regulations, the RIC can adopt a streamlined process for the consideration of regulatory changes. In addition, the Commission would not break or change the current process for creating regulations, nor would it raise any constitutional questions. All it would require is enabling legislation and some attention to internal congressional rules.

Our proposal acknowledges the importance of politics in the regulatory process. Ultimately the basis for regulation rests on enacted legislation, which is the result of a long and complicated political process. Cost-benefit analysis alone, no matter how persuasive, cannot overcome legislative action.

Perhaps most important in the current political climate, the proposed Regulatory Improvement Commission should be acceptable to both Republicans and Democrats because it gives Congress “two bites” at the apple. The first bite is when the original enabling legislation for the Commission is passed. Initially, Congress may opt to keep certain regulations that are particularly controversial off the table, such as environmental regulations.

The second bite comes when the proposed package of regulatory changes goes to Congress for approval. If the package does not appropriately balance the interests of both Democrats and Republicans, Congress can vote the package down.

Importantly, the RIC would help build trust in the retrospective regulatory review process. Like the BRAC Commission, the proposed Regulatory Improvement Commission is a one-shot deal that must be re-authorized by Congress. If the initial Commission is successful, Congress may be more willing to authorize it again.

The Regulatory Improvement Commission can be compared to something that sounds superficially similar: the SCRUB Act, which stands for the Searching for and Cutting Regulations that are Unnecessarily Burdensome Act and was recently discussed by a House subcommittee. The SCRUB Act would set up an independent commission to review regulations and forward proposed changes or repeals to Congress. However, under the SCRUB Act, the regulatory changes would go into effect unless Congress passed a resolution rejecting them.

We view the SCRUB Act commission as both politically and technically infeasible compared to the Regulatory Improvement Commission. Politically, it would be impossible for Democrats to approve any commission that possesses effectively unlimited powers to undo regulations. Additionally, the SCRUB Act raises certain constitutional issues, such as the delegation of legislative authority to a commission, that are difficult to surmount. For these reasons, we view the Regulatory Improvement Commission as far more likely to be effective than the independent commission proposed in the SCRUB Act.

Institutional innovation requires both a willingness to believe that things can be different and pragmatism about what is possible. It is clear that modern economies require some way of pruning down regulatory accumulation. The Regulatory Improvement Commission would be a first step in that direction.

This post was originally published on the University of Pennsylvania’s RegBlog, you can read it on their website here.  It is part of RegBlog’s five-part series, Debating the Independent Retrospective Review of Regulations.

Letting Innovation Out of the Box

Posted on by The Progressive Policy Institute

Innovating in the digital age requires flexible rules that keep pace with the latest technology. This is especially true in the video services market, where change has been fast and furious. That’s why Congress should act to repeal an expensive and innovation-restricting requirement on the design of set-top cable boxes.

Currently the FCC mandates that each cable box — the electronic device in your home that links your TV with your cable provider — use a particular type of technology known as a “CableCARD” that contains the security mechanisms needed to receive programming. The FCC’s rule, formally known as the “integration ban,” requires that these security functions cannot be hard-wired or otherwise integrated within the rest of the box.

The CableCARD requirement is a classic example of prescriptively regulating in order to reach a certain outcome. In this case, the desired outcome was competition, to create a retail market for set-top boxes. In its order the FCC stated the integration ban would “result in a broad expansion of the market for navigation devices so that they become commercially available through retail outlets.” The idea was for customers to buy cable boxes instead of leasing them, a universal box that could be used across providers with a removable CableCARD. It would be a marketplace similar to telephones.

But the intended outcome, a retail market for set-top boxes, never developed. Consumers just didn’t want to mess around with another piece of electronics that could potentially become outdated or incompatible. Instead, the overwhelming majority of consumers lease their set-top boxes through their cable provider. Moreover, an increasing number of consumers access digital programming from smart devices outside of traditional TV, such as tablets and smartphones. And, perhaps most telling, the introduction of YouTube, Hulu, Netflix, Amazon Prime and other delivery channels created different ways to access digital programming without a cable box. Recent research shows more people are cutting the cord on their cable subscription, particularly young people that are a key customer-building demographic.

The integration ban may have been well-intentioned, but the rule now accomplishes little more than impose old technology onto cable providers and consumers. Innovators are in the process of developing a “boxless” method of delivering cable service, where all control and delivery processing occurs in the cloud. But that requires flexibility in the evolution of box design, rather than the current rigid set-top box integration ban rule. Cable customers ultimately pay the price of the ban by missing out on the potential pace of innovation.

Fortunately there is an opportunity to repeal this outdated rule, with fresh momentum in Congress. The House will likely pass the repeal with bipartisan agreement, and it is now up for discussion in the Senate. Importantly, the current proposal preserves the CableCARD standard for use in retail devices like the TiVo, only affecting how these security features are embedded in boxes leased from the cable company. Customers can therefore continue to purchase their boxes, and retail sales could still become a bigger share of the set-top box market if that is the direction in which it evolves.

The world of digital programming no longer revolves around cable companies. It is time policymakers recognize the new face of competition in the video industry and let the tremendous pace of investment and innovation speak for itself. Repealing the set-top box integration ban would be a small but positive step forward in modernizing regulation for the data-driven economy.

This op-ed was originally posted by RollCall, you can read it on their website here.