Wednesday, April 21, 2010

IPI's Intellectual Property Conference

Just perused the agenda Institute for Policy Innovation's Annual World Intellectual Property Day Forum on April 26. IPI has again assembled an all-star cast for the conference. If you are interested in IP, you definitely should be interested in attending this conference. Details on IPI's website here.

Tuesday, April 20, 2010

Comparing Maryland’s Efforts On Transparency

Promoting transparency in government and by government officials is a recurring theme here at the Free State Foundation (see here, here, and here for some recent examples). The idea that government should “operate in the sunshine” for all to see is overwhelmingly supported by voters. More than 80 percent of Maryland voters, Democrat, Republican, and Independent alike, said that a searchable website for all state spending is a good idea. Most states have embraced the idea of an online transparent government. Today, 36 states have a transparency portal of one kind or another. And with a critical mass of these websites online, the U.S. Public Interest Research Group (U.S. PIRG) sought to compare and rank these websites.

On April 13th, U.S. PIRG released Following The Money: How The 50 States Rate In Providing Online Access To Government Spending Data, where Maryland fared as a solid mid-pack performer, ranking 23rd overall. On a positive note, Maryland could have ranked as high as 14th, if information was organized more efficiently. The state only received one point for “economic development incentives,” instead of the maximum of ten, since this information must be accessed on a different webpage. (For a detailed explanation of each state’s ranking, see Appendix B, starting on page 32 of the report). But note that many states had missteps such as this. In other words, Maryland is likely to be a mid-pack state again, even if this minor issue is solved, since many states are likely to fix these types of problems.

And Maryland is one of 29 that has “checkbook level” transparency – allowing citizens to view individual government contracts. So while Maryland isn’t the worst or best, what are the best doing, and what would it take to get there?

First off, what is the literal cost of transparency? According to the report, Maryland’s website cost less than $100,000. The most expensive website was Louisiana at $1 million, while several front runners in the transparency rankings have spent approximately $300-500,000 on their sites; some of the best spent less than that. The ones that spent the least typically repurposed existing resources (and existing expenditures) towards their transparency portal. The irony is that Louisiana isn’t ranked particularly high (21st), leaving the reader to wonder if Louisiana shouldn’t have been more transparent in their pursuit of transparency. (Yes, that was a bad joke, but there is an important lesson here - a blank check in the name of transparency isn’t necessary or advisable either.)

But the best sites “make” the state money, even taking into account the cost of the site. Utah reported that just one division, the Tax Commission, saves around $15,000 a year from reduced information requests. Government wide, the total savings for Utah are probably in the hundreds of thousands of dollars. And with the best states, since all bid information is posted online, some states, like Texas, have reported lower bids for contracts. Just another way that transparency can save taxpayers money.

And the best sites lay it all on the table. Every agency and expenditure is shown. There are no minimum expenditure limits for inclusion on the website. And the best show all of the bids on a project, and even track subcontractors. Three of the seven leaders include the contract in its entirety online. And most of all, this information is updated in a timely manner.

And after the fact, this information is used to ensure that state goals are met. No use funding a project if it doesn’t achieve its perceived goals. And past information can be examined, and trends of each contractor tracked. Now, more than ever, it’s easy to tell the best contractors and vendors from the worst. And even if the worst are part of the “old boys club,” their lackluster performance will now be noticed by citizens.

And don’t forget about subsidies and tax cuts, which don’t take money directly out of the coffers, but keep their costs outside the state’s bank account, at least directly, on the promise that some good will become of these indirect expenditures. Usually, the new company is promising to bring jobs to the area. And economists know of the “multiplier effect” for jobs. The simple explanation of the multiplier effect is that one person’s consumption is another person’s wage. When Factory X pays $1 in wages to an employee, and that employee takes his $1 to the butcher, part of that $1 is absorbed as the butcher’s wage. The butcher may then turn around and spend his wage at another local business. Each time, part of the $1 is siphoned off through cost of materials (and other costs), but a portion is passed on. Eventually, if we tracked every part of this dollar, we would see that it is worth much more than $1 to the community, hence politicians’ inclination to cut those creating jobs a break.

But many of these cuts go unchecked and unverified. Worse yet, some are completed entirely in secret. For example, the PIRG report discusses the context surrounding a Google decision to build a facility in North Carolina. Over 70 local officials were required to sign non-disclosure agreements, despite the fact that $260 million of taxpayer funded subsidies was on the table.

And politically it is a whole lot easier to forebear from collecting taxes, essentially, than to cut a company a check. But as William Shakespeare said “a rose by any other name would smell as sweet,” or in our case, smell as foul. Make no mistake, subsidies and tax cuts are expenditures just the same.

So what are the best states doing to combat this? Oregon said that all tax credits must vanish sometime before 2015, which would then force the new cuts on the books and onto the web. Minnesota has gone one step further, listing every job and wage created. This way, economists can actually evaluate the impact of past cuts. And knowing what types of jobs were actually created, and how many, is crucial. If a computer company promises high paying tech-related jobs, and delivers assembly line work, or if only a fraction of the jobs appear, then the amount of the subsidy needs to be examined. For a brief overview of how a deal looks in hindsight, look here for an examination of the impact a Dell Computers plant had in Tennessee. (In the interest of transparency, I will note that Ruben Kyle and Albert DePrince were professors of mine).

So where does Maryland go from here? Hopefully, to the top. But that will require a large, sustained effort to make it happen. The first thing to go should be the $800 fee to get up to date information on the General Assembly. Yes, as this article points out, it raised $105,600 for the state’s general fund, but at what cost to taxpayers? The fees collected are a small price to pay to keep the doors closed, if you have something to gain by working in the shadows.

Maryland also failed to pass any of the “open government bills” this session, even though they seemed sure-fire when introduced. They were later relegated to “summer study.” These bills are now scheduled to be revisited later this year. But kicking the can down the road won’t make Maryland a leader in transparency. Let’s hope that legislators will make keeping taxpayers "in the loop" a priority.

Must-Carry: FCC Regulation's Mismatch With Market Reality

What’s a regulatory agency to do when market conditions render its regulations irrelevant and even unconstitutional? That’s the situation facing the FCC over cable “must-carry” regulation.

Under must-carry, certain over-the-air TV broadcasters can compel carriage of their programming on cable networks covering the same area. Must-carry mandates dating back to the early 1990s were justified as a narrow exception to First Amendment restrictions on government control of media speech and were premised on local cable bottlenecks. The video marketplace of 2010, however, is characterized by vibrant intermodal competition. Direct Broadcast Satellite (DBS) and even some telco companies engage in head-to-head competition with cable incumbents. Video content is also increasingly delivered via broadband. In the face of such competition, the FCC's obligatory legal defense of must-carry regulation makes for a fine a display of Commission cognitive dissonance.

As I discussed in a recent blog post titled "Will the Supreme Court Decide 'Must-Carry' Must Go?" the Supreme Court is currently considering a petition by Cablevision challenging the constitutionality of must-carry on First Amendment grounds. Cablevision’s petition pointed to last fall's decision by the U.S. Court of Appeals for the District of Columbia Circuit in Comcast v. FCC wherein that Court maintained: "the record is replete with evidence of ever increasing competition among video providers…Cable operators, therefore, no longer have the bottleneck power over programming that concerned the Congress in 1992." Perhaps the most significant argument raised in Cablevision’s petition is that the Supreme Court's Turner rulings upholding the must-carry statute can no longer satisfy First Amendment scrutiny in light of vastly changed circumstances. In a recent FSF Perspectives paper, I described Cablevision v. FCC as a plausible "deregulatory First Amendment" ruling that will bring greater evenness and restraint to government with respect to content across mass media platforms.

This chain of events surrounding must-carry and video competition poses a dilemma for the FCC. How does it defend regulation premised on, and narrowly justified by, an apparent lack of cable competition when those old market conditions now have given way to an evident rise of video competition? Reconciling the must-carry statute that the FCC must defend in a court of law with the vibrant video competition is no easy task.

The peculiarities of litigation may give the FCC a fighting chance by allowing it to rely on procedural points rather than the merits of must-carry under the First Amendment. For instance, the FCC has argued that Cablevision’s constitutional and other legal arguments weren't sufficiently raised at the Commission or at the U.S. Court of Appeals for the Second Circuit. (The Second Circuit did consider and reject a Cablevision "as-applied" First Amendment challenge to must-carry.) And the FCC argued that the Cable Act of 1992 requires the constitutionality of must-carry first be decided by a special three-judge district court panel. Regardless of whether the FCC's procedural arguments have any persuasiveness, avoiding the facts of the matter is their best hope because the facts of the video marketplace are clearly on the side of competition. And in this case, competition could mean First Amendment deregulation by the Supreme Court.

The FCC's brief to the Supreme Court also maintains that the current Cablevision v. FCC case record somehow doesn't contain adequate information to permit the Court to conclude —like the D.C. Circuit did— that existing video competition obliterates the old cable "bottleneck" rationale for cable regulation that in any other context would be struck down under the First Amendment. But irrespective of how thoroughly developed the judicial record may be in the current Cablevision case, both the FCC's own video competition report and the D.C. Circuit's conclusion in Comcast v. FCC provide ample basis for judicial reassessment of today's video marketplace dynamics.

The Supreme Court can certainly take judicial notice of the FCC report and the Comcast ruling. To do otherwise would require the Court to shut its eyes when important constitutional free speech principles are at stake. If the Court's recent ruling in Citizens United v. FEC is any indication, it takes seriously the idea that under the First Amendment government should not be favoring or disfavoring different forms of media technologies. (See my FSF Perspectives paper "What Citizens United Means For Free Speech In The Digital Age.")

The FCC's brief also maintains that the absence of bottleneck recognized by the D.C. Circuit in Comcast v. FCC is countered by that Court's more recent observation in its March, 2010 ruling in another Cablevision v. FCC case that the video competition record is "mixed." In that case the D.C. Circuit upheld the FCC's 5-year extension of the ban on exclusive contracts between cable operators and cable affiliated programming networks under Section 628 of the Cable Act. Although the exclusivity ban ruling might blur the picture slightly, it shouldn't deter the Supreme Court from revisiting the Turner decisions' cable "bottleneck" rationale as the basis for heightened regulatory burdens on cable providers. As an initial matter, the exclusivity ban case never expressly disagreed with the Comcast ruling's pronouncement that a cable bottleneck does not exist to impose regulation. It never claimed there is a present cable bottleneck.

Notwithstanding the fact that the Supreme Court is not bound by lower court rulings, the Court should recognize that the D.C. Circuit's exclusivity ban ruling is analytically at odds not only with Comcast but with several other D.C. Circuit rulings. Oddly, the exclusivity ban ruling noted the Comcast ruling but went on to focus entirely on existing video market share, rather than both existing and potential competition in the dynamic market. The FCC's brief to the Supreme Court follows static market approach in part, arguing that Cablevision "did not provide the agency with any Long Island-specific market-share data to substantiate its claim of 'robust competition.'" But in a variety of contexts, including the video market context, the D.C. Circuit has routinely examined regulation in light of both existing market share and potential for competitive entry and future competition. The Supreme Court should likewise not rely on static market share as the savior of outdated regulation.

Crucially, the exclusivity ban case decided by the D.C. Circuit in March skipped over all First Amendment issues as not sufficiently presented. Rather, it applied the deferential "arbitrary and capricious" standard under the Administrative Procedures Act in upholding a 5-year extension of the FCC's ban on exclusive contracts between cable operators and cable affiliated programming networks. In the pending must-carry Cablevision case, however, if the Supreme Court takes up First Amendment issues it will be applying a more rigorous scrutiny regardless of whether it continues to apply intermediate-level scrutiny to must-carry or will instead subject such regulation to strict scrutiny. The D.C. Circuit's exclusivity ban ruling's brief observations on existing video market share should hardly satisfy either level of First Amendment scrutiny.

Hopefully, the Supreme Court will likewise address and reject the FCC brief's argument that "[t]he decreased number of over-the-air viewers makes carriage on cable systems even more critical to further the congressional interest in ensuring that 'a multiplicity of broadcasters' are financially able to provide an alternative sources of programming to the American public.'" This line of argument seeks to make a virtue out of must-carry's mismatch with the current competitive video market. For the Court to accept the logic of the FCC's argument would be to entrench those cable regulations that least fit today's reality. Aside from the intermodal competition offered by DBS and telco providers, increasing numbers of broadcasters are beginning to make content available via broadband using services and applications such as iTunes and Hulu. In reconsidering the constitutional viability of must-carry the Court should frankly consider that the lower the number of over-the-air viewers, the more glaring becomes the government's highly questionable favoritism toward that particular media technology.

Finally, it is worth observing that the FCC's brief rejects what might be a plausible way out of the dilemma posed by the competitive video market's incompatibility with the must-carry statute's regulatory premise. In its brief, the FCC disagreed with a Cablevision argument that must-carry only conceivably could be applied where a cable operator denies carriage to a broadcaster "with a view to stifling competition." The FCC answered that the Turner decisions rejected reliance on antitrust and administrative procedural complaint process as less intrusive means to constitutionally satisfy Congressional goals.

But unless or until the Supreme Court does reconsider its constitutional jurisprudence concerning cable regulation premised on early 1990s market assumptions, wouldn't it be more wise for the FCC to fashion a less intrusive administrative process, one that places the burden on petitioning broadcasters to show anticompetitive intent drove cable providers' rejection of carriage? Instead, we have the FCC continuing to advocate and enforce outdated regulation premised on a lack of cable competition for a video marketplace characterized by dynamic competition. Call that Commission cognitive dissonance.

Saturday, April 17, 2010

Suspend, Reflect, and Develop Legislation

The Washington Post has a very good editorial, "Policing the Internet," in today's paper. It ought to be required reading for anyone interested in the FCC's current effort to regulate Internet service providers like Time Warner Cable, Verizon, or T-Mobile. It especially ought to be required reading for those over at the Portals, the FCC's Washington headquarters.

As every reader of this space knows, on April 6 the federal appeals court, here in Washington, in Comcast v. FCC cast very serious doubt on the FCC's legal authority to regulate Internet service providers as the FCC is proposing to do. While the D.C. Circuit court specifically ruled only that the FCC lacked jurisdiction to sanction Comcast for its Internet network management practices, its reasoning calls into question the agency's authority to adopt the Internet regulation rules it has proposed under the rubric of enforcing net neutrality.

Here is the closing paragraph of the Post's editorial:

"Congress should step in to strike the appropriate balance. Enacting laws would take some time, but the process would allow for robust debate. In the meantime, any questionable steps by ISPs will be flagged by unhappy consumers or Internet watchdog groups. If ISPs change course and begin to threaten the openness of the online world, Congress could and probably would redouble its efforts."

This is the most sensible course for the FCC to follow. Indeed, the day after the court decision, I filed comments at the FCC urging essentially the same course. And I did so again on April 14 in a commentary published on In the comments and commentary, I urged the FCC to work with Congress to develop a new legislative framework – a market-oriented framework that would give the FCC circumscribed authority over Internet providers. The comments have more detail, but here is the essence of what I suggested.

"The core of the new legislative framework would be a provision granting the FCC authority, upon a complaint filed and after an on-the-record adjudication, to prohibit broadband Internet Service Providers from engaging in practices that are determined to constitute an abuse of substantial, non-transitory market power and that cause demonstrable harm to consumers. Such a carefully-circumscribed market-oriented rule would provide the FCC with a principled basis for adjudicating fact-based complaints alleging that ISPs are acting anti-competitively and, at the same time, causing consumer harm. Using antitrust-like jurisprudence that incorporates rigorous economic analysis, the Commission would focus, post hoc, on specific allegations of consumer harm in the context of a particular marketplace situation."

Of course, there may be other ideas worthy of consideration as well.

Everyone knows that the FCC is furiously trying to figure out what to do in light of the D.C. Circuit decision. It is commonly said ( and supposed) that, despite the judicial setback, that FCC Chairman Genachowski is determined to move forward to adopt net neutrality rules because President Obama made a campaign pledge along these lines. And it is true that President Obama did make such a campaign pledge favoring net neutrality rules.

But that was in the midst of a political campaign in 2008. It is now April 17, 2010. Here is what I say now.

First, Candidate Obama (and his putative FCC Chairman Genachowski) could not have known then what they know now: that the FCC's legal authority to adopt net neutrality regulations under the theory proposed by the Commission in its rulemaking notice is highly questionable.

Second, and more fundamentally, the FCC is supposed to be an independent bipartisan regulatory agency, not subject to presidential direction to the same extent and in the same ways as are executive branch agencies. This is not to say the president and his Administration cannot and should not have views on the subject, or that they shouldn't express those views to the FCC commissioners. But it is to say that campaign promises essentially relating to matters within the FCC's realm shouldn't be seen in the same way as, say, campaign promises relating to changes in policy at the EPA or Department of Interior. If they are, then the FCC's role as an independent regulatory agency will be altered.

Let me be clear: I have no idea concerning the extent to which -- if any – the FCC's post- Comcast effort to find new ways to adopt Internet regulations is really driven primarily by the desire to fulfill a campaign promise. But it shouldn't be, especially in the light of the altered situation resulting from the court decision. As all reasonable observers agree, and as the Post editorial points out, there have been "very few instances where ISPs have been accused of wrongdoing." And the Post is correct that "FCC interference could damage innovation in what has been a vibrant and rapidly evolving marketplace."

Here's what the FCC should do now:

• Suspend the current rulemaking proceeding, without terminating it. In this way, if there are allegations of abuses by Internet providers, there will be a forum for interested parties to bring those allegations to the attention of the Commission.

• Take time to reflect and work with interested parties and Congress to develop a new legislative framework appropriate for the digital age. The FCC is supposed to be an "expert" communications body. It knows, or ought to know, that the current Communications Act is especially ill-suited for today's dynamic communications environment. The Commission should use the court decision as an opportunity for envisioning a new Digital Age Communications Act.

Wednesday, April 14, 2010

A Fig Leaf for Maryland’s Fiscal Folly

Once again, the General Assembly has hidden behind a fig leaf by consigning the issue of pension and health benefit liabilities to the Public Employees’ and Retirees’ Benefit Sustainability Commission. Senate Bill 141 passed during the 2010 session charges the Commission with making recommendations as to “all aspects of State funded benefits and pensions provided to State and public education employees and retirees.”

In light of past experience, the General Assembly knows that such a Commission will certainly delay, or even prevent, any solutions. This Commission is a huge victory for proponents of the status quo.

A recap of the recent history of commissions relating to public employee benefits will demonstrate why those opposed to changing the status quo have little to fear.

During the 2005 session, the General Assembly created a Task Force to Study Retiree Health Care Funding Options. This Task Force completed its work and issued a report in November 2005. The primary recommendation of the Task Force was to create a second Commission to study the topic further. During the 2006 session, the General Assembly showing its timidity in dealing with multi- billion dollar promises of health benefits for retirees created the Blue Ribbon Commission to Study Retiree Health Care Funding Options – the Blue Ribbon part was meant to distinguish it from its predecessor of the same name.

The law creating the 2006 Blue Ribbon Commission required a final report by December 31, 2008, allowing two and a half years of analysis and deliberation. The Commission did not hold its first meeting until August 2, 2007, fifteen months after it was created. After squandering more than a full year of the time prescribed to deliver recommendations, the Blue Ribbon Commission was granted a one year extension to December 2009 to make a final report. Despite the additional year granted for the final report, the Blue Ribbon Commission was unable to comply with the law.

Instead, the Blue Ribbon Commission once again needed an extension and the General Assembly granted it with little opposition. House Bill 771 and Senate Bill 444 passed by the General Assembly during the 2010 session – the same one at which the Sustainability Commission was created - extends the time for a final report by the Blue Ribbon Commission to December 2011, delaying the final report for three years from the originally scheduled due date and five years from the creation of the Blue Ribbon Commission.

This history provides little comfort that anything will result from the Sustainability Commission, except more delay. Two years ago I detailed the extent of the then-existing unfunded pension and health benefits liability problem in a commentary in the Gazette – and the problem has only grown worse while the politicians have dithered.

Perhaps what the General Assembly is hoping for is the return of a booming economy to eliminate the need for any action. Or perhaps, the General Assembly hopes to use the escalating costs of these obligations as support for tax increases after the election.

Whatever the hopes of the General Assembly, this much is certain: the increasing liabilities for public employee pension and health benefits are not issues that it wishes to address.