In its Notice of Proposed Rulemaking (NPRM) for the Federal Communication Commission’s Restoring Internet Freedom proceeding, Chairman Ajit Pai proposes that the Commission perform a cost-benefit analysis (CBA) of the FCC’s Title II regulation of Internet service providers. Free State Foundation scholars endorsed the FCC’s proposal in their filed comments as a welcome development for improving the quality of economic analysis at the FCC. However, in the initial round of comments, some pro-regulatory organizations were skeptical of the FCC’s proposal for performing a CBA. Notably, the comments from these groups appear to have been intended to discourage the FCC from performing any cost-benefit analysis.
Requiring regulatory agencies to conduct CBAs has a history of bipartisan support. A 1993 executive order issued by President Clinton and followed by every administration since requires that executive branch agencies perform CBAs before implementing economically significant regulations. The FCC is not required to perform CBAs because it is an independent agency. However, other independent agencies, including the Federal Trade Commission and the Securities and Exchange Commission, have adopted internal rules requiring CBAs to help inform their regulatory decisions.
There should be little support for a regulation when its costs outweigh its benefits because adoption of that regulation will usually slow economic activity, destroy jobs, and often harm the parties the regulation is claimed to help. Cost-benefit analysis is an important tool that helps regulatory agencies evaluate in a systematic way whether a course of action is worth pursuing. Shortly before joining the FCC as Chief Economist, Jerry Ellig documented how the quality of SEC rulemaking improved after the agency, in the middle of the Obama Administration, adopted a requirement for conducting cost-benefit analyses.
Performing a cost-benefit analysis of a regulation requires an agency to address several important questions that it might otherwise fail to consider. Does the regulation address a market failure or systemic problem? If it does, how does it correct the perceived market failure? Are there other less intrusive regulatory approaches that would solve this market failure? And finally, do the benefits of the regulatory solution outweigh the costs of imposing new regulatory requirements? Needless to say, the FCC did not ask these important questions when it adopted the Open Internet Order in February 2015, but Chairman Pai is proposing that the Commission perform a CBA before repealing Title II regulation. Regrettably, some groups that support Title II regulation are skeptical.
In the initial round of comments of the Restoring Internet Freedom proceeding, Free Press and INCOMPAS criticized the NRPM for a lack of guidance for how the CBA should be conducted. But as we responded in our reply comments, “paragraph 106 of the Notice is clear in proposing that the FCC follow the same guidance in Section E of OMB Circular A-4, which has been used by executive branch agencies since 2003, while inviting comments on whether that is appropriate or whether the Commission should modify its approach.” Moreover, we added:
Also significant is the fact that neither INCOMPAS nor Free Press provide any guidance whatsoever to the FCC on how to better perform a cost-benefit analysis. Thus, their comments can only be interpreted as opposing the Commission performing any cost-benefit analysis at all. The FCC should not be an “economics-free zone.” Instead the Commission should improve its use of economic analyses, including cost-benefit analysis, so that it can make better regulatory decisions.
Free State Foundation Senior Fellow Theodore Bolema published a July 2017 Perspectives from FSF Scholars entitled “An Assessment of the FCC’s Proposal to Conduct a Cost-Benefit Analysis,” which was attached to FSF’s initial comments as Appendix A. In that paper, Dr. Bolema addresses the important questions pertaining to a cost-benefit analysis of the FCC’s Open Internet Order.
Does the regulation address a market failure or systemic problem? If it does, how does it correct the perceived market failure? Dr. Bolema says:
Significantly, the Open Internet Order regulations can only pass a cost-benefit test if they are addressing a clear market failure than can only be resolved by the FCC regulation. If there is no market failure or other systemic problem, then government action will likely do more harm than good. The FCC justified the 2015 Open Internet Order in large part on conjectured harms that might occur in the future, but had not occurred to date under regulatory oversight that was considerably less heavy-handed.
Given the remarkable record of innovation, investment, and choice of new services offered to customers before the Open Internet Order regulation was imposed, it is highly unlikely that any such market failure can be found.
Are there other less intrusive regulatory approaches that would solve this market failure? Dr. Bolema contends:
If the FCC does identify a market failure, perhaps based on market power for some parties in some places at some times, then it must also consider whether less intrusive alternative approaches are sufficient to address the market failure before resorting to public utility regulation of a broadband market segment. These alternative approaches include increased antitrust enforcement, new consumer protection regulations, or minimum quality standards.
OMB Circular A-4 requires that executive branch agencies consider less intrusive regulatory approaches as part of their cost-benefit analysis. Even if the FCC concludes that a market failure exists in its baseline scenario, that does not mean that the only alternative is the full Title II regulation imposed by the Open Internet Order. Instead, the FCC must then consider other case-by-case regulatory approaches that are different from the pre-2015 regulatory environment.
Ted Bolema’s Perspectives also considers some of the regulatory uncertainty and costs imposed by the Open Internet Order, specifically opportunity costs. For example, Free Press claims in its comments that broadband investment has increased since the Open Internet Order, despite convincing evidence discussed in our initial comments and reply comments that investment has declined. But even assuming, hypothetically, that investment has increased, the relevant question is did it increase less than it otherwise would have absent the regulation? This is the premise of my May 2017 analysis which ultimately finds that broadband investment declined by $5.6 billion since the Open Internet Order was adopted.
Dr. Bolema performed an additional cost calculation in his Perspectives, following the methodology the FCC proposed in its NPRM:
Applying this multiplier to the Free State Foundation estimate by Michael Horney of a $5.6 billion reduction in broadband investment over 2015 and 2016 produces an estimate of $7.0 and $9.8 billion in lost economic activity attributable to the Open Internet Order, with a midrange estimated economic impact of negative $8.4 billion. Horney’s estimate showed that the gap between the baseline investment and actual investment was growing. If this trend continues, as is likely, the economic impact of the Open Internet Order will only become greater, in a negative direction, over time.
It is important that the FCC perform this cost-benefit analysis, because agencies, independent or not, should analyze how new rules will impact innovation, investment, job creation, and economic activity. It is reasonable to question the methodology that an agency uses when assessing the costs and benefits of a regulation. However, if an interested party offers only criticism of an agency proposal to conduct a regulatory CBA, this is likely a signal that the interested party fears that the costs will outweigh the benefits, invalidating its policy position.Given the persuasive evidence showing a large negative impact on broadband investment, it is likely the Open Internet Order is more costly than beneficial to consumers and entrepreneurs. For this and other reasons addressed at length in our initial and reply comments, the FCC should conduct the proposed cost-benefit analysis. And if the results from the CBA are as we expect, the FCC should repeal the Title II classification of broadband Internet service providers and return to a light-touch regulatory approach.