Tuesday, August 30, 2016
Friday, August 26, 2016
Earlier this month, the Cato Institute published the 2016 edition of “Freedom in the 50 States,” coauthored by William Ruger and Jason Sorens. This study ranks each state with regard to its overall “freedom” by measuring the restrictions the state has placed on both personal and economic choices. For the purposes of this blog, I will use the authors’ analysis to discuss Maryland’s rankings among a number of economic freedom categories.
I note at the outset that since taking office in January 2015 Governor Larry Hogan has taken some actions, and proposed others not adopted by the Maryland General Assembly, which have and would improve Maryland’s ranking. But there is still much more work to be done.
Overall, Maryland is in the bottom five states in the “freedom” index, ranking 46th in the country. Maryland also happens to rank 46th in terms of “economic freedom.” This low ranking is attributable to the state’s combination of high taxes rates, unnecessary regulations, and burdensome occupational and business licenses that create barriers regarding how Maryland’s citizens can earn and spend money. Maryland’s regulatory and fiscal policies are the biggest reason for why its overall ranking is so low.
Free State Foundation President Randolph May and I have criticized Maryland’s regulatory policies and discussed areas where the state could improve in a January 2016 Perspectives from FSF Scholars entitled “Achieving Efficient Government and Regulatory Reform in Maryland.” In the “Freedom in the 50 States” study, regulatory freedom measures a number of different specific categories, including land-use requirements, labor market restrictions, and occupational licensing. Maryland ranks 49th in regulatory freedom. Here are some more specific findings relating to Maryland’s poor showing:
- Land-use freedom measures restrictions on rent control, how much a state uses eminent domain, and the number of permits and zoning regulations that burden property owners. Maryland has very restrictive land-use regulations, ranking it 48th in terms of land-use freedom. The authors state that if Maryland were to eliminate rent control, by itself, the state would move from 49th to 45th in terms of regulatory freedom.
- Labor market freedom considers a state’s right-to-work laws, minimum wage laws, disability insurance requirements, and worker’s compensation regulations. Maryland ranks 37th in labor market freedom.
- Maryland ranks 49th with regard to occupational freedom. As I discussed in a July 2015 blog, Maryland has overly restrictive occupational licensing requirements. These regulatory requirements burden entrepreneurial activity and create barriers for upward mobility, especially for low-income citizens.
“Fiscal freedom” is another important component of economic freedom. Maryland ranks 34th in the fiscal freedom index, which measures the tax burden placed on state residents, the amount of state spending, the amount of state debt, and the percentage of employment in the public sector. The authors say Maryland’s overall tax burden is average among the states, which is a more positive assessment than the most recent report from the Tax Foundation. However, the authors do say that state-level taxes have risen steadily over the last six years. One of Maryland’s most problematic components of its fiscal freedom ranking is its excessive business subsidies. The authors state that if Maryland were to end all business subsidies and cut taxes equivalently, its fiscal freedom ranking would rise from 34th to 24th.
For years, FSF scholars often have discussed Maryland’s burdensome tax and regulatory policies and the impact those policies may have on businesses and residents considering leaving the state. The state and local economy is one of the main reasons individuals migrate among states. According the study, Maryland had a net migration rate (NMR) of -2.4% in 2014. All of Maryland’s neighboring states not only rank higher overall, but also have a more favorable NMR. Delaware ranks 31st with an NMR of 7.6%, Pennsylvania ranks 26th with an NMR of -1%, Virginia ranks 21st with an NMR of 2.4%, and West Virginia ranks 39th with an NMR of 0.9%. While high tax rates and unnecessary regulations may not be the only reason why Maryland experienced a net population loss, reducing tax rates and eliminating burdensome regulations could incentivize individuals and businesses to remain in the state.Governor Larry Hogan has done a commendable job since taking office in January 2015 to take actions that move Maryland in a favorable direction. He has worked to lower licensing fees, transportation tolls, and tax rates. Governor Hogan also established a Regulatory Reform Committee with the mission of eliminating unnecessary regulations and streamlining administrative processes. But, as Maryland’s poor showing in Cato’s “Freedom” index indicates, there is much more work to be done, and the Maryland legislature needs to act in way that is consistent with improving the state’s “freedom” ranking.
Thursday, August 25, 2016
On August 10, 2016, the U.S. Court of Appeals for the Sixth Circuit reversed the Federal Communications Commission's (FCC) 2015 Municipal Broadband Preemption Order, which attempted to override state laws in North Carolina and Tennessee that restricted the use of municipal broadband. FSF scholars have declared that the FCC’s order was one of the most far-reaching and far-fetched attempted power grabs in the agency’s history. FSF scholars also have stated that the language of Section 706 of the Communications Act to remove barriers to infrastructure investment and to "promote competition in the telecommunications market" provides no clear statement of intent to authorize preemption of state laws concerning broadband networks owned by municipalities.
In an August 12 blog in The Federalist Society entitled “Sixth Circuit Ruling Stops FCC’s Unlawful Municipal Broadband Preemption,” FSF President Randolph May and Senior Fellow Seth Cooper recapped the Sixth Circuit’s decision to use the Supreme Court’s precedent in Nixon v. Missouri Municipal League (2004). The legal reasoning behind the decision in Tennessee v. FCC (2016) is simple and obvious: “The force of the clear statement rule… makes the intent of Congress clear in this case: § 706 does not authorize the preemption attempted by the FCC.” Of course, FSF scholars warned the FCC of its misguided and fictional legal authority in their August 2014 comments.
On August 17, 2016, Seth Cooper published an article in The Washington Times entitled “Rescuing Broadband from Government Interference.” From a legal perspective, Mr. Cooper says that even students in Constitutional Law 101 understand that local governments are political subdivisions of their states, and therefore they would recognize that the FCC has no authority to preempt state laws. And from an economic perspective, Mr. Cooper explains why municipal broadband harms consumers and taxpayers. He says that government should not compete against the market providers they regulate, because the dual role of competitor and regulator creates favoritism over private providers in granting permits and licenses. Such favoritism causes uncertainty among market providers and likely stifles private investment, leading to fewer consumer benefits than what would occur in the market absent a municipal broadband provider. Mr. Cooper also states that municipal broadband projects often fail and local taxpayers end up covering the multimillion-dollar bailouts, constraining the amount of money the local government could spend on more valuable programs.
Whether from a legal or economic perspective, the Sixth Circuit’s decision to reverse the FCC’s order creates a framework for efficient policy. At the Free State Foundation’s March 2016 Telecom Policy Conference entitled “The FCC and the Rule of Law,” Daniel Lyons, a member of FSF’s Board of Academic Advisors, said that if the FCC had a better understanding of the rule of law, the Municipal Broadband Preemption Order and the subsequent Tennessee v. FCC court case could have been avoided:
One thing I found interesting, relating back to the earlier conversation, is the way rule of law issues are playing out in the municipal broadband proceeding. One of the things that's long given me comfort is the fact that the Chairman is in the good hands of Ambassador Verveer. I always get a little bit nervous when nonlawyers -- and I say this as a lawyer, right? -- are in the chairman roles because I'm much more concerned that the agency gets driven by questions about policy than about questions about rule of law. And they will say, "Well, the courts take care of the rule of law issue." I think the muni broadband example is a good one. I think the Chairman has a pretty good idea of where the law ought to go in this area. Unfortunately, the path that he's taken is pretty clearly foreclosed by the Nixon vs. Missouri Municipal League precedent. And it becomes very difficult to drive the agency in that direction and force the legal side of the house to engage in the types of really legal gymnastics that they had to engage in before the Sixth Circuit last week in order to try to defend that position. Ultimately, the Sixth Circuit is almost certainly going to strike that down. The question it raises from a rule of law perspective is whether that should've happened in-house long before. I mean with all due respect.
Daniel Lyons is not the only expert who predicted the Sixth Circuit’s reversal of the FCC’s order. At the same conference in a separate panel called “Perspectives on Hot-Topic Communications Issues,” Brad Ramsay, General Counsel/Director of the Policy Department at the National Association of Regulatory Utility Commissioners (NARUC), issued his opinion regarding the action the Court might take:
I still would be very surprised if any three judges or any circuit would want to uphold the FCC in these circumstances given the precedent from the Supreme Court in Nixon. I looked at this case. This is basically the FCC telling the state whether or not it's going to get into the broadband business and where. The problem with the FCC's analysis is that it treats the state and the state organs as two separate entities. Basically it says, "State, this subdivision of the state is not really part of you, it's an independent entity and you can't tell it what to do." It's completely flawed analysis… So I'll be very surprised if this gets upheld at the Sixth Circuit. And if it does, I predict, with as much confidence as I have in the federal judiciary, which, granted, is not a lot, it'll go to the Supreme Court and get reversed if they do.FSF scholars and prominent experts in this field frequently articulated why the FCC’s Municipal Broadband Preemption Order was unlawful and should have been avoided. It is unfortunate that valuable resources (time and taxpayer money) were wasted during the FCC’s proceeding and the subsequent court case. On the hand, hopefully the Sixth Circuit’s decision has halted the FCC’s attempts to preempt state laws.
Thursday, August 18, 2016
Today, T-Mobile and Sprint both announced new unlimited mobile data plans starting at $70 a month and $100 a month, respectively. Some people may say that these so-called “unlimited” plans have limits, but that should not be the storyline. Instead, the storyline should be that competition and innovation among mobile providers enables consumers to have access to more choices as they continue to demand more and more mobile data. The fact that two major mobile providers announced similar innovative service offerings on the same day is a clear sign of robust competition in the mobile broadband market.
In January 2016 the FCC adopted a Notice of Proposed Rulemaking (NPRM) purporting to “unlock the box.” But in actuality, the FCC’s NPRM would unlock copyright protections by mandating third-party video device maker access to valuable content and subscriber information. This access mandate would result in widespread violations of licensing agreements negotiated between copyright owners and video service providers. The truth is that the NPRM’s strictures would stifle the video market’s innovative transition from set-top boxes to applications.
Concerns over the unintended consequences of the proposed rules have been raised by a majority of the Commission. Two of the FCC Commissioners – Ajit Pai and Michael O’Rielly – voted against the NPRM. They have cited increases in the costs of video innovation and violations of intellectual property rights that would result from the NPRM’s adoption. Commissioner Jessica Rosenworcel – who voted for the adoption of the NPRM – has also publicly acknowledged her concerns with the proposal. In June, Commissioner Rosenworcel, said: “Kudos to the Chairman for kicking off this conversation but it has become clear the original proposal has real flaws and, as I have suggested before, is too complicated. We need to find another way forward.”
The current proposal is irretrievably flawed. As FSF Senior Fellow Seth Cooper discussed in a February 2016 blog, the FCC’s proposal would undermine negotiated contractual rights to transmit copyrighted video to subscribers. This is because video service providers would be forced to make licensed video content available to third-party device makers who never contracted with copyright owners. Copyright owners would have no ability to enforce their negotiated licensing terms against third-party devices makers they never contracted with. Nor would the FCC have legal authority to police NPRM-enabled copyright violations by third-party device makers. Significantly, on August 3, 2016, the Copyright Office sent a letter to members of Congress describing in detail the copyright law problems posed by the FCC’s NPRM.
Although this by-product of the FCC’s proposal has not received as much attention as others, copyright violations that inevitably would result from the NPRM almost certainly will harm minority and diverse content creators. In a March 2016 letter to the FCC, a number of organizations representing minority consumers and diverse ethnicities, including the Multicultural Media, Telecom and Internet (MMTC), League of United Latin American Citizens (LULAC), and the National Association for the Advancement of Colored People (NAACP), asked the Commission to study the effects the proposal would have on “diversity and inclusion.” In April, MMTC submitted comments to the FCC stating: “[T]he unintended consequences of the FCC’s choice would harm diverse programmers and content creators by violating their copyright and licensing agreements and existing distribution arrangements with MVPDs, the lifeblood of their very existence.” Indeed, Commissioner Rosenworcel has publicly recognized the threat of harm that NPRM-induced copyright violations would pose to minority and diverse content creators.
To be sure, all content creators would be harmed by this proposal because it will enable third-party device makers to repackage content and rearrange channel lineups and tier placements. Copyright owners’ reduced control over the use of their video content will correspond with reduced financial returns. The NPRM will also cause harm by enabling third-party device makers to sell targeted advertisements to consumers based on their viewing habits. Ad revenues reaped by third-party device makers would be appropriated from the owners of copyrighted video content. However, minority and diverse content creators could be harmed disproportionately because they often sell their content and corresponding ads to specific audiences that are smaller in size. This loss in ad revenues will have the effect of discouraging innovation and creativity among minorities and other smaller, diverse audiences.
It is encouraging to see a majority of the FCC Commissioners raise concerns about the costs levied on minority programmers by the agency’s set-top box proposal. But the proposal is hopelessly beyond repair. FSF President Randolph May and Senior Fellow Seth Cooper rightly have called for the termination of what they denominated the “Enable Copyright Violations” proposal. (Also, see FSF’s comments and reply comments regarding this proceeding.)
Wednesday, August 10, 2016
Today, Hal Singer, a principal at Economists Incorporated, published an op-ed in Forbes discussing how Internet service providers (ISPs) are investing in capital outside of the broadband infrastructure market due to the FCC’s 2015 Open Internet Order. Mr. Singer shows that AT&T, Verizon, and Sprint have all decreased their capital expenditures by $1.9 billion, $1.2 billion, and $1.5 billion, respectively, from the first half of 2014 (before the FCC adopted the Open Internet Order) to the first half of 2016.Mr. Singer also says that other FCC proposals are discouraging ISPs from investing broadband infrastructure. The proposal to pursue price controls for business data services would stifle the deployment of fiber. The FCC’s privacy NPRM would harm ISPs’ ability to sell targeted advertisements and offer “free” services to consumers. (See my Perspectives from FSF Scholars from earlier this month.) And the FCC’s set-top box NPRM would create barriers for ISPs to integrate themselves into the pay-TV market. Mr. Singer makes a convincing case that the FCC’s assault on broadband (he calls it “The Wheeler Tax”) is pushing ISPs out of the broadband infrastructure market and into the edge market. Do not be surprised if ISPs continue to purchase edge providers, like we have seen with Verizon’s recent purchases of Yahoo and AOL.
Monday, August 08, 2016
By Randolph J. May and Seth L. Cooper
According to the U.S. Copyright Office’s August 3, 2016, letter to members of Congress, the Federal Communications Commission’s mislabeled “Unlock the Box” proposed regulation of video devices and apps conflicts with copyright law protections. It’s now clear the FCC’s proposal might more aptly be named the “Enable Copyright Violations” proposal.
Concerns that the FCC’s proposal would undermine the exclusive rights of video programmers to license and control the use of their copyrighted content have been widely known. Now, the Copyright Office has declared that the FCC’s proposed rules “appear to inappropriately restrict copyright owners’ exclusive right to authorize parties of their choosing to publicly perform, display, reproduce and distribute their works according to agreed conditions, and to seek remuneration for additional uses of their works.” The Copyright Office, with acknowledged copyright law expertise and charged by law with advising Congress concerning interpretation of the nation’s copyright laws, urged that “any revised approach to be taken by the FCC should be crafted to preserve copyright owners’ exclusive right under copyright law to authorize… the ways in which their works are made available in the marketplace.”
Predictably, some supporters of the FCC’s proposal have tried to put their own negative slant on the Copyright Office’s letter. For instance, the Copyright Office’s analysis was attacked with word-twisting and non-starter fair use arguments by Public Knowledge. In our view, the Copyright Office explained, in a careful and compelling fashion, why the FCC’s proposal would undermine the exclusive rights of copyright holders and why the proposal is contrary to federal copyright law.
The Copyright Office’s concerns about the FCC’s proposed improper curtailment of video programmers’ copyrights come from a straightforward reading of the law. The crucial provision concerning the rights of copyright holders to authorize reproduction, transmission, and public performance of their intellectual property is contained in Section 106 of the Copyright Act. As the Copyright Office put it: “The rights protected by the Copyright Act are ‘exclusive’ to the copyright owner, meaning that the copyright owner generally has full control as to whether or how to exploit his or her work, including by entering into licensing agreements.”
Public Knowledge’s press release incorrectly insinuates that the Copyright Office misrepresented the FCC proposal’s mandates. The Copyright Office, Public Knowledge claims, believes the FCC would mandate that copyright owners give away outright their video programming “for free exploitation by third-party devices.” Obviously, such overheated rhetoric is meant to put the Copyright Office letter in the worst possible frame. But a fair reading of the letter shows the Copyright Office understands the distinction between the Commission’s stated intent behind “Unlock the Box” and the actual practical effect of its proposal. Acknowledging that “[t]he FCC has stated that the Proposed Rule is not intended to negate these private contractual arrangements,” the Copyright Office stated the obvious truth: “[I]t is not clear how the FCC would prevent such an outcome under the Proposed Rule, for it appears to obligate MVPDs to deliver licensed works to third parties that could then unfairly exploit the works in ways that would be contrary to the essential conditions upon which the works were originally licensed.”
Public Knowledge’s press release also engages in plenty of misdirected rhetoric on fair use. It misleadingly claims that the Copyright Office wants video service providers and video programmers to disregard fair use rights. There is no reason to think this is so, and the criticism is hard to understand. The Copyright Office’s letter states that video service providers and video programmers avoid uncertainties regarding fair use by contracting around it through licensing agreements. This is hardly remarkable. Parties to commercial agreements contract away their rights all the time.
It goes without saying that licensing agreements between video service providers and video programmers don’t contract away fair use rights of video subscribers. To briefly illustrate from another context: Suppose a major publisher enters into an agreement with a bookseller for an exclusive promotion and sales effort for a blockbuster novel. The publisher and bookseller could contract around fair use, whereby the bookseller gives up any fair use claims it may have regarding what it might say about the novel in promotional materials or how it might display the novel. But the parties’ agreement would in no way waive the fair use rights of the novel’s subsequent readers and reviewers – and this is the point that Public Knowledge misunderstands or ignores.
In any case, the Copyright Office’s analysis is focused on licensing restrictions directly affecting the fair use rights of third-party devices – not the fair use rights of video subscribers. Discussing the Commission’s proposal, the Copyright Office acknowledged different fair use factors may be present with respect to video subscribers. Its letter even compared video subscribers to non-infringing private home users of VCR devices in Sony v. Universal City Studios (1984). So it’s silly to claim, as Public Knowledge’s press release does, that “[w]hat the Copyright Office advocates is encouraging distributors to negotiate away their consumers’ rights without those consumers’ consent.”
The copyright problems plaguing the FCC’s proposal were explained in an FSF blog post back in February. Public comments and reply comments filed by us in the FCC’s proceeding again explained that the proposal would undermine the exclusive rights of copyright holders in video programming. While we believe the FCC’s more aptly named “Enable Copyright Violations” proposal is misguided in a handful of respects, the proposal’s clash with federal copyright law is one of its most obvious flaws.
The Copyright Office, charged by law with advising Congress on copyright issues and interpretations of the nation’s copyright laws, has now articulated the copyright problems in a manner that the Commission should not ignore:
In its most basic form, the rule contemplated by the FCC would seem to take a valuable good—bundled video programming created through private effort and agreement under protections of the Copyright Act—and deliver it to third parties who are not in privity with the copyright owners, but who may nevertheless exploit the content for profit. Under the Proposed Rule, this would be accomplished without compensation to the creators or licensees of the copyrighted programming, and without requiring the third party to adhere to agreed-upon license terms. … As a result, it appears inevitable that many negotiated conditions upon which copyright owners license their works to MVPDs would not be honored under the Proposed Rule.
The FCC’s disregard of the exclusive rights of copyright owners is serious enough that the Commission should abandon its proposal. If it wishes to move forward with any new regulation at all – although in light of marketplace and technological developments, we submit none is needed – the Commission should explore ways of promoting competition in the video device market that do not enable violations of copyright law or undermine copyright licensing agreements.
Barring this, the Commission should be forthright enough to stop calling its proposal “Unlock the Box” and instead call it the “Enable Copyright Violations” proposal.
Friday, August 05, 2016
You probably saw the dismal figures for business investment released late last month in conjunction with the government’s most recent report on GDP, which itself was dismal. If you didn’t take note, you should have.
In reporting on the latest government data, the lead in the July 29, 2016, Wall Street Journal story declared that “declining business investment is hobbling an already sluggish U.S. expansion.” According to the WSJ, Gregory Daco, an economist at Oxford Economics, stated, “weakness in business investment is an important and lingering growth constraint.” MarketWatch’s July 29 story gloomily declared: “Businesses cut fixed investment by 3.2%, the biggest drop since 2009….Nor do companies show any sign they soon plan to ramp up investment, one of the three main pillars of economic growth.” Many other reports were to the same effect.
In the face of well-documented declining capital investment by businesses, now hovering near all-time lows, actions by the Federal Communications Commission that discourage further investment are far from harmless to the nation’s economy or to its consumers. It is surprising that in such a persistent, low-growth, low-investment economic environment, the agency continues to propose policies that discourage further investment by Internet service providers, despite the fact that from 2000 – 2015, ISPs had been leaders in capital investment in the United States.
Economist Hal Singer has shown in a report that, for the twelve largest ISPs, capital expenditures declined by 0.4% from December 31, 2014 through December 31, 2015. This represents a reduction in investment of about $250 million year-over-year. While not suggesting that the FCC’s decision in February 2015 to classify ISPs as common carriers subject to public utility-like regulation is solely responsible for the decline in ISP investment, Mr. Singer does say: “[W]hen investment theory is corroborated by evidence, as it is here, it is reasonable to infer that reclassification of ISPs as Title II common carriers was not a good thing for investment.” And according to Mr. Singer’s very recent calculations, early (but still incomplete) data for the first six months of this years indicate that the decline in investment by ISPs is likely to continue.
Unfortunately, in addition to the FCC’s Title II classification determination, the Commission’s proposed action in the “special access” (now renamed “Business Data Services” or “BDS”) proceeding, if adopted, likely will further deter capital investment by broadband services providers. The reason is simple – and widely-acknowledged by regulatory economists: Rate regulation mandating that incumbent telephone company providers give competitors access to their facilities at below-market rates discourages investment in facilities by both incumbent providers and new entrants. This depressive investment effect is the likely result of any Commission action in the BDS proceeding that forces the telephone companies to reduce the rates for network inputs sought by competitors.
Thus, for example, it should not be surprising that cable companies, new facilities-based entrants trying to gain a further foothold in the BDS market, oppose Commission actions that will force incumbent telephone company rate reductions. Lower incumbent rates for BDS services and inputs will only make it more difficult for cable operators and other non-incumbent competitors to compete – thereby discouraging capital expenditures for new network facilities by competitors and new entrants and incumbents alike.
The Commission would do well to consider the separate opinion of Justice Stephen Breyer in the Supreme Court’s landmark AT&T v. Iowa Utilities Board (1999) decision criticizing the FCC’s Unbundling Network Element (UNE) rules mandating excessive sharing of incumbents’ network facilities at below-market regulated rates. (Remember the FCC’s years-long UNE fiasco in which the FCC for years artificially propped up hundreds of non-facilities-based “competitors”? Or, like many, perhaps you’ve been trying to forget!)
Here is what Justice Breyer had to say:
“Even the simplest kind of compelled sharing, say, requiring a railroad to share bridges, tunnels, or track, means that someone must oversee the terms and conditions of that sharing. Moreover, a sharing requirement may diminish the original owner’s incentive to keep up or to improve the property by depriving the owner of the fruits of value-creating investment, research, or labor.”
“Nor can one guarantee that firms will undertake the investment necessary to produce complex technological innovations knowing that any competitive advantage deriving from those innovations will be dissipated by the sharing requirement.”
“It is in the unshared, not in the shared, portions of the enterprise that meaningful competition would likely emerge. Rules that force firms to share every resource or element of a business would create, not competition, but pervasive regulation, for the regulators, not the marketplace, would set the relevant terms.”
I wonder why it is so difficult for the Commission to acknowledge that, in a marketplace environment such as the BDS market where meaningful competition already exists in most locations and potential competition looms in the others, that forced sharing of network infrastructure inputs at regulated rates actually discourages capital investment and facilities-based competition?I can’t answer that question. But I do know this: At a time when capital investment by American businesses is declining, FCC actions that exacerbate that decline in investment – even if it is just a matter of slowing the rate of growth – are not good for our nation’s economy or its consumers.