We Know Times Are Tight, But …

There were constant references to the sorry economy we're living in as the Appropriations Committee of the Maryland House of Delegates completed its preliminary work on the proposed state budget, cutting over $700 million.

The bad habits of the past persisted, both in substance and process. The lawmakers continue to envision increased spending in future years, and the decisions, while taken in public, were for the most part worked out in private. The full report of their work did not go online until late Monday. One has to be well versed in the intricacies of state budget to make sense of the more than 40 mandate reductions and swaps from special to general funds. It was complicated this year by the infusion of federal stimulus dollars.

Some of these structural and procedural problems have been identified in 2008 policy papers by Free State Foundation Senior Fellow Cecilia Januskiewicz, who formerly served as Maryland Budget Secretary.

"In these fiscal times, we can't do all the things we would like," said one delegate, in the repeated refrain. Yet, they were persistently looking for ways to do half of what they would like to do, or a third of what they wanted to do, despite a write-down of $700 million in expected state revenues just two weeks ago. The lawmakers had spent literally hundreds of hours in subcommittee hearings combing the budget for cuts, yet we're unable to achieve their goal of increasing the fund balance (surplus) to $250 million. It is now only $50 million, leaving little wiggle room if there is more bad revenue news in the months ahead. The legislature's top fiscal expert had suggested a $400 million fund balance as a cushion.

Lawmakers did wind up cutting over $700 million from Gov. Martin O'Malley's proposed $ 32 billion budget, with more cuts still to come. Yet they rejected hundreds of millions of other potential cuts proposed by the analysts from Department of Legislative Services, such as cutting the funds that would allow a fourth year of tuition freezes at state universities. In Maryland, the legislature can only cut the governor's budget.

Ultimately, many of the "cuts" were simply reductions in proposed spending increases. Sometimes they "level funded" them -- kept a spending program at the same level as last year.

There were indeed actual reductions from this fiscal year's spending, but seldom is a program taken completely off the books. A rare exception was the "Principal Fellowship Program" in the state Department of Education. Passed in 2005, the program was designed to give incentives to effective school principals to move to troubled schools in other jurisdictions. The money was not spent in fiscal 2007 and 2008, and no principals had been nominated this budget year. The savings? A measly $159,745.

The Sellinger program for public aid to private higher education did suffer a real $5 million cutback from this year. But as the education subcommittee did several times, the budget language restores the funding in subsequent years, and even includes modest increases. Sellinger aid is based on a percentage of what the public colleges and universities receive, and the committee chairman, Del. John Bohanan, who headed a commission on higher education funding, said there is "gentleman's agreement" that the $45 million will go to financial aid for Maryland students at these private schools such as Johns Hopkins University.

Technically the legislators cannot restore cuts the governor has made. But more than half of state spending is mandated in law, and the legislature must approve any reductions in these formulas in the Budget Reconciliation Act. It is there that some of O'Malley's "cuts" in growth can actually be put back. This is what legislators did with the formula for the Maryland State Arts Council which O'Malley was going to cut by $6 million. Powerful and well-organized lobbying by myriad arts organizations in every legislative district got $3 million of that restored.

Who's representing the interest of the average taxpayer in this process? Reporters are about the closest thing to average taxpayers observing the process, leaving it up to the legislators to represent their constituents. For the most part they don't hear from their constituents except those who want to increase the budget or stave off a cut for programs they support.

The hearing rooms where the decisions are actually made are filled with lobbyists for programs, many of them paid by state tax dollars. At the education subcommittee, not only was the University System represented (by a former senator who was once vice chair of the Senate's budget committee), but each major state university had their own lobbyist on hand.

Even for experienced hands, the process is difficult to follow, as the proposed budget revisions were found in four different documents, suggesting options and budget language. Legislative analysts would jump around from one document to the other. These documents were placed on a table as the work session began, producing a feeding frenzy of lobbyists struggling to get copies. There were not enough copies of one key legal sized document outlining alternative budget choices.

In addition to the public meetings, there had also been unannounced private meetings of key committee members. There will always be private discussions among lawmakers, but when key decisions are made behind closed doors, then the public process becomes theater with the lines rehearsed, as the rapid proposal and passage of budget amendments showed.

All told, it is a troubling drama for anyone concerned about growth in state spending and transparency in government.

Meat and Potatoes on the Budget Table

In Wednesday’s (March 11) latest round of revenue write-downs, Maryland tax officials predicted the state will have $716 million less to spend in fiscal 2010 than they had forecast just three months ago. Budget Secretary Eloise Foster summed up the bleak prospects for a new round of budget cuts:

“Everything that was easy was done a long time ago,” Foster told reporters. “We’re now down to meat and potatoes.”

The advanced word on the revenue estimates was so dire – pegging the next year’s general fund revenues at $500 million below the actual take in fiscal 2008 – that the House Appropriations Committee put off its budget cutting decisions until later this week (March 18-20). The committee’s target for what needs to be cut is now more than $700 million, and legislators are looking for even more than that to provide at least a $400 million fund balance (surplus) to cushion against even worse news as the year progresses.

Even before the revenue estimates that serve as the benchmark for its constitutionally mandated balanced budget were officially released, the leaders of the General Assembly were announcing the formation of a legislative task force to look at many of the mandates, formulas and entitlements that I discussed in my March 9 op-ed in the Baltimore Sun.

This not-yet-appointed task force of seven senators and seven delegates – presumably the fiscal committee leaders along with a few token Republicans – will not get to work till this legislative session is over April 13.

Senate President Thomas V. Mike Miller Jr. summed up the stark issues.

“We have to be prepared to make some tough decisions …. in terms of our sustainability and the structural problems that we have in our budget,” Miller said a news conference. “A comprehensive review of state aid to local government will help us prepare for the necessary structural reforms that will benefits of the citizens of Maryland.”

Miller noted that 40 percent of the state budget is spent on aid to counties and municipalities. “We have to make some adjustment about how our money is allocated,” Miller said.

Tax hikes and layoffs of state workers are “off the table,” said House Speaker Michael Busch, who noted that he knew of only one county (Prince George’s) that had furloughed its workers the way the state had done already.

Here’s some of what’s on the table for this meat-and-potatoes work group: state subsidies of county pension costs (up 22% this year); calculation of education funding formulas; revenue structures and capacity in the counties; and tax limitations imposed in some jurisdictions.

There are several significant things about this task force. First, it recognizes that there is long-term “structural” spending problem that was not fixed by the 2007 tax hikes. Two, it plans to tackle some of the spending that has generally been off limits for Gov. Martin O’Malley, the former Baltimore mayor: aid to local subdivisions, teacher pensions and the like. Three, it is not some grand blue-ribbon commission created to produce a fat report, but as Miller referred to it, “a work group” of politicians familiar with the issues and having the power ultimately to propose politically workable solutions.

Lawmakers and governors created this problem by enacting and signing laws that required this spending, and they have the power to fix it.

The severe economic downturn has forced these legislators to face the day of reckoning that the federal stimulus has partially delayed. “Tough times require tough decisions,” Miller said, “and we in the General Assembly are prepared to make them.”

This fiscal mess appears to be a window of opportunity for true budget restraint that will make Maryland government live within its means every year – not just when times are good. “This truly is” such an opportunity for structural reform, the legislature’s chief fiscal analyst, Warren Deschenaux agreed with me in an interview. “I hope we don’t squander it.”

Raising taxes in 2007 was consistently described as “making tough choices.” Now, we’ll have to see if the same legislators are capable of making the “tough decisions” to permanently lower spending to which many interest groups are so fondly attached.

A Look Back at the Sirius-XM Merger

It has been interesting to watch the recent struggles of Sirius XM Radio and look back at the concerns raised when the Sirius – XM merger was originally announced. Just last month, Sirius XM seemed destined to file for bankruptcy before being saved, at least temporarily, by Liberty Media. What happened to what merger opponents claimed would be a competition-killing media giant?

The National Association of Broadcasters were among the first who cried foul of the merger, claiming that the consolidation of Sirius' and XM's market shares in the satellite radio market would be a “merger to monopoly” that would result in disaster for terrestrial radio broadcasters. The NAB argued that satellite radio represented a discrete product market, which, if this merger were approved, would be controlled entirely by a single company that could impose monopoly prices upon consumers.

This argument seemed flawed then, and now seems even more so in retrospect. In a CNET article written in April 2007 by FSF President Randolph J. May, May rightfully predicted that even if the merger were approved, a consolidated Sirius XM would still likely face strong competitive pressures from other forms of audio entertainment. May noted that the audio services marketplace offered a wide range of distribution technologies (including terrestrial broadcast stations, wireless audio services, iPods, MP3 players and similar devices, and the Internet), none of which appeared to be threatened into obsolescence by a merger between the two satellite radio providers.

According to a recent Wall Street Journal article, this is precisely what happened:

When Sirius and XM completed their merger last July, it was supposed to represent a strong new beginning, with the two fledgling companies becoming an entertainment force. Instead, a 17-month approval process diverted valuable executive attention from the underlying business, and consumers grew more enamored with their iPods, mobile phones and other alternatives to satellite radio.

The result after all this controversy? Way back on February 20, 2007, when the proposed merger was first announced, Sirius shares closed at $3.92. Upon the announcement of DOJ approval on March 24, 2008 and FCC approval on July 25th, 2008, Sirius XM closed at $3.15 and $2.25, respectively. Today, Sirius XM shares are valued at a measly $0.124.

Of course there are always those who will see any potential merger as problematic without really trying to examine the actual competitive effect of the transaction in light of today's dynamic communications and information market. The marketplace – and industry players – change so rapidly that it is difficult to grasp its true state by simply looking at a current snapshot. In fact, business models in the media industry actually seem to be trending towards deconsolidation. Clear Channel, once the poster boy of consolidation, has been selling off its assets the last couple of years in order to stay afloat. The FCC also recently approved Time Warner's request to spin-off of its cable services.

These examples have shown that, in the fast-changing transitory telecommunications market space, it is nearly impossible to make an ex ante prediction of the business model that will ultimately prove most successful – and regulators, in an appropriate show of humility, should err on the side of caution in trying to do so.

The Fairnes Doctrine Revival

For a while it was conventional wisdom to discount all the talk about reinstating the Fairness Doctrine as just so much campaign rhetoric. And candidate Barack Obama seemed to play down chances of its return.

It looks now like it would be a mistake to ignore the possibility of a big push for Fairness Doctrine reinstatement by the Obama Administration. On Sunday, Obama aide David Axelrod refused to rule out FD reinstatement. According to Broadcasting & Cable, Axelrod said that would be an issue for presumptive FCC Chairman Julius Genachowski. The B&C item noted that Genachowski served as a former aide to now Senator Chuck Schumer, a Fairness Doctrine proponent.

I am now of a mind that we will see a move by the Obama FCC to reinstate the doctrine. There will continue to be much agitation on the left for reinstatement. Initially, this will be seen by the Obama Administration as simply useful, perhaps almost harmless, political stoking of the base. But I predict the stoked pot, brought to a boil, will overheat, and the Obama Administration will succumb to pressures from the left and propose reinstatment, whether under the Fairness Doctrine moniker or another with an equally seductive name.

This would be most unfortunate. But I am afraid it is a scenario that is now more likely than not.

The Right Kind of Broadband Stimulus

In my view, the spending side of the House-passed stimulus bill is too large. Be that as it may, appropriating some funds targeted for furthering broadband deployment is a more worthwhile use of the public funds than many of the other targeted appropriations.

Still, with respect to broadband the bill could and should be improved, including in these ways:

• Funds should only be allocated for build-outs in unserved areas, rather than for underserved areas as well. We know that about 90-92% of homes already are passed by a broadband provider. The focus should be on the remaining 8-10% that do not have access to any service (except satellite broadband). Under the bill, the FCC is tasked with defining an "unserved" area within 45 days. This is likely to be a very messy and contentious process.
• The bill requires that NTIA ensure that grant recipients operate on an "open access" basis. The term "open access" is to be defined by the FCC not later than 45 days after enactment of the bill. Without belaboring the point, the stimulus bill is no place to effect what may be a far-reaching change in broadband policy. In effect, any definition of "open access" adopted by the FCC almost certainly will move broadband policy further in the direction of the traditional legacy common carrier regulation that prevailed in the last century. The "open access" label is no doubt appealing. But adopting open access as a mandatory condition, and then going through the process of defining what it means, and then going through the further process of implementing and enforcing whatever the regulator decides it means on any given day, inevitably will lead to a regulatory straightjacketing that will discourage investment and innovation. To put it plainly, "closed access" regimes, or what we frequently call proprietary systems, often spur innovation and investment in ways that mandated open regimes cannot. This is because the protection of property rights in proprietary regimes offers the prospect for realization of economic efficiencies that otherwise cannot be captured. In any event, having the FCC devise an open access rule in 45 days is no way to address the very significant issues involved. If our nation's policymakers think the government should impose open access mandates, the issue is consequential enough it should be considered outside of the appropriations process.
• The recent report from the Pew Internet & American Life Project, authored by John Horrigan, once again focused attention on the fact that there are a number of reasons why Americans don't subscribe to broadband service even when it is available. While by no means the predominant reason, for a significant number of Americans price is a factor. Thus, as FSF Research Assistant Tristan Hardy suggested in his recent blog, it may make sense to direct some public funds to expand the Lifeline/Linkup programs to include support for broadband for low-income Americans who meet certain low income means-based criteria.

As the stimulus bill moves through the legislative process. it should be improved in these ways.

Broadband Availability Does Not Necessarily Imply Adoption

Although all of the details of the economic stimulus package have yet to surface, it seems likely to target billions of dollars of government spending towards increasing deployment of broadband infrastructure. Ubiquitous broadband is a worthy goal. But making broadband services available does not necessarily mean that consumers will subscribe. There is a difference between encouraging broadband infrastructure deployment and encouraging broadband subscription rates – and policies should not ignore this difference.

First, it is important to note that, despite the reflexive proclivity of some to try to characterize United States broadband policy as a failure, much progress regarding deployment continues to be made. Last week, the FCC released its semi-annual report on High-Speed Services for Internet Access (the full report is available here) detailing the broadband deployment figures through December 31, 2007. Despite the extensive time lag in compiling and reporting the data, the FCC report makes clear that broadband availability and consumer adoption rates continue to increase. In 2007, high-speed lines connecting homes and businesses to the Internet increased by 46% from 82.8 million lines to 121.2 million lines. The report found that over 99% of the U.S. population lives in a zip code that has access to a high-speed connection through a number of competing technologies, including high-speed mobile wireless, satellite, ADSL, and cable modem service. 98% of the population lives in a zip code with two or more broadband providers.

Would even greater broadband availability in unserved areas actually encourage some consumers presently without broadband service to sign up? Sure, to some extent -- but deployment is only one part of the broadband equation. In a newly-released memo entitled "Obama's Online Opportunities II," John Horrigan, Associate Director for Research at the Pew Internet & American Life Project, considered the effectiveness of an economic stimulus package on increasing the actual pool of broadband subscribers. Based on his survey data, only about one-third of the U.S. adult population has failed to adopt broadband at home due to pricing or availability issues. According to Horrigan, "[p]roviding incentives to build broadband infrastructure directly addresses the availability problem and could be of particular help to Americans living in rural areas." However, the other two-thirds of adults cited issues related to the usability and relevancy of broadband to justify their decision not to subscribe. Truly, the generational gap plays a significant role and, as Horrigan pointed out, "it would take time to undertake the training and support needed to turn [older users] into competent online users." Horrigan suggests these take-up issues seem better suited for private sector solutions, such as making services easier to use or revising marketing efforts to better target these individuals.

If the ultimate goal of the nation's broadband policy is to increase broadband usage rates, this will not be accomplished in the most economically efficient or practically effective manner by focusing only on increasing spending on broadband infrastructure, and certainly not by directing scarce public funds to areas other than those unserved. In connection with government efforts to stimulate broadband investment, policymakers should narrowly target public funds to unserved areas. As for adoption, one possible suggestion is to expand the Lifeline and Link-up programs in order to subsidize home broadband access for those who meet well-defined low income means criteria.

In any event, as various stimulus proposals are considered, it is important to keep in mind the significant progress that already has been achieved as a result of private sector investment and a generally deregulatory environment. (More on any regulatory conditions in the stimulus bill later.) And, it is important to keep in mind as well that a significant number of consumers are just not interested in subscribing to high-speed Internet access at this time even though broadband is available to them. An economic stimulus package directed at increasing broadband availability, or even at pricing, will do nothing to change their minds.

Don't Delay the DTV Transition

The mere suggestion by President-elect Obama's transition team that the February 17 DTV transition date be postponed has already made the prospect of the analog TV cutoff more problematic than it otherwise would be. Human nature being what it is, many people who either were already readying themselves for the switch – or were about to rouse themselves to get ready for the switch – have or will stop dead in their tracks. Why get a converter box and hook it up now if nothing is going to happen for at least several months?

Despite all of Ben Franklin's admonitions ("A stitch in time…") and those since, procrastination is a powerful element of human nature.

Even though the suggestion that the cutoff date be delayed already has created some confusion, it seems to me, all things considered, that the preferable course still is to quash the delay talk and go forward with the February 17 implementation date. First, and most importantly, consider human nature again. If the government postpones the date, despite any and all protestations to the contrary ("Believe me this time when I say your analog signal will be cut off!), a large number of people won't take seriously any new date. After all, let's be honest: For many months now, it has been difficult for most of us to avoid the barrage of warnings concerning the February 17 transition date.

No doubt the DTV transition program - from awarding coupons to government education to manning call centers - could have been done better. But, in truth, much has already been accomplished by many in preparing for the cutoff. The focus now should be forward-looking, with efforts directed to making the February 17 date work as well as possible. For example, legislation could be passed allowing the NTIA to issue a reasonable number of additional coupons even before current coupons expire in recognition that the redemption rate will not be 100 percent. If need be, consideration can be given to appropriating more funds for even more coupons. More people can be hired to man the call centers and so forth.

Postponement of the implementation date jeopardizes the accomplishment of important public policy objectives. It almost certainly would delay getting a portion of the to-be-vacated spectrum into the hands of public safety agencies. And it almost certainly will delay use of the to-be-vacated spectrum for deployment of new next generation wireless broadband services. Indeed, President-elect Obama has been especially vocal about his desire to promote more broadband deployment.

Even with the best efforts, and regardless of when the cutoff takes place, there will always be some (unknowable and uncountable) number of people who will not be ready, no matter the efforts made by the private sector and the government. I do not mean to minimize the disruption and inconvenience to these people. And I understand that the people who will not be prepared at cutoff are, on the whole, perhaps more likely to be less well off than those who will be ready. (Of course, in a very (over)broad sense, the coupon program is intended to address concerns about any economic hardships associated with the transition.)

At bottom, having long ago committed to a firm date, it seems to me the best course is to continue to make an all-out effort to make the transition work as smoothly as possible, understanding that, inevitably, there will be a real need to address special problems and needs for several weeks in the aftermath. It was always predictable that there would need to be some period of intense post-cutoff attention and assistance.

Finally, President-elect Obama has proven to be a very effective communicator. And, at times, he has rightly emphasized the need for our citizens to exercise more personal responsibility, and he has extolled the need for common efforts to achieve a public good. There is a large element of the common public good, of course, in implementing the DTV transition and freeing up the analog spectrum sooner rather than later. And assumption of personal responsibility plays a significant role in accomplishing the transition with as little disruption as possible.

President-elect Obama has many important matters on his plate, many of greater import than the DTV transition. But I have the sense that, with Mr. Obama's eloquence, if he were to utter a few choice words of encouragement, perhaps even a call to action in his inaugural address, we can get over the February 17 finish line in better fashion than now envisioned.

Happy 2009 -- Upon Reflection, No Twittering

My late mother and I had this riff about think tanks. It began ten years ago the day I told her that I was resigning my law partnership to work in a think tank.

She said: "What in the world is a think tank?"

I said: "It's a place where you think."

She said: "What do you think about?"

I said: "First, I think about what I want to think about."

In a way the riff was silly, of course. But in another way it conveyed something significant – at least to me. A think tank is a place that ought, in the main, to respect and cultivate an environment conducive to a certain amount of studied reflection, not hurried off-the-cuff pontificating. It ought to be a place in which you can think about what you want to think about in a reflective, scholarly way. To my mind, this ability to reflect and consider is an important element in fostering the "deliberative democracy" championed by Madison. Think tanks – doing their best work – can play a constructive, even vital, role in maintaining the health of such deliberative democracy.

This brings me to a New Year's resolution. At least for now, I forswear Twittering. As many of you know, Twitter is a self-described "social messaging utility for staying connected in real-time." The idea is that by "twittering," that is by posting ongoing "tweets," your friends and "followers" can keep up with every thought that pops in your head, at least those that can be expressed in less than the 140 word "tweet" limit.

A lot of think tankers have established Twitter accounts and already are twittering away. Some say we must do this to keep up with the times and the 24/7 "news" cycle. That unless we issue a constant stream of tweet-thoughts we won't remain relevant. I confess I signed up for a Twitter account a couple of months ago, and since then, without issuing the first tweet, I've received a bunch of messages that people have signed up on Twitter to "follow me."

Well, cease and desist. No need to follow me. I've resolved not to twitter. It may be fine for others. But, for me, twittering away all day with instantaneous reactions cuts seriously into time that otherwise might be devoted to more reflective thought and deliberation - cuts even into the habit of more reflective thought.

Hopefully, this New Year's resolution will last longer than the one I make annually about changing certain (bad) dietary habits. It is enough to do a blog now and then when I think I have something worthwhile to say on fairly short notice. No 140 word limit on FSF blogs. Or, of course, on the "Perspectives of FSF Scholars" papers, or on longer scholarly studies or event transcripts.

Finally, at the Free State Foundation, our goal is to bring decades of expertise and experience, along with solid research, to bear on the resolution of public policy problems. To be truly impactful, we strive to combine academic rigor with real-world practicality in a considered and reflective way. Above all, we aspire to adhere to the free market, limited government, and rule of law principles that are our guideposts. Adherence to these principles is the surest way to advance overall consumer welfare and to ensure the social and economic well-being of America's citizens.

Having forsworn Twittering as one New Year's resolution, my other resolution – the principal one - is to work hard, everyday, to lead the Free State Foundation to fulfill the goals and aspirations stated above. If my mother were here to ask what I am thinking about on this New Year's Eve, that is what I would tell her.

Best wishes to all for a happy and healthy 2009, and thank you for your continued friendship and for your support of the Free State Foundation!

Net Neutrality and Googlopoly

Some broadband bits and pieces.

First, I was struck by Rick Whitt's blog post trying to explain what Google means by net neutrality in light of yesterday's Wall Street Journal article suggesting that Google's putative deals with Internet broadband providers concerning creation of a Google priority fast lane may be inconsistent with the company's relentless advocacy of net neutrality mandates. In his post, Whitt says: "[B]roadband providers should have the flexibility to employ network upgrades, such as edge caching. However, they shouldn't be able to leverage their unilateral control over consumers' broadband connections to hamper user choice, competition, and innovation." A bit further along, Whitt calls ups the same macro, the one labeled "unilateral control," and repeats the mantra: "[I]f broadband providers were to leverage their unilateral control over consumers' connections and offer colocation or caching services in an anti-competitive fashion, that would threaten the open Internet and the innovation it enables."

One thing Google's Rick Whitt knows for sure is that there increasingly are few places in the country where providers exercise "unilateral control" over a consumer's broadband connection. We could have a good debate about whether broadband providers exercise such "unilateral control" over consumers if he likes. In most places, consumers can switch if they are dissatisfied with an ISPs' practices. In many areas, there is fierce competition for broadband customers between companies that we use to call "cable" and "telephone" companies. And they are not the only competitors.

Perhaps you didn't take note of the most recent winner of the Alliance for Public Technology's "Broadband Changed My Life" contest. The winner's name is Nancy Reid, and she lives in Southampton County, Virginia, which she describes as a rural farming community. In her winning essay, Ms. Reid recites some of the difficulties she faces in rural Virginia. Then she explains:

"I was so close to achieving my academic goals but had a huge and very frustrating problem, now I would have to drive if I wanted to continue. That is when a close friend told us about his satellite broadband access. I was skeptical but after some creative financing had it installed. To say it has made an impact on my life is so true in many ways. I am now able to download and send pictures to my mom in California in seconds, online banking is a breeze, and school, well, my first 2 reports were given A's! How is that for a morale boost!!" (The extra exclamation point is Ms. Reid's, and I say good for her and for APT for telling her story.)

Satellite broadband access. In the discussions about broadband competition, especially in rural areas, rarely is satellite broadband access mentioned. It should be. It's available almost everywhere across the country. I understand that it is not as fast as cable or telephone-provided access, but not everyone needs or wants the same service. And for marketplace and technological reasons, all network infrastructures won't (and shouldn't) develop at the same pace if consumer demand is to be met efficiently. It will be a big mistake if, in trying to figure out ways to spur the further development of broadband, policymakers now abandon primary reliance on private sector competition in favor of command-and-control planning based on government guesses as to what services consumers want and how much they are willing to pay.

Rick Whitt concludes his post by stating that Google remains "strongly committed to net neutrality." What I think he really means is that Google will remain committed to neutrality in accordance with its own understanding of the concept as its business needs and strategic planning evolve. And as I have pointed out many, many times, therein lies a big problem. As the WSJ story, and Whitt's response trying to explain away the story, illustrate, the concept of "net neutrality" is likely always to be so murky and ill-defined that – in light of the extent to which marketplace competition already exists – the costs of enforcing neutrality mandates will outweigh the benefits. With the regulatory uncertainty created, along with possible enforcement sanctions, net neutrality mandates will result in diminished investment and innovation and increased consumer welfare losses.

A final note: One of the FCC's net neutrality principles states: "[C]onsumers are entitled to competition among network providers, application and service providers, and content providers." If this indeed is an enforceable mandate, it is not difficult to imagine that Google itself might one day find itself embroiled in an FCC net neutrality enforcement proceeding defending its dominant market position. After all, Google presently has approximately 65% of the search query market and captures about 75% of the advertising revenues of Internet search companies, and these market shares appear to be growing. It is not fanciful to imagine that some neutrality advocate will file a complaint at the Commission alleging that Google's dominant market position constitutes a googlopoly that deprives consumers of their entitlement to competition among content providers. I assume that, at the least, such a complainant will ask the agency to delve deeply enough into Google's search engine algorithms and search practices to ensure that they operate in a completely neutral and nondiscriminatory manner.

In the event this scenario occurs, I predict that Google's views on net neutrality will evolve -- quickly. Indeed, I predict that, even if such an FCC complaint never materializes (and I hope it doesn't), Google's net neutrality views will evolve as the company recognizes that implementation of rigid notions of neutrality, subject to unpredictable bureaucratic decisionmaking, will hinder the continued evolution of the Internet upon which its business model is entirely dependent.

Maryland Tax Burdens

On discovery of the news that an anti-tax ballot measure is leading -- but apparently not definitively resolved -- in liberal Montgomery County, I recalled a study I saw recently which found Maryland's state and local tax burden the fourth highest in the country. The study determines that Marylanders pay 10.8% of their total income in state and local taxes. Maybe county and state officials should not be as surprised as they seem to be that one of Robin Ficker's tax limitation proposals has garnered so much support.

The Montgomery County anti-tax measure would amend the county charter to require that all nine Council members, rather than the current seven, vote to exceed the established property tax limit. The Washington Post article on the ballot measure is here. If you want to see which states had a higher state and local tax burden than Maryland, the Tax Foundation study is here.

Another Good Morning in America

First things first. To Barack Obama, go congratulations on an historic victory. I grew up in Wilmington, North Carolina at a time when schools were segregated and blacks and whites drank from separate water fountains. The stain of slavery and Jim Crow will always be part of America's history.

But America is nothing if not a work in progress. To my mind, America is, and always hopefully will be, not just a country, but a country with special ideals. A country with aspirations to build that "shining city upon a hill" of which the Pilgrim John Winthrop first spoke, and of which President Reagan so eloquently spoke over three and a half centuries later. To invoke Reagan's spirit is to invoke the idea it is always a new "morning in America."

Apart from everything and anything else, it speaks to America's goodness, and its capacity for change, that we have elected our first black president. That reality should be celebrated, and in no way minimized.

America is not only a country with ideals, but a country in which ideas matter. If you go to the Free State Foundation's website, you will see our mantra: "Because Ideas Matter…" Ideas matter in America because of the success, thus far, of our democratic experiment. We are fortunate to live in a country in which it is possible, without fear of persecution, to contest notions of public policy and the public good in the marketplace of ideas. That is still not true in many parts of the world today.

The FSF home page also makes clear the fundamental principles that guide the "ideas" work of the Foundation. FSF's purpose, broadly speaking, is to promote understanding of free market, limited government, and rule of law principles.

This is not the day or the space to lay out policy prescriptions or to criticize the policy prescriptions of others. Back to that business of debating specific ideas soon enough, I'm sure. But I do want to take the occasion to say, at least broadly speaking, a few words about what FSF's commitment to the core principles stated above means, including in the context of some of the issues on which FSF labors.

As a result of the financial crisis, there is much talk to the effect that America needs to adopt much more pro-regulatory, interventionist policies. Whatever the merits of the need for more regulation in the financial services arena – and overly simplistic or overtly political analyses and sloganeering here will have long-term harmful effects – it would be a serious mistake for policymakers to apply any such pro-regulatory agenda indiscriminately to America's private sector. This certainly would be true in the communications marketplace, where free market-oriented policies, however haltingly applied at times, have already brought consumers many benefits, including competition in most markets, choices of an array of services and products unimaginable a decade ago, and at affordable prices. As I explained in "Deregulation as Scapegoat" in the Washington Times last month, if policymakers now were to take steps to re-regulate today's competitive communications markets in a way that resembles the command-and-control regulation that prevailed in the generally monopolistic analog era, overall consumer welfare and the nation's economy will suffer.

The promotion of free market policies is inextricably linked to the principle of limited government. Limited government provides the breathing space for America's entrepreneurial spirit to take root and flourish. Policies that respect the limited government principle empower individuals, without undue government interference and burdens, to seize opportunities to achieve their dreams. And the principle of limited government is linked to perhaps the foremost American ideal -- individual liberty. The new President and Congress, and state officials as well, ought to be keenly aware, always, of the inherent tension and trade-offs between individual liberty and government intervention. The balance struck between the two is struck differently depending upon time and circumstance. But without a sympathetic understanding that more government intervention almost always means less individual freedom, the balance is likely to be struck in a way that gives liberty short shrift.

And the rule of law. It undergirds all. Without the rule of law, free market policies could not exist, and limited government would be a chimera. The notion of the rule of law can be expressed in many ways. But, in short, as Ronald Cass, former dean of the Boston University School of Law, puts it in his book, The Rule of Law in America, the constitutive elements of the rule of law are: (1) fidelity to rules (2) of principled predictability (3) embodied in valid authority (4) that is external to individual government decision makers.

Another way of expressing the idea of the rule of law is to speak of respect for and adherence to our constitutional principles. For example, a good deal of communications law and policy implicates First Amendment rights. Talk of resurrecting the Fairness Doctrine in today's digital communications marketplace, with its multiplicity of voices, surely implicates the broadcasters' free speech rights. In my view, a resurrected Fairness Doctrine in today's environment would be constitutionally impermissible. And, as I have explained elsewhere in a law review article, proposals to impose Fairness Doctrine-like net neutrality mandates on broadband Internet service providers not only constitute unsound policy, but likely violate the providers' First Amendment rights as well.

Ultimately the rule of law principle which undergirds all is dependent upon a shared understanding and commitment that law and politics are not the same, and that it is the judiciary's role to interpret the law, not make policy. As important as any other charge, our new President and Congress should always fulfill their responsibility to promote and preserve such commitment and understanding.

With all that said, it's just another good morning in America.

Maryland's Governor Ranks Last on Fiscal Policy

In a newly-released report entitled "Fiscal Policy Report Card on America's Governors: 2008" authored by Chris Edwards of the Cato Institute, Maryland Governor Martin O'Malley ranks at the very bottom of the pile of governors in his handling of fiscal policy. Governor O'Malley is not on the ballot tomorrow. But the report's last place ranking of the governor's handling of the state's fiscal affairs nevertheless is instructive as Marylanders head to the polls with economic matters very much on their minds.

The Cato paper explains that: "The report card grades the governors on their fiscal performance from a limited-government perspective. The governors receiving an 'A' are those who cut taxes and spending the most, while the governors receiving an 'F' raised taxes and spending the most. The grading mechanism is based on seven variables, including two spending variables, one revenue variable, and four tax rate variables."

With regard to Governor O'Malley's ranking, the report has this to say: "The lowest-scoring governor, Martin O’Malley of Maryland, spearheaded the passage of a $1.4 billion tax increase in 2007, which was unique in its large size and scope. It increased the corporate tax rate, the top personal income tax rate, the sales tax rate, and the cigarette tax rate. It also expanded the sales tax base and raised taxes on vehicles. This enormous increase will hit Marylanders directly in the pocketbook, and indirectly through slower economic growth over time."

The Cato report describes in details the variables used to grade the fifty governors' fiscal policies. You can judge for yourself whether you think Governor O'Malley's ranking is warranted.

The FCC’s Actions Should Benefit “Joe the Caller”

With the FCC facing its own important November 4 vote on proposals to reform the archaic intercarrier compensation and universal service regimes, here are some thoughts, some of which relate to the discussion at last Friday’s Free State Foundation seminar on the subject.

First, back to 1926. At the time of the creation of the Federal Radio Commission, the FCC’s predecessor agency, Senator Clarence Dill, the chief Senate sponsor of the Radio Act, declared the agency’s commissioners would be “men of big abilities and big visions.” The notion that the new agency could attract such men (and, of course, women too) to serve was tied directly by Senator Clarence Dill to the central idea that the FCC was to be an “independent body” and an “expert authority.”

Much of the work of the FCC affects the American people and the American economy in important ways on a day-in, day-out basis, so the commissioners shouldn’t get too many free passes on anything they do. But some matters, obviously, are more important than others. This is so with regard to the universal service and intercarrier compensation proceedings.

With competition now firmly embedded in the telecommunications marketplace, enabled in large part by new digital technologies, intercarrier compensation and universal service reform is necessary to increase the efficient use of our telecommunications networks, while creating an environment in which competition can flourish without wasteful uneconomic subsidies. The mechanics of how to achieve these efficiency and pro-competitive objectives are no mystery to economists and other public policy scholars who have studied the issues for years, if not decades: Move quickly to a unified intercarrier compensation regime in order to eliminate existing arbitrage opportunities that have everything to do with outdated regulatory constructs and nothing to do with the economic cost of originating or terminating traffic. And move quickly to a universal service regime that targets distribution of subsidies narrowly to those who truly need them, and that collects funds to support the subsidies from a broad base.

The difficulty lies not with the design of a meaningful reform plan, although surely there are differences regarding specific points to be worked out at the margins. Rather what is at issue now is whether the commissioners have the will to adopt such a plan. Surely, none of the commissioners sought or accepted the job with the idea of avoiding making tough, consequential decisions in the interest of all American consumers.

Now go back to 1980, even before the AT&T divestiture. At Friday’s FSF seminar, Professor Gerald Brock, Professor of Public Policy and Public Administration at The George Washington University and a member of FSF’s Board of Academic Advisors, began his slide presentation with one entitled “Unified Intercarrier Compensation – An Old Problem.” He points to a 1980 tentative decision that “found the wide variety of existing access compensation methods unreasonably discriminatory and sought to replace them with a unified method.” This early attempt to address the intercarrier compensation problem, according to Professor Brock, was “blocked by opposition from those who would pay higher rates.” The intercarrier compensation problem, and the opposition to reform, is not new. 1980 is almost three decades ago.

Now go back to 2001. In a blog posted last Tuesday entitled, “The Time for Bold Action Is Now,” I predicted there would be cries that the FCC should not “rush to judgment,” that it should seek still more comment before doing anything. In the course of explaining why in this instance those cries are not well-taken, I quoted from Commission pronouncements in 2001 when it opened the intercarrier compensation proceeding. Here’s just one: “The existing intercarrier compensation rules raise several pressing issues. First, and probably most important, are the opportunities for regulatory arbitrage created by the existing patchwork of intercarrier compensation rules.” The Commission stated in the 2001 notice: “We are particularly interested in identifying a unified approach to intercarrier compensation – one that would apply to interconnection arrangements between all types of carriers interconnecting with the local telephone network, and all types of traffic passing over the local telephone network.” Since the FCC sought comment on the 2001 notice, there have been at least five further rounds of comments filed, not to mention the thousands of pages of ex parte comments submitted. Arguments about the FCC “rushing to judgment” seem wildly misplaced in this instance.

Now back to the present – and the future. Two questions from the audience at Friday’s seminar particularly struck me because they highlighted why it has been so difficult up to now to reform intercarrier compensation and universal service. One questioner asked whether the agency, in effect, shouldn’t be especially concerned about acting in a way that might disadvantage some competitors vis-a-vis others. And another asked about the political economy of achieving reform. Won’t more intense, narrow interests likely prevail over the more diffuse public interest in reform? Isn’t this the “public choice” dilemma that has stalled reform efforts long past when it has become clear that substantial change is needed?

Two fair questions. As to the first, I thought John Mayo, Professor of Economics, Business and Public Policy at Georgetown’s McDonough School of Business, and a member of FSF’s Board of Academic Advisors, gave a good answer. It is not the business of the FCC to protect competitors from disadvantage, but rather to adopt policies conducive to creating competition. The focus on creating an environment in which competition thrives without distortive arbitrage opportunities and subsidies, not the protection of a particular class of competitors, will best serve the long-run interests of the American consumer.

As to the second question, the political economy one, the questioner is correct that public choice theory predicts the difficulty of accomplishing meaningful reform that advances te broader public interest in the face of intense, narrowly-focused opposition to change. As a general subscriber to public choice theory, I understand that achieving reform in these circumstances is not easy. But I think the political economy dynamics are changing in a significant way. To fund universal service programs, every “Joe the Caller” in America now pays more than an 11% surtax on every interstate call – and more and more Joes and Josephines (with thanks to Commissioner Deborah Tate at Friday’s FSF seminar for this inclusiveness) are beginning to notice the tax’s size. Why wouldn’t they? An 11% tax is not peanuts, and the fee has grown significantly in the last several years. And it has the detrimental effect of suppressing telecommunications usage, and of discouraging investment that would be directed towards build-out of new, more economically efficient networks.

Again, the way to do something positive for Joe and Josephine, the average American telecommunications consumers, is no mystery to any of the sitting commissioners. No doubt they understand the public policy imperative for bold action to implement, without delay, a unified, cost-based compensation regime and a more narrowly-targeted, efficient universal service regime.

In their consideration of the intercarrier compensation and universal service proposals, the commissioners ought to have in mind Senator Dill’s hope and expectation that the commissioners would be men and women of big abilities and big vision.

The Time for Bold Action Is Now

With the FCC poised in early November to consider proposals to reform the outdated intercarrier compensation and universal service fund regimes, you will hear much talk in the coming days about how the FCC should not rush to judgment to decide issues of such complexity, especially with so many various “interests” affected. You’ll hear about wireless and wireless carriers; ILECs and CLECs in small, mid, and large sizes, and rural and urban varieties; VoIP providers; and so forth and so on. Much of this talk about protecting this or that particular interest, or actions favoring one type of service provider at the expense of another, will have a distinctly familiar “inside the beltway” ring. Pundits will be giving (hedged) odds as they try to figure out who the winning and losing companies will be.

It would be a mistake to buy the “don’t-rush-to-judgment” line. And it would be a mistake for the Commission to forget that the “interest” that really ought to matter in all this is the average American consumer, let’s say “Joe the Caller,” who now pays an 11% tax on every interstate call in order to fund the various unreformed universal service programs.

As for claims that the Commission may be rushing to judgment, in this instance the charge is well-nigh laughable. If the Commission takes any longer to take meaningful actions to reform the IC and USF regimes, it ought to plead guilty to negligence and beg for the court’s mercy.

Here are just a few excerpts from two different Commission decisions in 2001 expressing a sense of urgency regarding the agency’s need to comprehensively reform the intercarrier compensation regime:

“We believe it essential to re-evaluate these existing intercarrier compensation regimes in light of increasing competition and new technologies, such as the Internet and Internet-based services, and commercial mobile radio services (CMRS). We are particularly interested in identifying a unified approach to intercarrier compensation – one that would apply to interconnection arrangements between all types of carriers interconnecting with the local telephone network, and all types of traffic passing over the local telephone network.”

“The existing intercarrier compensation rules raise several pressing issues. First, and probably most important, are the opportunities for regulatory arbitrage created by the existing patchwork of intercarrier compensation rules.”

“We believe that there are significant advantages to a global evaluation of the intercarrier compensation mechanisms applicable to different types of traffic to ensure a more systematic, symmetrical treatment of these issues.”

And similar long-ago and oft-repeated statements exist concerning the need to reform the universal service regime.

Almost a year ago, I wrote a not so prosaically titled piece, “Put Universal Service Reform Near Top of FCC’s Agenda.” It urged the Commission to cap the high-cost fund, eliminate the identical support rule which provides subsidies to wireless carriers based on wireline carrier costs, and implement reverse auctions as a means of distributing subsidies. Commissioner Deborah Tate deserves credit for leading the Federal-State Joint Board to a point last year where the Board put on the table useful reform recommendations. And Chairman Kevin Martin deserves credit for working hard over the past several months to tee up a set of comprehensive proposals for the Commission to consider. (Of course, the Commission’s staff deserves much credit as well for its hard work.)

No doubt at all that the Commission is confronted with difficult decisions that, if they are to serve the larger public interest, which is to say, the long-run consumer welfare interest, won’t please everyone. Sure, there likely will be compromises and deals cut, and this is often a necessary part of the process of moving forward. But meaningful reform won’t be achieved and sound policy won’t be served by a pedestrian “split-the-difference” or “hold harmless” mentality.

In my view, the Commission should act boldly to adopt a unified and cost-based intercarrier compensation regime that eliminates the arbitrage opportunities that exist under the present rules. The existence of these arbitrage opportunities deters and misdirects investment and innovation to the detriment of all consumers and the general economy. And the Commission should act to implement a universal service system which targets subsidies in a much more narrow fashion than occurs under the current regime. The truth is that the universal service mission is essentially mostly accomplished with respect to provision of voice service. If broadband service is going to be subsidized, any such subsidies should be explicit, narrowly targeted to areas that lack service, and funded broadly, preferably from general revenues. Competitive bidding mechanisms, such as reverse auctions, should be employed to ensure that service is provided as economically and efficiently as possible. And the reforms must be implemented without undue delay and without long transitional periods that render them ineffectual or "obsolete-before-implemented."

The time for kicking the can down the road has past. The can is broken.

Again, I appreciate that the issues are complex and that their resolution involves making difficult choices. Nevertheless, the principles that should guide the Commission are relatively simple and fundamental.

We’ll discuss all of this at the FSF lunch seminar, “Archaic Intercarrier Compensation and Universal Service Regimes: Proposals for Reform,” this Friday at noon. For information and to register, click here.

Burying an FCC Proceeding Seven Years Later

In early 2001, the FCC initiated a proceeding to examine whether it should adopt new regulations to govern the developing technology of what it called “interactive television” or “ITV”. The notice asked hundreds of questions, including many variations of: what is interactive TV; who should be allowed to provide it; and how should it be regulated? The concern prompting the initiation of the Commission’s “interactive television” proceeding, in large part, was the recently consummated AOL/Time Warner merger. The Commission worried that a cable company, like Time Warner, that vertically integrated with an Internet services provider, like AOL, might discriminate against rival ITV providers. It worried about the potential market dominance of a new service launched by the newly-integrated Time Warner and AOL called “AOLTV” that combined video streams with data services including web content.

Put in the best light, the agency’s notice raised questions concerning the regulatory implications, in the then-emerging digital broadband environment, of the marrying of “video” and “data,” of the “television” and the “computer” screen.

With Jeff Eisenach, I filed comments in response to the FCC notice. Remember this was March 2001. In those comments, we said something worth keeping in mind today:

“In today’s rapidly changing technological marketplace environment, however, even the
launching of regulatory inquiries can do more harm than good. Initiating such inquiries may well affect – even if inadvertently – business and technology decisions as current and potential market participants assume full-battle mode in an effort to “shape the process” early on. The likelihood of the harm outweighing the benefit is more acute when the “constant” and continuous” changes to which the Commission refers make it difficult even to specify a “definition” for the potential object of the Commission’s regulatory concern.”

The comments also urged caution by the Commission in light of the First Amendment implications raised by any regime that regulates content or creates mandatory access rights. The Commission’s notice inquired about both.

Of course, we now know the FCC’s concerns that AOL/Time Warner integration might be anti-competitive were, as they say, grossly exaggerated. Anyone following Time Warner and AOL knows the marketplace, in recent years, has dictated more un-integration than integration of those companies. And, of course, in a broader sense, the market for broadband video, data, and voice services and products, sometimes integrated, sometimes not, becomes ever more competitive.

Now comes word that the FCC yesterday issued an order closing the ITV proceeding. The Commission says, wisely: “In the absence of any clear direction or consensus as to how this market may develop, it would be inappropriate to commence further regulatory action.”

Good for the FCC – even though, as I said seven years ago, the Commission should not have initiated this particular proceeding at a time when even a casual reading of the notice indicated the agency really couldn’t define the object of its concern.

And this caveat as well: The closure of the ITV proceeding is just the termination of one seven-year old docket with a particular docket number. The Commission continues to consider, in one proceeding or another with other docket numbers, imposing various regulatory mandates applicable to broadband providers, including broadband video providers, sometimes under the rubric of “net neutrality,” sometimes “a la carte,” sometimes “open access,” and whatever else have you. Even in terminating the ITV proceeding, the Commission takes pains to remind it is “without prejudice” to further market intervention if conditions warrant. The Commission should cut this sentence from its ITV termination order and post it, in large caps, above the entrance to the Portals through which all FCC regualtors must pass: “In the absence of any clear direction or consensus as to how this market may develop, it would be inappropriate to commence further regulatory action.”

And, finally, this reminder too: This Friday, September 26, FSF is sponsoring a lunch seminar entitled, “Delivering Content in a New Technological Environment: An Exploration of Policy Implications.” The seminar, which will especially focus on the policy implications of the movement to server-based technologies and away from traditional channels, for delivering video content, features Professor Steven Wildman and FCC Commissioner Robert McDowell. Who knows? They may even take a stab at defining interactive television, or explaining the difference in today’s environment between a “television” or “computer” screen. The seminar, including lunch, is free. The details are here.

Don't Confuse Financial and Communications Markets

Absent clear-headedness, the financial crisis facing the U. S. threatens more than the financial institutions that made, packaged, and resold, and re-packaged and re-sold, bad loans. It threatens to give all deregulatory efforts, however justified, a bad name. And it may threaten to give all those who reflexively favor more regulation, regardless of the circumstances, a newfound regulatory cudgel. If so, and if this reflexive approach were to be applied to today’s communications markets, it would be most unfortunate.

It may well be there have been failures of government oversight that could have prevented or ameliorated the current financial crisis, although history is likely to show that government intervention, or at least encouragement, bears some portion of responsibility as well. For example, Congress, with the Administration’s acquiescence, steadfastly encouraged Fannie and Freddie to back more and more, larger and larger home loans to those who, realistically, could not afford them. In all bubbles, the “just sign on the dotted line” mentality takes hold until bursting-time.

Due to ongoing technological innovation and past successful efforts to eliminate or reduce outdated legacy regulations, most communications markets are now workably competitive. This is especially true with respect to broadband communications. Firms formerly known as “cable television” operators and “telephone” companies are engaged in fierce competition in many places to provide integrated “triple play” packages of Internet, video, and voice services. They also provide these services on a stand-alone basis for those who don’t prefer the bundle. In its last broadband report, the FCC found that over a year ago 96% of the nation’s zip codes were served by two or more broadband providers.

Of course, the wireless firms we still often call “cellphone” companies increasingly compete in the broadband marketplace. Now you can watch many of your favorite television shows and other videos on your “cellphone,” not to mention accessing your email, stock quotes, weather reports, and favorite websites. Satellite operators HughesNet and WildBlue offer high-speed broadband service across the U. S.

For a recent announcement of one of the latest technological broadband innovations (and new ones come at you every day), AT&T’s new “HomeManager”™ “phone” caught my eye. AT&T describes the portable device, with a seven-inch color touch screen, this way:

"AT&T HomeManager provides one-touch access from anywhere in the home to a robust lineup of popular features and content, including visual voice mail, weather reports, e-mail access, local news, a portable speakerphone and more. From a broadband-enabled base station, information is sent directly to the cordless touch screen, delivering quick and easy access to relevant information."

Developed in collaboration with equipment manufacturer Samsung, AT&T says HomeManager™ “is a game-changing device that provides true convergence to wireless, wireline and Internet users.” Whether or not the new device is a game-changer, I do not know, although it seems pretty cool. I suspect that, like AT&T, the other broadband providers, like AT&T, have their own “game-changers” in the works -- constantly.

The point is that the broadband marketplace continues to evolve in a generally competitive environment in which the providers are – and, alas, must be – responsive to consumer demand. In this environment, it is such responsiveness to consumer demand that leads to the roll-out of innovative services at reasonable prices.

Government intervention in the form of imposition of legacy command-and-control regulation almost certainly will stifle the innovation and investment that currently characterizes the marketplace. Indeed, the rapid expansion in the availability of broadband service has not come cheap. Cable operators have spent well over $100 billion upgrading their systems to handle digital broadband since passage of the 1996 Telecommunications Act. To remain competitive, AT&T and Verizon reportedly have spent more than $70 billion in the last two years to expand capacity with fiber optic technology and other capacity-enhancing equipment.

This is not to say that even more competition of the facilities-based variety would not be welcome, or that the FCC has no role in facilitating such additional competition. For instance, I have urged the Commission in comments to act promptly to grant the Clearwire-Sprint applications that would allow the New Clearwire venture to construct and operate a new nationwide wireless broadband network using WiMax technology. And it is not to say there are not specific instances of “market failure” where government intervention may be appropriate. For example, in remote rural areas where there is no satisfactory broadband service, it may be appropriate for the government to provide narrowly targeted subsidies to providers through a competitive bidding process.

To continue thriving, the communications marketplace, especially broadband, does not need more regulation. Indeed, there are still many legacy regulations that should be eliminated. While the government should stand ready to intervene, if necessary, in specific instances of demonstrable market failure, it would be very unfortunate if, in the wake of the financial crisis, reflexive generic calls for “more regulation” were imported into markets which bear little or no resemblance to the financial services marketplace.

In other words, we will all be the worse off if policymakers should ever blithely assume that the causes and cures for the current financial distress provide a justification for applying heavy-handed regulation in the communications marketplace.

Don't Roam Backwards

The Federal Communications Commission is considering whether to revise the policy it adopted – unanimously – to exclude from its automatic roaming mandate requests from mobile service providers to roam in their home markets. “Roaming” occurs when a subscriber of one mobile service provider utilizes the facilities of another mobile service provider with which the subscriber has no pre-existing relationship to place or receive a call. The Commission requires that a service provider accede to roaming requests by unaffiliated carriers except where the requesting carrier has a wireless license or spectrum usage rights in the same geographic area as the would-be host provider.

In other words, there is an automatic roaming right unless both providers have spectrum rights in the same overlapping area, the requesting carrier’s home market. Of course, in that instance, the two providers are free to negotiate a mutually satisfactory roaming agreement on a voluntary basis.

Several mobile service providers and rural carrier interests have asked the FCC to revoke the home market exclusion from the automatic roaming mandate, or at least to revise it substantially to preserve the automatic roaming entitlement. This the Commission should not do. Were it to do so, it would be another instance of the agency looking backwards through the regulatory rearview mirror, rather than forwards.

Recall the reasons why the Commission adopted the home market exclusion only a year ago. According to the Commission, an automatic roaming right in the home market of the requesting carrier “does not serve our public interest goals of encouraging facilities-based service….” The agency says this is because:

"[I]f a carrier is allowed to ‘piggy-back’ on the network coverage of a competing carrier in the same market, then both carriers lose the incentive to build out into high cost areas in order to achieve superior network coverage. If there is no competitive advantage associated with building out its network and expanding coverage into certain high cost areas, a carrier will not likely do so."

The Commission’s rationale – to encourage facilities build-out by preventing mandated piggy-backing on another carrier’s facilities – is sound. It was this very reason, the deterrence of incentives to invest in facilities, which caused me to oppose for so long the agency’s “Unbundled Network Elements” network sharing regime. The Commission’s UNE network sharing rules were tilted too far in the direction of mandatory piggy-backing on the in-place facilities of incumbents.

There are certainly echoes of the long-running UNE saga in the roaming controversy. In the 1999 AT&T v. Iowa Utilities Board case, the Supreme Court held that the FCC’s UNE rules were unlawful because they required unlimited network sharing. What Justice Stephen Breyer said in his concurring opinion has particular relevance here:

"Nor can one guarantee that firms will undertake the investment necessary to produce complex technological innovations knowing that any competitive advantage derived from those innovations will be dissipated by the sharing requirement...Increased sharing by itself does not automatically mean increased competition. It is in the unshared, not in the shared, portions of the enterprise that meaningful competition would likely emerge."

Eventually, the wisdom embodied in Judge Breyer’s opinion held sway when the courts forced the FCC as a matter of law to abandon the agency’s overly expansive UNE network sharing regime. The conclusion that the regime discouraged facilities-based investment was central to the courts’ decisions.

To be sure, the facts relating to the UNE regime and the mobile roaming issue are not precisely parallel. But the same underlying principle is at issue in both instances. Mandated network sharing discourages both carriers – the one with the facilities and the one without – from further innovation and investment that lead to more robust competition. The UNE network sharing requirement, in effect, established a regulated resale mandate, and the same would be true with respect to elimination of the home market exclusion, even though the FCC sunset the mobile carrier resale obligation over five years ago.

This does not mean that the Commission might not tweak its roaming rules to allow some in-market roaming entitlement for some limited time or on some circumscribed basis if it determines that some form of narrow relief is warranted on a transitional basis. For example, if the requesting carrier’s spectrum rights are encumbered for some period of time so that, in effect, use of the spectrum by the requesting carrier is not feasible, then some form of transitional relief from the home market exclusion may be warranted.

But in reconsidering the roaming regime, the Commission should not roam backwards by adopting a UNE-style mandatory network sharing regime. When it based the home market exclusion on the principle that network piggy-backing discourages facilities build-out, the Commission too must have heard the echoes of its unfortunate UNE experience.

Going forward, the FCC should stick to principle.

"The Most Significant and Controversial Assertion of Agency Authority"

Last Friday, I moderated a panel entitled, "Net Neutrality Regulation: Perspectives on What It Means and Whether It Is Necessary," at the American Bar Association's annual meeting in New York. The program was sponsored by the ABA's Section of Administrative Law and Regulatory Practice. The presentations, and the back-and-forth exchanges among the panelists, were some of the most interesting and informative I have heard in a long while. The panelists were Marvin Ammori, General Counsel, Free Press; Link Hoewing, Vice President of Internet and Technology, Verizon; James Speta, Professor of Law, Northwestern University; and Joe Waz, Senior Vice President, External Affairs and Public Policy Counsel, Comcast.

Not surprisingly, much of the discussion centered on the FCC's August 1 action sanctioning Comcast for what the FCC claims to be discriminatory interference with Comcast's subscribers access to BitTorrent's peer-to-peer applications. When the audio of this ABA Continuing Legal Education program becomes available later, I will provide a link for those that might be interested. But, for now, I want to highlight two statements by members of the panel that struck me as very significant, and worthy of further attention and reflection.

Professor Speta, one of the nation's leading telecom scholars, teaches courses in telecommunications and Internet policy and administrative law. He is also a member of FSF's Board of Academic Advisors. Near the outset of his remarks, Professor Speta declared: "The FCC's Comcast action is the most significant and controversial assertion of authority by an agency since the FDA's effort to extend its jurisdiction over tobacco." In the course of his remarks, Professor Speta indicated that he believes, on occasion and depending on the circumstances, there may be instances of Internet service provider conduct that call for net neutrality-like remedies in the context of post hoc adjudicatory proceedings that sound in antitrust jurisprudence. But he professed considerable skepticism that the Comcast matter presented such an instance.

In any event, Professor Speta's characterization of the FCC's action as the most significant and controversial assertion of agency authority since the FDA's attempt to extend its jurisdiction over tobacco ought to give pause. In that case, even though Congress had regulated tobacco in many different ways for many years -- and had considered and rejected legislative proposals to give the FDA authority to regulate tobacco -- the FDA proceeded to assert authority by classifying tobacco as a "drug." Suffice it to say for present purposes that the FDA's regulatory grab did not turn out well. In 2000, the Supreme Court rejected the agency's jurisdictional assertion in FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120 (2000). Before the FCC acted in the Comcast case, I argued in pieces here and here that, in light of the changed circumstances since the complaint against Comcast was filed by Free Press, and the uncertainty surrounding the FCC's "ancillary" authority to regulate the practices of Internet providers, the Commission should have dismissed the complaint without prejudice.

Speaking of Free Press, Mr. Ammori made the second statement I wish to highlight. Near the beginning of his remarks, he said that one of Free Press's goals is to make communications policy "more political." Now we all know that, in practice, the FCC, a so-called independent regulatory agency, does not operate consistently in accordance with the theoretical premises of such an agency. The theory of the Progressive-era reformers who envisioned the independent agencies like the FCC was that these agencies, by institutional design, would be insulated from ordinary politics, that their largely apolitcal regulatory decisions would be guided by the institutional expertise of the commissioners and staff.

I am one who has questioned the validity of the theoretical premises of the independent agencies on separation of powers grounds. Be that as it may, query whether it really makes sense to want to make decisions such as "net neutrality" more political. This is especially so when such decisions involve, as they inevitably will, and as they do in the Comcast case, highly technical questions concerning whether certain Internet practices constitute acceptable "reasonable network management" or prohibited "discrimination." It is certainly worth pondering whether making the decisional process "more political" in cases like Comcast's enhances the quality of agency decisionmaking. I doubt that Senator Clarence Dill and the other "founders" of the FCC would think so.

The FCC's Misleading Disclosure Statement

The FCC's website contains the following statement: "The FCC does not regulate the Internet or Internet Service Providers (ISP)." Check it out for yourself here.

While the import of this statement has been "degraded" and "impaired" in various ways over the last couple of years, the FCC's action last week sanctioning Comcast in the BitTorrent affair certainly now renders the statement, to put it nicely, inoperative. Or you could say inaccurate or false. You could find other similar declarations, but this one in the Commission's news release indicates the extent to which the agency's website statement is inaccurate: "The Commission announced its intention to exercise its authority to oversee federal Internet policy in adjudicating this and other disputes regarding discriminatory network management practices with dispatch..."

In the interest of accurate disclosure, I assume the FCC fairly promptly will correct the website statement. Perhaps in the interest of the fullest possible disclosure it will even provide a link to the Comcast order.

Hard Cases Make Bad Law: On Regulatory Bits and Torrents--Part II

Back on July 17, when I first became aware that FCC Chairman Kevin Martin wanted to get a Commission majority to issue an order holding unlawful Comcast’s actions in last November’s BitTorrent affair, I wrote this piece, “Hard Cases Make Bad Law: On Regulatory Bits and Torrents.” My view hasn’t changed since then, and now we’re a day away, to steal a phrase, from Day One -- as in the first day the FCC, with a Bush-appointed chairman leading the way, may take a major step towards regulating the Internet.

The arguments that I made in the July 17 piece have been echoed in pieces in recent days by FCC Commissioner Robert McDowell, “Who Should Solve This Internet Crisis,” and the Wall Street Journal editorial board, “FCC.politics.gov.” And I just saw this July 31 letter to Chairman Martin from Republican Leader John Boehner.

Upon reflection, I think what is most disturbing about what Chairman Martin apparently is about to do is the way it is the anti-thesis of conservative, not “conservative” in a partisan political sense, but in the Burkean sense of little “c” conservatism. It is true that President Bush and many of his appointees could never fairly be accused of being Burkean conservatives, but that is too bad. And it is especially too bad when it comes to taking a step that likely will be used as a precedent for much greater regulation of the broadband Internet than even Chairman Martin likely envisions, or with which he would claim to be comfortable.

Now Chairman Martin’s allies in this matter, Move.on, Free Press, Public Knowledge, and Google, are anything but Burkean conservatives. They will freely and proudly admit that they want to radically alter the FCC’s existing general posture of creating a minimal regulatory environment for the Internet. (It must be pointed out that, under Chairman Martin’s rein, this general deregulatory posture, announced in 2002 under his predecessor, increasingly has been honored in the breach.) More and more Chairman Martin has allied himself with Move.on, Free Press, and others who want much more broadband regulation.

Now, to be clear: Unlike some, I have not taken the position that the FCC definitely is without legal authority to sanction Comcast for the Internet service provider’s actions regarding BitTorrent. It may have such “ancillary” authority, but it may well not. To my mind, the agency’s authority is questionable, especially after it proclaimed it was adopting net neutrality “principles,” not “rules.” And the courts have not been at all reticent about holding – frequently – that the FCC has exceeded its regulatory authority. This being the case, the prudent course would be for the FCC not to take what amounts to a radical step towards Internet regulation in a matter that, for all practical purposes, has been resolved. As far as I can tell, BitTorrent, supposedly the offended party, is not urging the Commission to proceed to sanction Comcast, but rather working with Comcast and others in engineering forums to develop mutually-satisfactory network management techniques. We would have a different case for the FCC to consider if Comcast had not changed its disclosure practices and then proceeded to work with others in the Internet community to address network management issues that, with today's exploding P2P traffic, are of common concern to all.

So, the reason I find Chairman Martin’s proposed action the anti-thesis of conservative in the Burkean sense, is that it is simply imprudent. For an official to exercise the government’s authority just because he or she may possess the raw power, when there is no longer a sound reason or pressing consumer or other need for such exercise, is imprudent. Indeed, in this instance, not only is there not a present need to exercise such power in light of what has transpired since last November’s BitTorrent affair, its exercise in the service of delving into what are almost universally recognized to be difficult technical network management issues, is likely affirmatively to cause harm. Taking regulatory action, likely to cause future harm in the absence of present need, on the basis on uncertain legal authority, is unconservative.