Maryland Must Fix Its Business Tax Climate To Bring Jobs and Investment

On October 26, the Tax Foundation issued its State Business Tax Climate Index. Authored by economist Kail Padgitt, the Index evaluates and provides a competitive ranking of all fifty states according to how they tax businesses. Maryland ranks near the bottom. Officials and citizens in Maryland should consider the state's abysmal Index ranking a pointed reminder of the need to foster an economic atmosphere more conducive to innovation, investment, and jobs. Right now, Maryland needs some business tax climate change.

Just as businesses compete with other businesses for customers, states compete with other states for businesses and job creation. By creating economic climates favorable to start-ups and business migrations, states benefit from increased investment, jobs, and, ultimately, state tax revenues. One significant way that states compete with each other economically is through their respective tax systems. As the State Business Tax Climate Index puts it, "[t]ax competition is an unpleasant reality for state revenue and budget officials, but it is an effective restraint on state and local taxes." Interstate tax competition, including business tax competition, is especially important in difficult economic times: "[t]his means that state lawmakers must be aware of how their states' business climates match up to their immediate neighbors and to other states."

The State Business Tax Climate Index is based on five weighted components: state corporate tax, state individual income tax, state sales tax, state unemployment tax, and state property tax.

Overall, Maryland ranks 44th in the Index for state business tax competitiveness. Although Maryland's corporate tax and sales taxes put it in a relatively competitive position relative to other states, Maryland's individual income tax index puts it near the cellar, at 49th place. A state's individual income tax factors into a state's overall business climate, as the Index relates, because "a significant number of businesses, including sole proprietorships, partnerships and S-corporations, report their income through the individual income tax code." And, "[t]axes can have significant impact on an individual's decision to become a self-employed entrepreneur." Also, "[c]omplex, poorly designed tax systems that extract an inordinate amount of tax revenue are known to reduce both the quantity and the quality of the labor pool," thereby raising business costs. Maryland likewise lands near the bottom of the pack due to its unemployment insurance tax burdens (#47) and its property tax burdens (#40).

The need for Maryland to establish and maintain a competitive position is particularly challenging considering the relative positions of its neighboring states. Virginia, for instance, stands at #12 in the state business tax climate standings. As the title of an October 21 Baltimore Business Journal op-ed reads, "Maryland will keep losing business to Virginia if lawmakers don't change." Tax reform is crucial for Maryland to attract or keep businesses that have recently opted for Northern Virginia. Overall, #44 Maryland also falls behind Delaware (#8), Pennsylvania (#26), and West Virginia (#37). And while Maryland does compare favorably to New Jersey (#48), it should be kept in mind that New Jersey may be poised to become more competitive in the future. Recent state income tax reforms in that state have moved it out of last place on the Index list—a distinction New Jersey had held for a handful of years running.

The State Business Tax Climate Index does provide a positive point for Maryland to build on:

In 2008, Maryland added four individual income tax brackets, one of which will expire at the end of 2010. With expiration of the 6.25% rate on income over $1 million, Maryland's top state-level income tax rate in 2011 will be 5.5% on income over $500,000. In combination with its highest in-the-nation county-level income taxes, Maryland's personal income tax system will still rank poorly, but its Individual Income Tax Index score will improve.

Maryland will want to do better than a poor ranking if it hopes to prevent business relocations as well as job and other economic investment opportunity losses to its more competitive neighbor states. The path to a more favorable business tax climate, however, should not be based on special tax breaks and exemptions for select companies or industry segments. Unfair favoritism and manipulation of the tax system could bring some short-term benefits to well-lobbied interests, but it can also make a state's tax system more complex, increase compliance costs, and – most importantly – do nothing to address the underlying business tax climate problem. As the Index puts it:

The ideal tax system—whether at the local, state or federal level—is simple, transparent, stable, neutral to business activity, and pro-growth. In such an ideal system, individuals and businesses would spend a minimum amount of resources to comply with the tax system, understand the true cost of the tax system, base their economic decisions solely on the merits of the transactions without regard to tax implications, and not have the tax system impede their growth and prosperity.

Maryland should keep that ideal tax system in mind when evaluating its own tax system. For the sake of Maryland's economic future, the Legislature needs to take a serious look at bringing further reforms to the way it taxes individual incomes, and also take a hard look at reforming its unemployment insurance and property tax systems. Maryland shouldn't be satisfied with losing out on jobs and economic growth because of a bottom-tier business tax climate.

Now What? New Directions in Communications Policy

Technorati Tags: FCC,Internet Regulation,Net Neutrality,Communications Policy Reform

As Barack Obama famously declared after his 2008 election, "elections have consequences."

Well, now what?

First, it should be said much of communications policymaking need not be partisan. Historically, in fact, a good deal of communications policymaking has been accomplished on a bipartisan basis – and this includes the good and the bad, and there has been plenty of bipartisan blame for the latter.

Next, forgive the sacrilege, and with apologies to FCC Chairman Genachowski and all those who (when convenient) parroted the Chairman's mantra that the new FCC would be entirely "data-driven." No. An important element of policymaking necessarily is dependent upon policy preferences and perspectives. As I pointed out in a blog as early as September 2009, as the Chairman's newly-minted "data driven" mantra even then already was being overworked, "regulatory philosophy matters a lot" in deciding how to interpret and make use of data.

I did not mean then, and do not mean now, to denigrate the value of seeking and considering data in the policymaking process. But I did mean to emphasize that it is either naïve or disingenuous to suggest that being "data-driven," in and of itself, is sufficient for the development of sound policy. It is not. It is crucial that policymakers have a proper regulatory perspective and philosophy.

I gave several specific examples in the September 2009 blog of why this is so, and concluded:

"The upshot is this: The extent to which one starts with a basic assumption that markets work better than government intervention or the other way around is part and parcel of a regulatory philosophy. Whether one embraces cost-benefit analysis, or appreciates the law of unintended consequences, or the principle of "first, do no harm" is part and parcel of a regulatory philosophy. So is the extent to which one accepts, especially in regard to communications markets, the power of Schumpeterian dynamism to change markets, as opposed to embracing a static or snapshot market view."

If "elections have consequences," and regulatory philosophy matters, again, now what?

For his part, Chairman Genachowski should abandon his proposal to impose net neutrality regulation on Internet providers. In the absence of market failure or more than a few isolated instances of even allegedly abusive practices, the pursuit of Internet regulation in the form of prescriptive neutrality mandates has been a fool's errand. In truth, the errand primarily has been spurred on by Free Press and a few like-minded allies, and FCC Commissioner Michael Copps, all of whom have a view – a regulatory philosophy if you will – that places a high priority on government control, if not ownership, of the communications media. Both Free Press and Commissioner Copps openly acknowledge they look to self-avowed socialist and Free Press co-founder Robert McChesney for direction on communications policy. On this score, lest you think I exaggerate, see my blog of this past June, "Not Mao Zedong or a Communist…But a Socialist." The American public is in no mood to look towards an avowed socialist for direction on communications policy.

Of the 95 House and Senate candidates, Democrats all, who signed the pro-net neutrality pledge, all 95 lost. Surely it would be wrong to assert that all their defeats are attributable to their pro-Internet regulatory position. But it is would be wrong too to ignore the obvious fact that there is no widespread popular support for regulating the Internet and Free Press-style government control of the media. The willingness of the "lost 95" to sign the pledge was a tell-tale sign of their anti-market perspective.

As for the Republicans now in control of the House, it would be a mistake for them to confuse undertaking proper oversight of the FCC's actions with initiation of a series of ill-conceived "investigations." What is needed by the House Republicans are not new investigations, but new directions. They need to develop a platform embracing free market-oriented communication reform. In today's competitive and dynamic communications marketplace, such reform platform is long overdue. And, obviously, such a market-oriented platform should be embraced by Senate Republicans, and by like-minded Democrats in both Houses. There is no reason why this cannot be an arena for bipartisan accomplishment. Indeed, it was President Carter and his agency appointees that, working with Congress, deregulated the airlines and railroads to the benefit of consumers. And it was President Clinton and his appointees that, again to the benefit of consumers, first articulated the policy that broadband Internet providers should not be regulated as common carriers.

As I wrote shortly before the election in, "Reforming Communications Policy: The Constitutional Underpinnings," communications law and policy would benefit greatly from closer alignment with important constitutional values. This would mean less regulation carried out under the indeterminate "public interest" standard which governs so much of the FCC's regulatory activity, and which provides agency officials with relatively unbridled discretion. And it would mean more respect for the Fifth Amendment property rights of owners and operators of communications networks and owners of media content, as well as for the First Amendment free speech rights of those subject to the FCC's regulatory reach.

FSF's website and blog contain hundreds of long papers and short pieces documenting and explaining the need for meaningful communications policy reform. And for those who want to immerse themselves further, in August 2009 Carolina Academic Press published FSF's book, "New Directions in Communications Policy." The book contains essays by eleven leading law and economics scholars suggesting various avenues of policy reform in areas ranging from broadband to spectrum, and from universal service and inter-carrier compensation reform to media deregulation.

Finally, it should be emphasized, above all, that free market-oriented communications reform would benefit consumers and our nation's economy. Through the further investment and innovation that such reform would spur, new jobs would be created. This ought to be reason enough for the new Congress, and for the FCC, to get serious about developing new directions in communications policy.

UTOPIA: A Costly Lesson in the Failure of Government-Owned Networks

Back in the news this month is UTOPIA, a broadband network venture of several Utah municipalities facing mounting debts. As recently covered in Communications Daily and other news outlets, UTOPIA member cities are considering a $60 million bailout to sustain the project. With local taxpayers potentially on the hook for even more money if the pricey bailout plan fails to make good on its promises, UTOPIA provides an unfortunate – but highly instructive – example of the financial perils of government-owned broadband networks.

Government ownership and operation of broadband networks poses potentially serious problems and pitfalls. Threshold concerns raised by government-owned broadband networks include whether government might use its taxing and rights-of-way powers to its give its own networks advantages over existing or potential private competitors, whether government has the institutional incentives and competency to provide advanced information services undergoing rapid innovation, and (particularly in the case of UTOPIA) whether taxpayers are sufficiently protected from financial failures. Whatever the potential upshots to government-owned broadband projects may be, the potential downsides should strongly caution any community against getting their government in the business of broadband business.

When it comes to government-owned broadband networks, a cautionary case in point is the struggling UTOPIA – the Utah Telecommunications Open Infrastructure Agency. UTOPIA member-city governments built and operate a fiber network, also allowing private ISPs to use the infrastructure to offer services. Launched less than a decade ago, the project was initially funded by a $185 million bond issue for which member cities have (thanks to refinancing) pledged over $500 million to back with sales tax revenue if subscriptions fall short.

In fact, subscribership has run far below the project's initial projections. UTOPIA initially predicted it would run fiber to some 70,000 homes and businesses in six of its member cities and achieve a 40% subscription rate by 2008. The Salt Lake Tribune reported this summer that UTOPIA only had around 10,000 subscribers. The Salt Lake Tribune also reported that "[i]n January, Utopia called on its member cities to begin covering the network's bond payments, something the original Utopia promoters promised never would happen."

UTOPIA has never covered its annual operating expenses. It lost $51 million alone in fiscal year 2009. One recently reported estimate put project loses at approximately $250,000 a month. The Utah Taxpayers Association claims that UTOPIA's budget projects 2011 losses of approximately $20 million.

If the ups and downs and the business failings of some telecommunications and broadband technology companies over the last fifteen years teach anything, it is that the broadband Internet marketplace is competitive and tumultuous. Some companies are winners, and others are losers. And when private broadband providers fail, private company investors and shareholders are saddled with the financial losses. But when government itself becomes a broadband provider – banking its projects with municipal bond issues and backing them with direct taxes – then citizen taxpayers are ultimately left holding the bag whenever government broadband network projects go belly up. Meanwhile, the active presence of government-owned broadband networks can discourage or delay private providers from expanding their operations or entering into the market to bring consumers competing, sustainable services.

So UTOPIA's prior losses and potential future losses should be cause enough for serious concern by UTOPIA member-city citizens. But as pointed out earlier, UTOPIA member cities have now begun deliberations on a UTOPIA bailout plan that includes an approximately $60 million bond issue to sustain the project. At least a handful of UTOPIA city governments have already pledged to throw more money into the project.

Unfortunately, some of the proffered reasons for propping up UTOPIA are less than persuasive. UTOPIA backers have made much of a feasibility study purporting to show how the chances for a turnaround are plausible if certain changes and large infusions of new money are put into the project. Keep in mind, however, that it was overly optimistic plans and studies of that kind that helped launch UTOPIA in the first place. Given how UTOPIA subscriptions and revenues have not panned out as previously planned, isn't a strong dose of skepticism warranted when considering new proposals to inject even more taxpayer money into the project?

Also keep in mind the much-cited feasibility study was performed by a private consulting company providing a variety of support services to government-owned broadband projects, including network design and build-out. This is not an imputation of bad motives behind the study, but the source does suggest an inherent lack of impartiality that should be factored in to any evaluation of the study. Not to be forgotten, Communications Daily and other outlets report that the Utah Taxpayers Association claims additional factors were not included in the feasibility study, such as potential future competition and demographic analysis of its prospective subscriber base. Given the financial stakes of a UTOPIA bailout, those claims are certainly worth exploration and could shed additional light on the study's merits.

Finally, no one should be impressed by the rationale that additional funding is necessary to save prior financial commitments from ruin. One might call it the government-owned broadband equivalent of the "too big to fail" meme. By itself, the claim in no way establishes that investing new funds will salvage a faltering business. And however one tries to answer the question of whether a $60+ million bailout of UTOPIA will, in fact, make the project sustainable, outside observers should see UTOPIA as an example of how faltering government-owned networks can back local government officials and taxpayers into a corner. UTOPIA member-cities and their citizens now have to either accept big losses or incur additional losses in the hope of cutting those losses while risking further losses if the project continues to struggle.

There may be good reason in some circumstances for government to run its own proprietary networks in order to carry out governmental functions. And there may even be instances where total lack of broadband service availability in remote areas might make limited government involvement a plausible option. (The latter seems increasingly less likely as wireless broadband and satellite broadband services continue to be rolled out.) But owning and operating broadband networks involves unpredictable capital and operating costs, market uncertainties, and financial risks that taxpayers should prefer not to be responsible for. The ongoing struggles of the dreamily-named UTOPIA should serve as a warning to others — and particularly to taxpayers — about the real-world hazards of government owning and operating broadband networks.

Reforming Communications Policy:The Constitutional Underpinnings

Technorati Tags: First Amendment,Non-Delegation Doctrine,Property Rights,Communications Policy Reform,FCC Merger Consideration,FCC

One of the chief benefits of the rise of the Tea Parties has been the increased awareness of constitutional principles they have brought to public policy debates. Whether questioning the constitutional authority for ObamaCare's compulsory individual mandate or the massive bailout of automobile manufacturers, raising such constitutional concerns is not unhealthy in a regime grounded in the rule of law. Indeed, it is unhealthy not to at least consider such concerns.

In that spirit, and in advance of Tuesday's elections, I want to offer here, in admittedly brief and broad outline, some thoughts on ways in which communications law and policy would benefit from closer alignment with widely shared constitutional values. I am not making the claim that existing constitutional jurisprudence necessarily dictates reform along the lines I advocate. It doesn't – for now.

But that doesn't mean that communications policy shouldn't be reformed in ways that do not run so much against the grain of the Founders' constitutional understandings. And it doesn't mean that, as we work to envision what communications law and policy should look like in the digital age, that we should not have in mind certain underpinnings of our Constitution.

Here are some thoughts to get started:

· The Public Interest Standard: So much of the FCC's regulatory activity is carried out under the vague and indeterminate delegation of authority to the agency to act in the "public interest." Although the Supreme Court said in 1928, and has repeated often since, that delegations of authority to administrative agencies must contain an "intelligible principle," the Court nevertheless has refused to rule that the public interest standard violates the non-delegation doctrine and is not likely to do so any time soon. This does not mean that when Congress updates the Communications Act to account for the rise digital age competition and convergence – as it should do sooner rather than later – that Congress should not provide the FCC with more specific policy direction. Under the public interest standard, unelected agency officials simply have too much unbridled discretion. And, by delegating authority in vague terms, our elected legislators escape accountability for having to make tough public policy choices. This is not the accountability to the public that our "separation of powers" framework is intended to foster. Congress should replace directives for the FCC to act in the "public interest" with explicit directives, especially commands to the agency to take into account marketplace competition.

· The First Amendment: It is time to recognize that we live in an age of media abundance and, yes, despite decades-old rote incantations to the contrary, media diversity. Legacy regulations that restrict the speech rights of media purveyors, even media operators routinely demonized as "giant corporations," are inconsistent with our free speech values. There are many examples, but in this category would fall program content restrictions still applicable to broadcasters and the "must carry" rules that require cable operators to carry local television stations.

And the incessant push for net neutrality mandates - requirements that Internet providers carry all traffic without discrimination - amounts to nothing more than a "must carry" regime for ISPs. Absent evidence of a market failure that would justify converting, either formally or as a matter of practical effect, today's Internet providers into common carriers, net neutrality mandates raise serious First Amendment issues by compromising ISPs' free speech rights. Supporters of net neutrality who claim these government-enforced non-discrimination restrictions promote free speech values evidence a profound misunderstanding: The First Amendment is intended to protect against censorship by the government, not by private entities. More than two decades ago, Ronald Reagan's FCC got rid of the Fairness Doctrine that required broadcasters to "balance" their coverage of public issues. In the digital age, we don't need anything resembling a Fairness Doctrine for the Internet.

· Property Rights: In order to encourage investment and innovation, a reformed communications policy needs to demonstrate more sensitivity to property rights than does the current regime. Property rights – protected by the Constitution's Fifth Amendment – are implicated in many ways by FCC regulation, from the proposed net neutrality regulations which would, as a practical matter, require capacity set-asides and infrastructure build-outs for carrying traffic that ISPs might prefer not to carry, to the potential for confiscatory rate regulation in the guise of enforcing non-discrimination carriage mandates. And the various existing and proposed program "access" requirements applicable to cable operators, adopted, again, in the name of enforcing non-discrimination, surely implicate the property rights of those who invest in building and operating the platforms that, in effect, are turned into semi-public utilities.

Just witness the bizarre bazaar that is the Comcast-NBCU merger proceeding, as program "competitors" seek to use the leverage of the Commission acting under the indeterminate "public interest" standard to extract conditions that require the merged entity to treat all post-merger Comcast and non-Comcast programming in a perfectly equal fashion. And witness further the claims that multichannel video providers, who presumably bargain and pay market prices to create or acquire programs that they believe will be attractive to their subscribers, also should be required to make the programming they own available to everyone on the Internet on "fair" and "reasonable" terms – to be decided by the FCC. Some of this type of government-mandated access and rate-setting arguably was justified in the more monopolistic, bygone era – but not in today's rapidly changing, much more competitive digital environment. The efforts to carry on with, or even expand, the old "fairness" and "non-discrimination" and "reasonable access" rules shows a lack of respect for the property rights of the owners of content and of the platforms in which service providers invested to distribute such content.

As stated above, this is not intended to be an exhaustive or definitive exposition of the proposition that communications law and policy should be reformed in ways that conform more closely with important constitutional values, such as protection of free speech and property rights, and separation of powers principles. Rather, it is simply a part of our ongoing project at the Free State Foundation to pay close attention to the Constitution as we continue our work looking towards meaningful – yes, even "radical" in the sense that the transition from the analog to digital age is radical – reform of our nation's communications policies.

I sense that there is change afoot, fueled in no small measure by the rise of the Tea Parties and their attention to constitutional principles, which, after Tuesday's election, may make the prospects for meaningful communications policy reform more promising.

And here at FSF we'll keep working at it.

Maryland's Pension Liability Problems Require Reforms in 2011 Session

Maryland's Sustainability Commission has finally convened. Tasked by the Maryland Legislature to analyze the state's pension and retirement benefit liabilities situation and to make recommendations on how to sustain the state's pension and retirement benefits systems, the Commission now has two October meetings under its belt. And as the most recent Commission meeting presentations (available online) make clear, Maryland has a serious pension liability problem that is getting worse and which can't be ignored or solved by overly-optimistic investment returns.

A presentation to the Commission by the Department of Legislative Services' Office of Policy Analysis points out that Maryland pension liabilities are continuing to grow. Salary increases (including cost-of-living adjustments), a 2006 retroactive benefit enhancement that added $1.9 billion to the state's actuarial accrued liabilities, and rising life expectancies are all factors contributing to Maryland's approximately $31 billion dollar pension and retirement benefit liability deficit. Also a contributing factor is the state pension fund's annual asset investment losses of 5.4% and 20% in 2008 and 2009, respectively — significantly off from the system's optimistic asset investment return target of 7.75%. As the Office of Policy Analysis presentation concludes, it is already "too late" address the funding gap for fiscal year 2012. Rather, "[s]olutions designed to reduce current funding gap must address accrued liabilities."

Some of those solutions for addressing Maryland's growing pension and retirement benefit funding shortfalls have been discussed here in recent posts, including a transition for future employees from a defined benefit plan (where the benefit on retirement is determined by a set formula rather than investment returns) to a defined contribution plan (where the ultimate pension benefit is determined by investment returns).

Now, as a report at the Washington Examiner highlighted, a Commission meeting presentation by the Maryland Department of Budget & Management indicates that recently passed federal health care legislation and accompanying regulations will complicate, and perhaps restrict, pension reform efforts in Maryland. But whatever challenges new federal health care regulation poses, the Commission should not let those challenges derail the interim report it has been directed to issue to the Governor and Legislature in time for the 2011 Maryland legislative session. Although the Commission's Chairman was reported as expressing skepticism at its kickoff meeting over whether the Commission could meet its interim report deadline, an interim report doesn't need to define definitive solutions; it only needs to include initial steps for specific and actionable solutions that the Legislature has already put off for too long.

To paraphrase the conclusions of the Office of Policy Analysis: the problem is getting worse, and it's too late simply to deal with future fiscal year funding gaps. Maryland must begin taking action to address its accrued liabilities. And such action should be a top priority for the 2011 Maryland legislative session.

Maryland Pension Problems Need To Be Addressed, Not Avoided

An excellent editorial in Wednesday’s Washington Post hit all the right notes regarding Maryland's steep public pension funding deficits. Once upon a time—that is, in 2002—Maryland's state pension was fully funded. But as the editorial points out, Maryland's financial shortfall in funding former state employee pension liabilities now exceeds $18 billion, with unfunded health-care obligations piling on another $15 billion.

With that dire $31 billion deficit in mind, the editorial provides highlights of how Maryland made a financial mess for itself when it comes to public pension funding:

• beginning in 2003, state lawmakers reduced annual payments into the pension fund
• in the latter half of the 2000s, state lawmakers increased spending on programs without attempting to meet increasing pension obligations
• in 2006, state lawmakers by increasing pension payouts to retired teachers and state workers retroactively to 1998, adding $1.8 billion to state pension liabilities over 25 years
  state pension equity investments underperformed without state lawmakers making pension fund adjustments
• the economic downturn beginning in 2008 that included steep declines in stock values without any corresponding fixes by state lawmakers to state payments further steepened the pension fund's financial imbalance

And so Maryland faces a $31 billion public pension funding shortfall. Now what?

The editorial goes on with some straight talk for state lawmakers and the commission recently tasked with studying Maryland's pension funding problem (see the blog post "Maryland's Slow-Moving Sustainability Commission"). The recommended remedial steps for Maryland include:

• moving future employees away from a defined benefit pension system (where the benefit on retirement is determined by a set formula rather than investment returns) onto a defined contribution pension system (where the ultimate pension benefit is determined by investment returns)
• phasing in over the next decade a that full payments be made for public pensions
• transferring a portion of retired teachers' pensions to local governments that incur long-term debts for the state through negotiated agreements between local school boards and teachers unions

One can also add that nothing should stop Maryland lawmakers from considering those steps—particularly modest increases on annual state payments to public pension funds—even before the Sustainability Commission issues its reports. If it's too much to ask lawmakers to solve Maryland's public pension problems, can't they at least be expected to hold the line on public pension liabilities and keep the situation from growing worse?

The editorial acknowledges that “[a]ny or all of these steps will be difficult and require leadership." But that is precisely what leaders are elected to provide. And the steps will only more difficult if Maryland lawmakers continue to avoid the state's pile of pension debts.

"The Liberal I Aspire To Be"

In our post-modern political lexicon, what it means to be a classical liberal in the Enlightenment sense of the term has been lost, or, worse yet, deliberately perverted. So it is almost a hopeless task to try to explain why views that were considered classically "liberal" at the time of our nation's Founding -- before Progressive Era and New Deal ideas uprooted previous constitutional understandings concerning the relationship of the individual to the state -- are now called "conservative". This is too bad.

But here is what new Nobel Prize winner Mario Vargas Llosa said at the American Enterprise Institute in 2005:

“Thus, the liberal I aspire to be considers freedom a core value. Thanks to this freedom, humanity has been able to journey from the primitive cave to the stars and the information revolution, to progress from forms of collectivist and despotic association to representative democracy. The foundations of liberty are private property and the rule of law; this system guarantees the fewest possible forms of injustice, produces the greatest material and cultural progress, most effectively stems violence and provides the greatest respect for human rights. According to this concept of liberalism, freedom is a single, unified concept. Political and economic liberties are as inseparable as the two sides of a medal.”

If only all of today’s self-described “liberals” subscribed to this eloquent statement of what classical liberalism means, I, with Vargas Llosa, would aspire to be one too. And we would be in the good company of Adam Smith, John Locke, Montesquieu, Thomas Jefferson, and James Madison.

Congratulations to Mario Vargas Llosa for his Nobel Prize, and thanks to the Heritage Foundation’s Insider for highlighting the quote.

Scott Cleland on Google TV

 

Scott Cleland has another excellent piece on Google – this time on Google TV and Google’s significant video presence on the web. Indeed, armed with lots of facts and figures, as usual, you might conclude with Scott that Google is the dominant Internet video distributor.

Here is the link to Scott’s piece, which is well worth reading:

http://precursorblog.com/content/google-tv-dumb-content-vs-content-king

Broadband Legislation and Net Neutrality Regulation: Where We Stand and What Ought to Come Next

Now that Congress has recessed until at least after the November elections, it is a good time to assess where things stand now, and what ought to come next, with regard to the proposals for government-imposed net neutrality regulations.

Since shortly after the D.C. Circuit's Comcast decision last April, which strongly casts doubt on the Federal Communications Commission's authority to regulate Internet service providers, I have said that, if the FCC is to take any action at all to impose net neutrality mandates, it should do so only if Congress explicitly grants it such authority. And I have suggested that any such legislation granting the FCC authority to regulate the practices of Internet providers should be narrowly circumscribed. In mid-June, I suggested model language, which you can find here, to accomplish this purpose.

Under my proposal, the FCC would be given authority "to prohibit broadband Internet service providers from engaging in acts or practices that are determined to constitute an abuse of substantial, non-transitory market power and which cause harm to consumers." And the agency's rulemaking authority would be narrowly circumscribed; its authority over broadband providers would be exercised primarily through adjudication of individual complaints alleging abusive practices.

Importantly, I have urged since the day after the Comcast decision that, while Congress deliberates on broadband policy in the post-Comcast environment, the Commission should suspend consideration of all proposals to impose net neutrality mandates by administrative fiat. This certainly includes consideration of Chairman Julius Genachowski's "Third Way" proposal which would classify broadband Internet providers as common carriers under Title II of the Communications Act. Title II is the regulatory regime that applied to Ma Bell and other dominant telephone companies last century when narrowband providers operated in a monopolistic environment.

Last week, a draft bill written by House Energy and Commerce Chairman Henry Waxman surfaced. In a statement issued shortly thereafter, I said that the draft bill contained "positive elements" and that "[o]verall, the draft bill provides a basis for Congress moving forward to consider adoption of broadband legislation that gives direction to the Commission." And, I emphasized, "[i]n the meantime, it certainly doesn't make sense for the FCC to act on its own."

I identified as positive elements the bill's requirement that the FCC enforce net neutrality requirements through adjudication of individual complaints and not rulemaking; its recognition of the importance of allowing Internet providers to engage in reasonable network management practices; its prohibition on the FCC's continuing its rulemaking to classify Internet providers as common carriers under Title II; and the bill's December 2012 expiration date.

In contrast to these positive elements, I expressed concerns about the bill's provision prohibiting wireline broadband Internet providers from "unjustly or unreasonably discriminat[ing] in transmitting" traffic. I said that if the discrimination provision were interpreted "too rigidly by the FCC, this legacy common carrier-type restriction can inhibit development of new, differentiated services in response to evolving consumer demand." Therefore, I urged that "any discrimination prohibition should explicitly require a showing of consumer harm as a prerequisite to any agency remedial action."

In the few days remaining before the congressional recess, without the prospect of any hearings or time for further deliberation, no Republican signed on to Chairman Waxman's draft, and he did not actually introduce it as a bill. Instead, he issued a statement outlining the provisions of his draft, and his statement concluded in this way: "I do not close the door on moving legislation this Congress….If our efforts to find bipartisan consensus fail, the FCC should move forward under Title II. The bottom line is that we must protect the open Internet. If Congress can’t act, the FCC must."

So, this is where things stand now in the long-running net neutrality saga (some might say soap opera). The question is: What ought to come next?

Here's my view.

Although I do not believe Chairman Waxman's draft bill should be enacted into law without modifications, I do think, as I said, that it contains positive elements and provides a basis for continuing legislative efforts. The circulation of the draft should have the effect of clarifying, perhaps in ways both intended and unintended, certain fundamental principles that should guide the way forward.

First, the draft bill should cement the bipartisan consensus that has been growing steadily since the April Comcast decision that the FCC should not adopt net neutrality mandates in the absence of legislation granting the agency the authority to do so. No one is arguing that there is any present market failure or existing pattern of abusive practices causing consumer harm that requires immediate remedial action. Chairman Genachowski speaks of the need to "preserve the freedom and openness of the Internet." Even Free Press, the most ardent, vociferous net neutrality advocate, says the government needs to act "to ensure that the Internet remains open for everyone." In other words, the claim of net neutrality advocates is not that it is urgent for new laws or regulations to be adopted to remedy a market failure that has led to a closed Internet; rather they want to take action to, in their words, ensure that the Internet remains open in the future.

In this circumstance, and having in mind the law of unintended consequences and the principles of cost-benefit analysis, a persuasive case can be made that neither the FCC nor Congress ought to take any action regarding net neutrality unless and until a marketplace failure manifests itself or consumer harms become evident.

But assuming the three member Democrat majority at the FCC continues to threaten, albeit ill-advisedly, to impose net neutrality mandates, it makes sense for Congress to continue its efforts to fashion appropriate legislation. Because as long as there is the prospect that Congress may legislate in this area, it ought to be unthinkable for the agency to charge ahead with the ill-conceived Title II classification proposal that would convert Internet providers into common carriers.

Finally, an important point on developing legislation. Consistent with the model language I suggested in June, the troublesome provision on discrimination in the Waxman draft bill should be replaced with one that requires proof that the Internet provider alleged to have committed a discriminatory practice possesses substantial market power and that the alleged abusive practice causes consumer harm. This heightened standard will require the FCC, before imposing any regulatory sanction on an Internet provider, to engage in a rigorous economic analysis that explicitly takes into account marketplace competition and general consumer welfare. Despite any conclusions to the contrary that the major Internet providers may have reached, I fear that, absent such a rigorous standard, the FCC will be left with overly broad discretion to regulate Internet providers in ways that may stifle innovation and investment.

***

Well, there you have my views on the way forward. And, from my perch running a free market-oriented think tank, I certainly hope they are persuasive. Be that as it may, I don't get to write the communications laws; just try to persuade. But the Hill folks who do have an awful lot of sway over writing the communications laws will be the featured speakers at the Free State Foundation lunch seminar on October 12. All the event details are here. I am sure we will have a spirited discussion concerning what broadband legislation should look like, including plenty of audience participation.

If you wish to attend the seminar and haven't already registered, you can RSVP Susan Reichbart at: sreichbart@freestatefoundation.org

Technorati Tags: Net Neutrality,Broadband Regulation,FCC,Internet Regulation

IPI’s Communications Summit

 

As usual, it looks like my friends at IPI have a good communications conference in the works. It is next week on Wednesday, October 6, in DC. There is a good line-up of speakers on the important communications topics of the day. Get the details here. As you’ll see, there is a free reception the night before to boot.

If you’re free, it should be worth your while to attend.

Model Transparency Act Should Point the Way for Maryland

The American Legislative Exchange Council (ALEC), a free market-oriented member organization of state legislators, recently adopted new model legislation that sets some baseline government transparency standards. Maryland should consider either adopting ALEC's Transparency and Government Accountability Act or measuring its current open public records practices against ALEC's model and making changes to state law to bring greater governmental transparency.

The focus of ALEC's Transparency and Government Accountability Act is on having state governments make more records available to citizens online in a free and accessible format. Although states have their own Public Records or Freedom of Information Acts (FOIA) – such as Maryland's Public Information Act – those statutes essentially place the burden on citizens to make requests for records and pay appropriate fees in order to obtain access to public information.

And records requests sometimes encounter government officials' stonewalling that includes state-claimed exemptions or privileges from disclosure that ultimately require repeated requests or even litigation to resolve. When states require public disclosure of information as their default practice they provide citizens with easier access records from the outset. This reduces the frequency of citizens having to request records, and also reduces the administrative costs of government in responding to individual requests.

The Sunshine Standard, a website providing tools for improving government transparency, has made the model legislation available at its website. In particular, the ALEC model requires states to maintain an official, searchable website using a consistent domain that makes available a variety of information, including: open public meetings laws, schedules, and agendas; budget information, including spending and revenue information and state payments, elected official and administrative official information; state ethics laws and ethics commission process and enforcement information; state auditing information; government contracting and procurement information; lobbying registration and state agency lobbying contractual information; and state FOIA information.

Maryland transparency laws already make a lot of this information available. For instance, the Maryland Attorney General's office has a page dedicated to the Open Meetings Act, providing access to the laws, information about the Open Meeting Law Compliance Board, and an Open Meetings Act Manual. Likewise, the Maryland Department of Budget and Management provides access to considerable state budget information as well as government contracting and procurement information. And Maryland's Office of Legislative Audits provides information online. For instance, the website of the Maryland's State Ethics Commission is not especially user- or information-friendly, with a confusing advisory opinions section. What's more, whereas the ALEC model calls for information to be posted online about the status of investigations and enforcement actions, Maryland law requires that such investigations and enforcements be strictly confidential until final orders are issued. So no status updates can be found on the State Ethics Commission's site. In any event, Maryland does not currently make the information it already provides available at or linked from a consistent website domain as called for in the ALEC Model.

What's more, providing search indexes could also allow citizens to better analyze disclosed data. Insights can often be drawn from cross-referencing existing records, in particular. For example, a searchable site could provide an easy way to gain information about how much money a government contractor donated to the campaign of an elected official. Consideration of the ALEC model should also prompt states such as Maryland to consider not only making additional information more easily obtainable but also to revising their agency practices to become more transparent and open.

Of course, any comprehensive approach to government transparency should also include local governments. Citizens have often encountered enormous obstacles to obtaining access to government information at the local level. (See, for instance, this Washington Post op-ed from earlier this year, "Maryland's Fake Open Government.") Since counties, cities, and other governmental subdivisions are routinely delegated taxing, condemning, zoning and other regulatory powers, those local governments should adhere to standards of transparency too. States seeking to revamp and expand government transparency in light of ALEC's model should at the very least also consider applying it to local governments where relevant and where possible.

Transparency and open government should be an easy issue for bi-partisan and cross-ideological agreement. ALEC's Transparency and Government Accountability Act provides an excellent framework for states to consider. Maryland citizens could stand to benefit from a re-examination of their state's transparency laws and practices in light of the new ALEC model legislation.

The Virtue of Proceeding Cautiously

Free Press lately has taken to attacking FCC Chairman Julius Genachowski for not yet adopting net neutrality mandates to regulate Internet service providers. The most recent attacks, increasingly personal, are ill-conceived. And, joined as they are by acts of street theatre, they do not contribute constructively or in a serious way to the regulatory debate.

For example, last week Free Press and other pro-net neutrality advocates protested in front of the FCC's headquarters by handing out waffles as they trumpeted their “Don't Waffle on Net Neutrality Campaign!" In a press release, Free Press admonished Chairman Genachowski to "stop waffling and get to work."

There is no need to say much about the street theatre other than to make the obvious point that, while Free Press has every right to protest outside the FCC's headquarters with waffles and signs, the FCC commissioners should not be influenced by such antics. Their decisions must be governed by the facts, by the law, and by sound regulatory principles and policy perspectives.

With this in mind, this statement in the Free Press release particularly struck me: "The public can’t afford to wait much longer for the FCC to stop waffling and move forward on enacting real Net Neutrality rules to ensure that the Internet remains open for everyone.” This claim immediately raises the question: Why the need for any administrative action, much less the need for quick action, especially as Congress is actively considering broadband legislation.

Free Press says the public "can't afford to wait much longer." Why? There is no evidence that the Internet services market suffers from a market failure or that consumers are experiencing any demonstrable harm as a result of the absence of Internet regulation. There is no evidence, in Free Press's words, that the Internet presently is not "open for everyone." And there is no reason to believe, consistent with the workings of the marketplace, that the Internet will not remain open.

Indeed, surveys indicate that consumers generally are satisfied with their Internet service. A poll released last week by Broadband for America, a group supported by major Internet service providers, indicates 75 percent of the survey respondents said that "the Internet is currently working well." And 55 percent responded that "the federal government should not regulate the Internet at all." The FCC's own survey released last June showed that 91 percent of broadband users are either "very" or "somewhat" satisfied with the speed of their Internet service at home.

Amidst this sea of reported consumer satisfaction, it makes no sense for Free Press to lambast Chairman Genachowski for failing to adopt a new regulatory regime for the Internet, especially one akin to the rigid common carrier regulation traditionally applied in a monopoly environment or in cases of market failure. If anything, Genachowski should be commended for now recognizing the virtue of proceeding cautiously – if indeed he truly has recognized such virtue – in light of the risks to continued infrastructure investment and innovation that his Internet regulation proposals entail.

Over the weekend, in rummaging about old papers, I came across this statement from the landmark 1978 "Study on Federal Regulation" prepared by the Senate Committee on Governmental Affairs: "Simply because a problem exists and, in theory is remedial, does not mean that regulation or other government intervention is desirable. Controls should only be undertaken where there is a clearly identified problem that cannot otherwise be solved, and where the anticipated achievements are significant and not vitiated by projected adverse consequences." While there are various formulations of the cost-benefit analysis that should be an integral part of an agency's decision regarding whether or not to adopt any new significant regulation, the statement above is surely a good one.

But please note the requisite predicate for proceeding with any agency regulation at all: that "a problem exists" or "there is a clearly identified problem." With respect to the proposals for government imposition of net neutrality mandates, absent a clearly identified problem, the case for regulation fails at the outset. And, thus, so does the unwarranted charge of waffling.

There is vice in rushing to regulate absent a clearly identified problem. And there is virtue in proceeding cautiously when considering intervention in a marketplace that is working well.

Technorati Tags: Net Neutrality,Broadband Regulation,Internet Regulation,FCC

Government Shouldn't Design Devices in Dynamic Markets

Last week the National Association of Broadcasters (NAB) continued its push to have government require that FM receiver chips be embedded in wireless devices. Apparently, NAB seeks a forced-access technology mandate by which Congress would require one media delivery platform – FM broadcasting receivers – be fused into the physical devices of a competing media delivery platform – wireless devices. And this despite the fact that MP3 players, including iPods, typically carry FM receivers and that wireless innovation has led to the availability of smartphone applications that allow access to FM broadcasting. In other words: "There's an app for that."

NAB released a poll suggesting that consumers would be willing to pay a small amount in order to have FM receiving capability in their wireless devices. NAB's poll comes in the wake of summer lobbying efforts surrounding the Performance Rights Act (H.R. 848 and S.379). Reports indicate that NAB seeks an amendment to the pending legislation that would include an FM chipset mandate being imposed on wireless manufacturers.

Wireless devices designed with FM receiving capabilities may, in fact, have strong appeal with consumers. But that should be something for the market to decide. Designing commercial media technologies should not be the business of Congress or bureaucrats. This is especially so in dynamic markets where rapid innovation is a constant and government technical mandates can be quickly rendered obsolete by new market developments. Not to mention the fact that the politically driven design decisions made by government can easily thwart the market-driven design decisions made by private enterprise. Wireless manufacturers design devices with all kinds of functionality trade-offs in mind. Balancing complex technological and financial constraints requires freedom to experiment and innovate. Unfortunately, the idea of a wireless FM chipset mandate fits a too-familiar pattern of government technical mandates that artificially prop up a technology market segment to the exclusion of genuine, dynamic market supply and demand.

Consider another example of intrusive government technical mandates currently being imposed on the video marketplace. The FCC's ongoing efforts to expand regulation of video navigation devices fit this mold of government-imposed mandates for technological devices premised on a static view of the market rather than a dynamic view. As I point out in an April blog post "National Broadband Plan: A Setback On Set-Top Box Regulation," the FCC first set out its government reengineering and managed competition ambitions for video navigation devices in the National Broadband Plan. And over the course of the spring and summer, the FCC has begun its implementation.

First, the FCC issued a notice for public comment on a proposed new set of CableCARD regulations concerning cable set-top boxes. CableCARDs are small physical devices created as a result of prior rounds of FCC regulation-induced negotiations with the cable industry. Provided to consumers by cable operators, CableCARDs contain security functions that can be inserted into the video navigation devices of independent set-top box manufacturers so that those devices can be used to access cable programming. (Cable operators are also subject to an FCC-imposed "integration ban" that prohibits them from combining video navigation and security functions in their set-top boxes. They are instead required to make use of CableCARDs to provide security functions for the set-top boxes they lease to their customers.) Based on its notice, the FCC will eventually issue new interim rules that will govern CableCARDS until a promised new regulatory regime is put in place.

Second, the FCC issued a Notice of Inquiry seeking comment on specific requirements for an expanded video navigation device regulatory regime that will apply to all multichannel video programming distributors (MVPDs). The FCC intends to require that all MVDPs install a "gateway device or equivalent functionality" in all homes using video navigation devices by the end of 2012. By year's end the FCC will follow up with a Notice of Proposed Rulemaking that will distill the new technical mandates for video navigation devices with which all MVPDs must eventually comply.

The FCC has premised these new regulations largely on the argument that a competitive set-top box market has not emerged as was originally contemplated by the Telecommunications Act of 1996. But a serious problem with the FCC's policy is that it insists on giving consumers something that they may not want. Consumers often find it convenient, for instance, to lease cable set-top boxes from their cable operator as part of their overall cable package. This saves consumers a trip to the store to purchase a set-top box from an independent manufacturer. It also saves consumers the effort of buying a new set-top box should they decide to upgrade to a better product that includes high-definition picture or digital video recorder service.

In addition, set-top boxes may become much less prevalent or even largely irrelevant in the years ahead. Some cable operators, such as Cablevision, are looking to offer video programming services without set-top boxes by transferring functions to cable head ends. Overly aggressive regulation could potentially thwart those kinds of technological advancements.

Another problem with the FCC's policy is that it looks for competition in the wrong place. Late 2010's video marketplace is nothing like 1996's video marketplace. In addition to cable service, consumers now enjoy competition from two national direct broadcast satellite (DBS) providers. Telcom MVPD entrants also offer competitive service packages in many places. And some consumers are using video gaming devices or direct broadband connections through their PCs – or even through their wireless devices – to obtain video services and programming. The fact that the FCC now intends to expand regulation to DBS and telco MVPDs implies that it now sees a variety of device substitutes available to consumers.

However, the FCC seems to be making a liability out of an asset with its plans to apply video navigation device regulation to all MVPDs. As a general matter, the FCC mistakenly treats MVPD competition as grounds for new regulation for all video navigation devices rather than as the competitive basis for deregulation of cable set-top boxes. And, in particular, the FCC wrongly insists on expanded regulation to sustain a government-managed niche market for video navigation devices for cable, DBS and telco video services when the viability of that niche market has arguably been undermined by dynamic market changes.

Undoubtedly, those dynamic changes that have taken place in the video market since 1996 require a new and different policy approach to cable set-top boxes. But that policy approach should be deregulation as a means to further video innovation and competition between cable, DBS, telco MVPDs, and any other potential emerging competitors. Importantly, Section 629 of the 1996 Act, fairly uniquely, gives the Commission the power to sunset set-top box regulation when the MVPD and set-top box markets are fully competitive and when elimination of regulations would promote the public interest. Federal law puts it within the FCC's power to bring about device deregulation. The Commission should exercise this power that Congress has conferred.

Dynamic market developments and existing law support deregulation for cable set-top boxes and cable providers rather than the imposition of government-mandated and designed navigation devices. In the same vein, Congress should not adopt FM chipset mandates for wireless devices.

The lesson here is that Congress and the Commission should say no to mandating designs for advanced communications and information services devices in dynamic markets.

FCC Should Take Broadband Pricing Flexibility Seriously

The FCC's Further Inquiry in its Open Internet proceeding seemingly continues its nearly year-long trek towards imposing net neutrality regulation on Internet service providers. And yet its Further Inquiry perhaps suggests a new receptivity by the agency to more flexible broadband pricing arrangements. Its latest Public Notice seeks public comments responding to questions that include wireless broadband pricing. The Notice appears to indicate some realization by the FCC about the potential benefits of flexible broadband pricing models. But at the same time, the Notice raises its own questions about whether the FCC fully grasps the implications of that realization.

In its brief references to broadband pricing, the Notice observes that "[m]obile broadband service providers such as AT&T Mobility and Leap Wireless (Cricket) have recently introduced pricing plans that charge different prices based on the amount of data a customer uses." The Notice adds that "[t]he emergence of these new business models may reduce mobile broadband providers' incentives to employ more restrictive network management practices that could run afoul of open Internet principles." And the Notice goes on to ask for public comments in response to the question: "To what extent do these [usage-based data pricing] business models mitigate concerns about congestion of scarce network capacity by third-party devices?"

The Commission should be complimented for this nod toward pricing flexibility and usage-based pricing, in particular. Usage-based or metered-billing models can serve as efficient methods for network operators to address bandwidth capacity limits and to make optimal use of existing infrastructure. Better yet, such pricing allows consumers to pay only for the amount they use – meaning that low-volume Internet users who primarily use the Internet to check e-mail or follow friends on Facebook would pay less than high-volume users who routinely send and receive data-rich files such as music or high-definition video. Consumers respond to pricing signals. That is a fundamental economic truth. Usage-based pricing is something that consumers are accustomed to when it comes to a variety of other goods and services. But one is hard pressed to know whether the Commission appreciates that fundamental economic tenet.

Many of these same points about usage-based pricing were aptly made by FSF Distinguished Adjunct Senior Fellow and former FCC Commissioner Deborah Taylor Tate in her FSF Perspectives essay "Paying For Use Is Fair":

Consumers should be able to take control of their own consumption of broadband just as they have for other electronic commodities, and in some cases, they could reduce their monthly broadband service. At least consumers should have the option to utilize a metered approach if they want. This type of transparency in billing, along with providing education and outreach to consumers, should be the goal of policymakers and providers alike.
…
Broadband providers -- just like wireless providers -- should be allowed to use a consumption model without government interference as long as consumers know and understand what they are paying for.

But consider what should be a basic implication of the Commission's acknowledgment of the benefits of usage-based pricing models in the wireless context. Namely: those same benefits from usage-based pricing for addressing network scarcity, consumer preferences, and "reduc[ing] mobile broadband providers' incentives to employ more restrictive network management practices" should apply to broadband networks generally. But has the FCC faced up to the fact that once it recognizes the benefits of usage-based pricing for wireless broadband, it follows that similar benefits should obtain in the case of wireline broadband? A reading of the Notice suggests not.

Instead, there remains a disconnect between the Notice and the "nondiscrimination" regulation proposed earlier in the Open Internet proceeding. According to the Commission's proposed "nondiscrimination" regulation, "a broadband Internet access service provider may not charge a content, application, or service provider for enhanced or prioritized access to the subscribers of the broadband Internet access provider." Under the proposed "nondiscrimination" regulation, an ISP attempting to employ usage-based pricing would be burdened with having to prove to the Commission that its pricing model is "reasonable network management" according to the Commission's own judgment. Such a regulatory regime is hardly welcoming to broadband pricing flexibility that is responsive to consumer demand. (For more on the proposed regulation, see comments FSF submitted to the FCC in January as part of this proceeding.)

The likelihood of a plethora of complaints filed under the Commission's proposed "nondiscrimination" regulation challenging usage-based pricing would be a foregone conclusion. The hostility of would-be complainants to such pricing was on full display, for instance, when TimeWarner Cable unveiled a (subsequently quickly scuttled) plan to introduce metered pricing for its broadband services. Free Press howled about the plan and ex-Congressman Eric Massa even introduced a bill to saddle broadband ISPs with a Federal Trade Commission rate case regime to strictly control broadband pricing. (For more see FSF President Randolph May's FSF Perspectives essay "The 'Free Lunch' Free Press" and blog post "The Federal Internet Rate Regulation Commission"). It is unlikely that usage-based pricing models would emerge under a regulatory regime that would submit such pricing to overblown attacks as a part of public proceedings.

If the Commission were truly to recognize the fundamental role of pricing plans in free market commerce as a means to bridge scarcities of goods and services with consumer demand, it would opt for service provider pricing flexibility as the ideal approach over a detailed regulatory apparatus. But, as it now stands, the FCC's recent Notice hints at broadband pricing flexibility while its proposed regulation still points toward onerous pricing restrictions.

Hopefully, the Commission's apparent recognition of the benefits of usage-based pricing in one particular context will lead it to recognize these benefits in all contexts instead of opting for arbitrary, selective price regulation.

Constitution Day at the FCC

Technorati Tags: First Amendment,FCC,Constitution Day,Free Speech,Property Rights

Today we celebrate Constitution Day. On September 17, 1787, thirty-nine delegates to the Constitutional Convention, after meeting in Philadelphia through a long hot summer, signed the new Constitution. Just 223 short years ago.

It is well to have the Constitution in mind every day, of course. But on Constitution Day it is especially appropriate. Here at the Free State Foundation, we have always considered education concerning a proper understanding of the Constitution an important part of our work on communications policy issues. Even more than with respect to most other federal agencies, the Federal Communications Commission's regulatory activities implicate constitutional concerns, such as proper regard for property rights, adherence to due process, and, especially, the protection of free speech.

Indeed, historically, there has been an inherent tension between FCC regulation of communications and the First Amendment rights of regulated entities. So, on this Constitution Day, I would like to call to your attention my latest article on the subject, "Time for the FCC to Respect the First Amendment," which appears in the new edition of the Heritage Foundation's The Insider magazine.

The article's title is a deliberate giveaway of my perspective that, all too often, the FCC's actions impinge directly on First Amendment rights, or at least chill their exercise. Here are a few excerpts from the article, which I hope many of you will read in full:

"With the transition from the analog to the digital age, and the proliferation of new media outlets, you might expect that the FCC would eliminate many of its outdated forms of regulation, including those that threaten free speech rights. You would be wrong. Indeed, in several respects, the FCC is acting, or proposing to act, in ways that would enhance its regulatory oversight of speech. The agency wants, for instance, to impose network neutrality restrictions on Internet providers – sort of like a digital must-carry mandate. Meanwhile, the agency's 'Future of Media' project appears ready to provide justification for more government control of private media and more government funding for public media. And don't forget the agency's maintenance of outmoded speech regulations such as cable must-carry rules."

"While President Obama's FCC Chairman Julius Genachowski and other net neutrality advocates claim the regulations would promote free speech values, in fact they turn the free speech guarantee of the First Amendment on its head. Government-enforced neutrality mandates likely will violate the Internet providers' First Amendment rights. Like newspapers, magazines, movie and CD producers, or the man speaking on a soapbox, Internet service providers possess First Amendment rights."

"In today's environment, we do not need, and should not want, government-supported or government-controlled media acting as a 'filter' or a 'megaphone,' or deciding what programming is in the 'public interest.' Such 'filtering' or 'megaphoning' necessarily involves the government in making decisions based on content. How else to decide what information should be filtered or amplified to meet some 'public interest' objective? This government involvement in content selection runs against the grain of our First Amendment values."

In all their actions, and in conformance with their constitutional oath of office, the FCC commissioners should square their decisions with the First Amendment's intent to protect the speech of private citizens from government interference. In today's digital environment, with the proliferation of media sources, this means the FCC needs to shed its ingrained analog-era mentality that has led to an understanding of its role as enforcing "fairness" or "balance," or achievement of ill-defined and questionable "public interest" objectives.

In a law review article, "Charting a New Constitutional Jurisprudence for the Digital Age," published in 2009, and cited shortly thereafter by Justice Clarence Thomas at page 5 in his concurring opinion in the Supreme Court's Fox Television case, I concluded:

"Perhaps it was predictable, maybe even likely, that the First Amendment’s protections would be limited substantially during the twentieth century’s Analog Age that tended towards a monopolistic or oligopolistic communications marketplace. But now, in the face of proliferating competitive alternatives attributable to profound marketplace and technological changes, it ought to be considered predictable and yes, even likely, for the

Court to establish a new First Amendment jurisprudence befitting the media abundance of the twenty-first century’s Digital Age."

I leave you with thoughts of the First Amendment on Constitution Day – and wish you a reflective one!

Maryland's Slow-Moving Sustainability Commission

With the State of Maryland now facing some $18 billion in unfunded liabilities for state pension benefits plus another $15 billion in unfunded retiree health benefits, the commission created to examine state employee and retiree pensions and benefits is finally set to meet. Almost.

According to an article in yesterday's MarylandReporter, staffers will meet today to set out a meeting schedule for the Public Employees' and Retirees' Benefits Sustainability Commission. A first meeting is slated for later this month—or next month. As MarylandReporter also details, Sustainability Commission members actually hope to complete their interim report by their year's end deadline.

The new Sustainability Commission was created as part of the 2010 budget conference committee compromise. But as pointed out in an April blog post by Cecilia Januszkiewicz ("A Fig Leaf For Maryland's Fiscal Folly"), this isn't the first time the Maryland legislature has dodged the decisions that ultimately need to be made by turning the issue over to an outside commission for further study. The Maryland Legislature's evasion of responsibility on the issue goes back at least as far as its decision in the 2005 session to create a Task Force to study the state's pension liability problems. Anyway, the 2010 compromise ultimately rejected the Maryland Senate's proposal to make some changes to pension and benefit funding. The Maryland Senate's proposal, in turn, came in the wake of a report from the predecessor Sustainability Commission about ways to ensure the long-term viability of the state's pension system. So here they go again.

That said, MarylandReporter's coverage highlighted public employee unions' opposition to any possible increases in employee contributions or cuts in benefits. Curiously, one public employee union representative asserted the need for a long-term perspective instead of a snap-shot view and downplayed the seriousness of Maryland's multi-billion dollar pension deficit. But this sounds like little more than a "the-problem-will-fix-itself" approach that no responsible Maryland official or taxpayer should take seriously. And it was reliance on a snap-shot view from an earlier time that included a more robust economy and a full state treasury that played a big role in the overspending and overly-optimistic rate-of-return projections that led to the budget and pension liability woes that the state now faces.

The Sustainability Commission's presumable interim report would be followed up by another report…in 2012. Should the final report be prepared and delivered on time, then the Maryland Legislature would finally be faced once again with making changes to the state pension system for fiscal year 2013. Don't expect Maryland's pension liability problem to fix itself before then.

Googleoply IV – And Counting

 

Scott Cleland has another in his series of papers exploring how, in his view, Google is monopolizing the consumer Internet media. As usual, it is full of facts and figures.

Scott knows about as much about what Google is up to as anyone who is not not on the inside – and, I’m sure more than many who are.

His “Googleopoly IV” may be found on his blog here. If you are interested in following Google’s exploits, it is must reading.

High-Level Rules Should Mean No Low-Level FCC Micromanaging

Earlier this month, the FCC issued the latest Public Notice in its nearly year-long march toward regulating the Internet through network neutrality mandates. The Commission's Further Inquiry claims that public discussions have narrowed the scope of disagreement over regulating broadband network management practices. And the request for additional public comment purports to clarify remaining issues under debate. But contents of the Notice itself leave one wondering if the Commission really intends to act within the scope of these supposed new areas of agreement.

In a couple of respects the FCC can be commended for issuing its latest Inquiry. First, by requesting further comments, the FCC's action suggests it is not acting in as much of a rush to impose new Internet regulation as may have been thought. As FSF President Randolph May recently stated upon issuance of the Notice, there is no immediate urgency for the Commission to act on Chairman Genachowski's "Third Way" proposal. Rather, "[s]eeking further comment on the issues relating to specialized services and wireless platforms can only serve to further clarify the issues and, potentially, bridge differences."

Second, the FCC's Public Notice suggests an apparently new recognition by the Commission that case-by-case enforcement of more general, so-called "anti-discrimination" policies offers a more plausible approach to network management regulation than adoption of a set of specific, technical rules to be imposed on broadband Internet access services. In the words of the Notice, "discussion generated by the Commission's Open Internet proceeding appears to have narrowed disagreement" on the idea that "in light of rapid technological and market change, enforcing high-level rules of the road through case-by-case adjudication, informed by engineering expertise, is a better policy approach than promulgating detailed, prescriptive rules that may have consequences that are difficult to foresee."

But there also seems to be less than meets the eye with these Public Notice "positives." In particular, there is a disconnect between the Notice's positive nod to case-by-case adjudication and the "Third Way" proposal's core component: subjecting broadband Internet services to fairly prescriptive common carrier regulation. As FSF Academic Advisory Board member Glen O. Robinson pointed out earlier this week, the FCC "has said it clearly intends to retain as operative all those provisions that are necessary to support control of rates and services (Sections 201, 202, 208) for these are central to its ostensible purpose of preventing 'unreasonable discrimination' in the provision of broadband service." Additionally, "the Commission's NOI suggests that it may not be content with just those provisions necessary to prevent discrimination." (See the FSF Perspectives piece "The Middle Way to Internet Regulation.")

The disconnect is in the details. For aside from the Notice's say-so about case-by-case adjudication as preferable to prescriptive rules, Professor Robinson also pointed out that "nothing in its new public notice suggests any retreat from earlier proposed ('low-level') fixed rules." "What is most noteworthy about some of these rules," Professor Robinson continued, "is that they have nothing whatsoever to do with any applying 'engineering expertise' on an ad hoc or a fixed-rule basis." Professor Robinson's essay specifically referenced the FCC's earlier proposed rules for banning broadband ISPs from charging different prices for enhanced or prioritized (i.e., different) services, except for those fall under the category of "specialized services."

What's more, nothing in the Notice's "general policy approaches" to "specialized services" suggests that any one or more of those approaches marks any kind of retreat from an onerous, rule-based treatment of broadband Internet services that includes and goes beyond network management practices. And the Notice's line of questioning concerning details of the wireless business ecosystem — including third-party wireless device connectivity, usage-based data pricing models, wireless application compatibility and restrictions, and wireless app distribution models — also leaves one wondering if the FCC is really serious about employing case-by-case adjudication after all.

Of course, Congress is truly the authority charged with adopting "high-level rules." And so, Congressional legislation is the legitimate vehicle for granting the FCC authority to establish a proper case-by-case adjudication regime using high-level rules. As FSF pointed out earlier this year in comments submitted in response to the FCC's Notice of Inquiry concerning potential broadband reclassification, "[i]f the Commission determines that, in its view, there needs to be some agency authority over broadband ISPs, it should work with Congress to pass a new, narrowly-circumscribed legislative framework." In particular, FSF said:

The core of a legislative framework should be a provision granting the Commission authority, upon a complaint filed and after an on-the-record adjudication, to act to prohibit broadband ISPs from engaging in practices determined to constitute an abuse of substantial, non-transitory market power and that cause demonstrable harm to consumers. Such a circumscribed market-oriented rule would provide the Commission with a principled basis for adjudicating fact-based complaints alleging that ISPs are acting anticompetitively and, at the same time, causing consumer harm.

FSF's Randolph May even suggested legislative language to achieve those objectives. (See also the FSF blog post "Broadband Internet Regulatory Authority: Some Suggested Legislative Language.")

It is appropriate to commend the Commission's nod towards reliance on an adjudicatory regime. In the end, however, regardless of whether one thinks the FCC's recent Notice will actually bring real resolution to additional issues still fraught with disagreement, no amount of headway over "specialized services" and treatment of wireless broadband can paper over the serious questions about the Commission's authority to adopt "Third Way" regulations.

Chairman Genachowski Says No To Spectrum Giveaway

Technorati Tags: Spectrum Auctions,Spectrum Policy,M2Z,FCC

FCC Chairman Julius Genachowski deserves kudos for stopping in its tracks a disaster-in-the-making spectrum giveaway. He pulled the plug on a draft order that would have established rules for auctioning spectrum in the 2GHz band, also known as the AWS-3 (Advanced Wireless Services) band.

The problem with the draft order is that it would have sanctioned an auction tailored specifically to the unique business model of one company, M2Z Networks, which proposed to provide a "free" nationwide broadband service over part of the spectrum to be auctioned under the rules M2Z proposed.

Calling M2Z's plan to offer free broadband service a "business model" is being charitable. More realistically, M2Z's designer auction plan, which it has pursued for years here in Washington, should be called a "spectrum speculation" model. Indeed, the plan's chief backer is John Doerr, vaunted venture capitalist with the firm of Kleiner Perkins Caufield & Byers. We would all be better off if Mr. Doerr would devote his considerable talents to finding and funding promising Silicon Valley start-ups with innovative ideas and new technologies – companies that are not pleading for special government hand-outs.

M2Z's designer auction plan with its special conditions would have devalued the spectrum and reduced the auction proceeds. The reduced proceeds to the U.S. Treasury would be paid by American taxpayers. The FCC should not be in the business of tailoring auction rules to particular business models. Instead, it should always opt for clean, unconditioned auctions so that the spectrum will be awarded to the bidders who value it highest. They are in the best position to determine what services consumers value most in the marketplace, and at what price.

It is a valid public policy objective to make broadband service as ubiquitously available as feasible, and the government has a limited role to play in achieving this objective in proper ways. There is no need to rehearse here again all the progress that has been made in this regard in the past decade. Broadband service is now available to over 95% of American households. According to the latest Pew Internet & American Life Project report, over 65% of U.S. households subscribe. And the Pew reports consistently show that, for a significant number of non-subscribers, the cost of broadband service is not the reason they do not subscribe.

To the extent that the government wishes to further spur broadband availability and adoption, there are measures that it can take that do not involve the pitfalls and pratfalls of the M2Z plan. For example, I have supported circumscribed measures to target government financial support for new broadband infrastructure to geographic areas without any service at all. And, I – along with my colleague Deborah Taylor Tate, FSF Distinguished Adjunct Senior Fellow – have long supported directing LifeLine-Linkup support for broadband to low-income persons who demonstrate the need for financial support.

In other words, there are appropriate means for the government to employ to achieve the public policy objective that M2Z claimed to embrace with its plan. But adopting designer spectrum giveaway auctions, as M2Z urged, is certainly not one of them. The reason I referred above to M2Z's plan as a "spectrum speculation" model is this: A model based on "free" service, with all the service specifications – speed, quality, build-out, and upgrade requirements, and the like – designed and refined by the FCC likely would fail, if it ever got off the ground at all. Even if conditioning auctions were otherwise advisable, the broadband Internet market is too dynamic and innovative, and consumer demand changes too fast, for the government to set in stone specifications for service. Indeed, I suspect that "failure" of its free government-specified service is a key element of its business plan. Had M2Z gotten its way, and then faced financial difficulties as a result of its faulty business model, the company surely would have come forward with its ready-made alternative plan for using the spectrum, asking to be relieved of the conditions it originally embraced. You can bet that M2Z would have resisted mightily any attempts by the FCC to then reclaim "its" spectrum. Hence, the "spectrum speculation" model.

So, again, Chairman Genachowski deserves praise for putting the kibosh on M2Z's spectrum giveaway proposal. Hopefully, having now gone through this exercise, his commitment to unconditioned auctions will be strengthened going forward.