Google, Yahoo, and Federalism

In addition to massive federal probes of the deal, the nonexclusive Google-Yahoo ad pact is facing scrutiny from states as well. The California attorney general is being pushed to examine the advertising arrangement.

Why all this hubbub? As I’ve argued here before, the Google-Yahoo deal is fairly minor, not a merger, beneficial to consumers, and was initially thought not to even need approval.

One may particularly wonder why the states are getting involved. If there’s ever a fairly clear case for federal preemption, antitrust investigations of international companies would seem to be it. After all, isn’t it the federal government’s job to regulate interstate commerce?

While libertarians may in general be in favor of federalism, we should also recognize its limits. One big caveat is that there should be no situations where both the feds and the states are regulating something. Subjecting a voluntary, beneficial agreement to multiple levels of regulation is always worse than subjecting it to only one. Further, there are some issues where multiple regulatory jurisdictions are actually harmful. These are issues in which the most regulatory jurisdiction governs behavior, not the least.

Libertarians like federalism because when states have to compete to keep businesses and individuals, the threat of moving keeps taxes and regulations relatively light. (This explains why certain types of businesses concentrate in certain friendly states like Delaware or South Dakota.)

But with the internet, the opposite is often true. Heavy regulation in one jurisdiction affects the whole internet. A website cannot effectively offer different content in different states. (Nor, for that matter, can it be organized differently to meet different antitrust laws in different states.) Earlier this month, Google had to change its homepage – for everyone – to follow a California statute. Before that, New York implemented a new taxing scheme targeting online retailers and effectively forced some of them out of the state. And just recently, Comcast was a put in a double bind between its legal arguments to the states and its arguments to the FCC.

All this is just in the US. Since the internet is global, jurisdictional issues are far worse for internet companies. The EU’s data retention regulations have put Google between a rock and a hard place in its lawsuit with Viacom. And Microsoft and Intel both face antitrust claims in the US and the EU.

So, before we libertarians reflexively start singing the praises of federalism, we should take a careful look at the individual context and ask ourselves: will multiple regulatory jurisdictions help companies flee from regulation, or just subject them to more layers of regulation?