Premature Capitulation?

Over the decades I’ve spent in this Heart of Darkness (a.k.a., the bowels of American politics), I’ve learned two lessons that have encouraged the steady politicization of the American economy:

• When the right time comes, I’ll take a principled stand (sadly, too often, once you’re no longer in office); and
• Of course, we know the “right” answer is often to liberalize current rules, but that would be politically naïve, so our goal should be to avert even worse rules (but, of course, sacrificing principle rarely assuages those favoring more government control).

And both lessons seem to have been forgotten in the Republican rush to avert the threatened action by FCC Chairman Tom Wheeler to transform the Internet into a federally regulated utility. Senator Thune, Representative Upton, and Representative Walden have proposed a “compromise” bill that would strip the FCC of its purported authority to reinterpret the Communications Act to consider the Internet as a “public” utility.

Unfortunately, their language concedes perhaps the most dangerous part of such a reclassification: removing the freedom of network owners to price their services. Well, actually not quite: the Republicans would remove providers’ ability to price in ways that some view as “discriminatory.” They explicitly mention pricing policies that might result in “throttling” (like congestion-managed toll lanes?), unreasonable “network management” (as decided by whom?), and “paid prioritization” (like that used for just-in-time transportation services by most transport companies?).

But proponents argue if FCC is left alone, its rules might even be worse. And, indeed, they probably will be—but FCC action would be administrative, reversible by a future administration or via inevitable legal challenge. If Congress—led by erstwhile opponents of net neutrality—accedes to forcing the Internet into quasi-utility status, the losses could be permanent.

Those contemplating this action should reflect on the consequences of similar regulation on an earlier network—the railroads. This was America’s first national network, knitting together then small town and rural America into the national economy. Railroads dramatically lowered transportation costs—changing the economy and resulting in growth in some regions, contraction in others.

Network industries were novel, involving complex managerial decisions (both operational and investment) to balance the shared roles of the rail grid (the tracks and the marshalling yards) and the flows (the locomotives and rail cars). Rail managers sought out new pricing strategies and contracts to balance these competing objectives, while achieving sustainable profitability. Not surprisingly, since railroad policies in these areas were themselves experimental, shippers were sure they were being harmed. Rates designed to concentrate flows (thus, achieving greater efficiencies) were often condemned. Confusion about pricing policies that sometimes led to shorter hauls bearing a higher rate than longer hauls were considered predatory and unfair, choking smaller communities and the farmer.

States, like the FCC today, sought to appease these populist pressures, seeking to bring the railroads under political control. By the mid-1880s, some two-thirds of the states had enacted rail regulatory commissions. Some of the more aggressive enforcement actions were overturned by the Supreme Court based on the constitutional prohibition against constraints on interstate trade. So, advocates turned to Congress, enacting the Interstate Commerce Commission in 1887. Some in the rail industry endorsed that action, seeing it as preferable to chaos of state regulation (which, one might note, had been stymied for decades). And, given the nascent ICC’s lack of knowledge of railroads, the first decade or so of regulation was relatively innocuous. But, having acceded to the principle of political control, pressures mounted for more and more regulation and Congress responded by a series of acts strengthening the ICC.

The result was a century of stagnation, of legally mandated network “neutrality.” Railroads were forbidden to charge “discriminatory” (that is, varied rates), forbidden to use “priority” pricing, and so forth. As competing transportation networks (trucking, barge lines, mine-mouth electricity generation, etc.) evolved, the ability of the railroads to meet that competition was crippled. “Just-in-time” delivery options were illegal until railroads were liberalized in the 1980s—a century later. Rail, once a highly innovative industry, was denied the price freedom needed to make these innovations viable.

Must America repeat this mistake? Do we really want to see this most promising sector for a century stagnate too? Firms already operating in the Internet world may now favor this action as a second-best approach, but do they wish to face prior political approval for innovations that may occur tomorrow? Agriculture and mining shippers once favored stifling regulation too, but as the resulting quality of rail transportation services declined, many became advocates for liberalization.

One can and should oppose the actions of the FCC under Tom Wheeler, but that should not lead to endorsing his goals in other ways. We should oppose efforts to ravish the Internet but, even more, we should not avoid that outcome by our timely compliance.