The Internet generates legitimate concerns about privacy, safety, fairness and misinformation. It’s good we are having a national discussion about how best to address such concerns. But when someone suggests we need a law to solve our problems, it’s time to pause and take a breath. And take another breath — or maybe book a meditation retreat — if someone claims we need a whole new federal bureaucracy.
But that’s exactly what some have done. Scholars at the University of Chicago’s Stigler Center recently called for the creation of a new federal Digital Authority to oversee everything from privacy and mergers to discrimination and online addiction. Reps. Zoe Lofgren (D-Calif.) and Anna G. Eshoo (D-Calif.) have a similar proposal for a 1,600-employee U.S. Digital Privacy Agency, which would regulate the way tech companies handle data. President Barack Obama’s chief economic adviser Jason Furman wrote for the U.K. competition authority a report suggesting a new digital regulator might be needed. Australia’s competition regulator recently recommended something similar.
On its face, a single expert agency, laser-focused on one set of problems, sounds sensible. But history shows that such industry-specific agencies are most susceptible to “regulatory capture,” a term used to describe when an institution is dominated by the industry they are charged with overseeing — for example, when a state board that sets the rules for the practice of dentistry is dominated by practicing dentists.
The idea was popularized by the Stigler Center’s namesake, Nobel economist George Stigler, who argued that “regulation is acquired by the industry and is designed and operated primarily for its benefit.” In his foundational paper “The Theory of Economic Regulation,” Stigler warned that any regulated industry has strong incentives to form close connections with its regulators to seek favors. The inevitable result, he argues, is that industries disproportionately influence the agency’s agenda, shape its rulemaking and even supply it with personnel.
Companies find it much easier to influence narrowly focused institutions than institutions with broader law enforcement mandates. Where the latter hear from a wide range of companies with a variety of concerns, the former hear only from one type of company. Think about how much easier it is to talk your way out of a speeding ticket from the local police officer, who knows your family, than it is to deal with an effectively anonymous city cop who pulls over dozens of drivers a day. Similarly, big companies would much rather deal with a select group of bureaucrats whom they know well — and who hear only their perspective most of the time.
Captured agencies don’t hold companies accountable; instead, they act to benefit the industry’s established players, disadvantaging newer firms and the public at large. In worst-case scenarios, such agencies can block new, disruptive competitors that threaten the established, regulated industry.
The recent report from the Stigler Center holds up the Federal Communications Commission as an example of what a new Digital Authority could look like. But the FCC is a perfect example of the likely problems of an industry-specific regulator. At nearly every turn, with every new potentially disruptive communications innovation, the FCC (and its predecessor, the Federal Radio Commission) did the bidding of the best-connected incumbents. As former FCC chairman Michael Powell said, “[T]he history of the FCC is, when something happens that it doesn’t understand, kill it. We tried to kill cable. We tried to kill long-distance. When [MCI founder] Bill McGowan start[ed] stringing out microwave towers that threatened AT&T, the FCC tried to stop him. The FCC tried to kill cable because it was going to threaten broadcasting.” While it didn’t halt technological progress or competition, it often slowed it, occasionally by decades.
For example, almost immediately after its creation, the Federal Radio Commission sided with industry players when it rejected the expansion of AM radio bands at the behest of existing commercial broadcasters. Later, the agency slowed the development of FM radio to protect AM radio manufacturers. It cracked down on early “community antenna television” (cable TV) to protect the broadcast television industry; conducted “beauty contests” to parcel out valuable broadcast licenses, sometimes to the politically connected (such as President Lyndon Johnson’s wife); and slowed approvals and imposed onerous regulations on satellite radio services to protect traditional radio stations. The FCC also transfers billions of consumer dollars between various telecommunication competitors in pursuit of several different connectivity goals — an exercise that brings everyone to Washington to petition the FCC for a share of the money.
Thinking forward, the FCC’s history suggests that a single digital regulator would make it easier for existing companies to lobby for processes that restrict new competitors. Even regulations that are intended to promote competition could easily become barriers to new competitors. Similarly, new digital business models could be delayed or blocked by regulators who are too familiar with the existing way of doing things to imagine new pathways to success.
Then there’s the question of price controls: Fixing prices with competitors is anticompetitive — unless the government is the one setting the prices. And where private price-fixing agreements are unstable (since it only takes one defecting party to ruin the agreement), government-mandated prices are conveniently government-enforced. A single digital regulator could provide a simple mechanism for guaranteed profits. Imagine a digital ad industry regulated like the FCC regulated the AT&T telephone monopoly for more than 40 years.
So what is the alternative? As I noted earlier, regulators are less susceptible to the interests of individual companies and interests when they hear from a lot of different companies with a lot of different interests. Thus, generalist agencies that broadly regulate many industries are more resistant to capture. Further, agencies that primarily enforce laws (like the DOJ) are far less attractive targets for regulatory capture than those that mostly write rules (like the FCC). A company that manages to get in bed with the former might be able to dodge a lawsuit or put pressure on a competitor, but that pales before the possibility of influencing rules that reshape a company’s entire industry.
In the United States, we already have an economywide enforcement agency: the Federal Trade Commission. Charged by Congress to promote competition and to protect consumers, the FTC has decades of experience addressing antitrust and consumer protection issues in the tech industry. Even now, it is pursuing investigations into digital companies under its current authority. And if new capabilities are needed to police digital companies, doesn’t it make sense to give such authority to an experienced agency that has been resistant to regulatory capture?
Like many Americans, I am concerned about today’s Internet-related challenges. But I hope our representatives will take a breath and focus on using and improving the tools we already have.