The radicalism of net neutrality

There is nothing moderate, however, about the Commission’s ultimate objective, which is to subject broadband providers to so called “net neutrality” regulation.   As proposed by the Commission last October, the rules would ban any business practice adopted by a broadband ISP that can reasonably be characterized as “discriminatory,” excepting only those determined, on a case-by-case basis, to be “reasonable.”  Any practice not specifically permitted, in other words, would be prohibited.

What practices might be implicated in such a sweeping ban?  The Commission offers little or no guidance.  Companies like Comcast presumably would be banned from discriminating against peer-to-peer traffic (like BitTorrent), unless they could demonstrate such discrimination is “reasonable.”  What about giving preferential treatment to remote medical services, high definition conference calls, or interactive online games?  The Commission tells us only that it will decide on a “case-by-case basis.”

There is a loophole, and a big one:  The ban on discrimination by ISPs only applies to content, application and service providers – not consumers.  As the Commission explains in its Notice of Proposed Rulemaking, “non-discriminatory” means an ISP “may not charge a content, application, or service provider for enhanced or prioritized access to the subscribers of the broadband Internet access service provider … but that this rule would not prevent a broadband Internet access service provider from charging subscribers different prices for different services.”

To propose applying such an intrusive and cumbersome regulatory regime to a market as dynamic as the market for Internet applications and services is as audacious as it is misguided.  But the radicalism of net neutrality lies not just in the level of proposed intervention, but in the rationale behind it.

Traditionally, regulatory intervention has been justified only the basis of market failure, a principle which reached across both parties and ideologies.  But the FCC has discovered virtually no evidence of market failure:  Even net neutrality advocates cite only two brief episodes of allegedly harmful discrimination, the most recent of which occurred more than three years ago.  As 21 economists, including Carter-era regulator Alfred Kahn and Nobel Prize winner Vernon Smith, recently pointed out in a filing at the FCC, “there is no economic basis for a finding of market failure in the markets at issue.”  However, “there is strong economic evidence that the regulations would inhibit, or prohibit, efficiency enhancing conduct, thereby reducing competition, slowing innovation, deterring investment and ultimately reducing consumer welfare.”[1]

Boiled down to the basics, in other words, net neutrality is a massive scheme for what Richard Posner termed “taxation by regulation” – the transfer of wealth from one group to another by means of government regulation.

The redistributionist case for net neutrality cannot be found on the bumper stickers or web sites of liberal advocacy groups like Free Press or Public Knowledge who are pressing the political case.  They instead dedicate their efforts to whipping up anti-corporate sentiment against the “big ISPs” – or, more recently, against Google, which has had the temerity to propose, with Verizon, a relatively moderate approach. The populist rhetoric of such groups often strikes a radical pose, but the real radicalism of net neutrality lies in the naked use of Federal regulatory power to redistribute wealth.

Jeffrey A. Eisenach is a managing director and principal at Navigant Economics LLC, and an adjunct professor at George Mason University Law School.