Competition and Regulation
     REMARKS BY FCC COMMISSIONER HAROLD FURCHTGOTT-ROTH
   BEFORE THE DAVID T. CHASE FREE ENTERPRISE INSTITUTE AT
            EASTERN CONNECTICUT STATE UNIVERSITY
                  WILLIMANTIC, CONNECTICUT
                       APRIL 26, 2000
  
  Thank you very much for that kind introduction.  It is a great honor for me to be
  here at Eastern Connecticut State University.
   I once thought about writing a book on regulation and I went to see a very
  prominent book agent a few months ago about this project.  Someone referred me to a
  book agent and told me, "This is the book agent who really understands regulation and is
  very sympathetic to the idea of a book on regulation."  
  So I called him up to schedule an appointment and he said, "You want to write a
  book . What's it on?"  
  I said, "Well, it is on regulation."  
  He said, "Books on regulation do not sell.  I am really not interested in a book on
  regulation."  
  I responded, "Well, I am with the FCC.  I think I have some new ideas about
  regulation."  
  And the agent said, "Look, kid, you want to write a book about sex, a book about
  health, I can sell that book no one wants to read your book about regulation.  Why don't
  you save yourself some time and photocopy your ideas and give them to your ten closest
  friends?  They are the only people that would ever buy your book on regulation."  
  Needless to say, I am just glad I did not talk to the book agents who are not
  sympathetic to a book on regulation.  
  The topic today is about competition and regulation. Some might think that is an
  odd combination.  In some views, competition is the antithesis of regulation.  Purely
  competitive markets are absent regulation.  Likewise, heavily regulated markets are
  absent competition.  Economists know a great deal about the theory of competition and a
  great deal about the theory of regulation.  Today, I want to talk about the practical side of
  regulation from an economist's perspective.  
  Bear in mind, it is tough to be an economist in Washington.  Sometimes you feel
  like you have to park your brain at the beltway before you are allowed inside.  There is a
  common saying in Washington, "We need regulation to promote competition."  This idea 
  grates on the nerves of a lot of economists.  It is like saying, "We need cigarettes to
  promote a cancer-free society."  Taken to its logical extreme, if everyone died from
  cancer, we would have no more human cancer.  And if you regulate everything that is
  over-regulated anyway, there won't be any more competition. 
  I have not come here today to discuss the subtleties of regulation rhetoric, but I
  have come here to discuss the economics of regulation how regulation is made and the
  resulting limits placed on competition.  I am going to discuss regulation from an
  economist's perspective.  I am going to suggest that there is a market for regulation with
  demand for, and supply of, regulation.  
  But first, we need a few simple definitions about what regulation is.  To some
  extent, regulation is simply the government stepping in to markets to compel results that
  the market would not have otherwise reached.  That is not necessarily bad.  Sometimes it
  can even be good.  
  The government does this through four branches of government:  the legislators who
  write the laws; the executive branch which enforces the laws; the judicial branch which
  resolves disputes; and a strange hybrid called "independent regulatory agencies" which
  combine elements of all three of the other branches.
  Demand for regulation
       What is the demand for regulation? The demand for regulation is not from
  consumers buying books about regulation, but there is demand from whenever there is a
  market failure.  There are various externalities that may lead to consumer demand for
  regulation that you learn about in your economics courses.  These include instances
  where there are high transaction costs, high enforcement costs, high litigation costs, or
  simply where consumers have a substantial degree of risk-aversion that can be mitigated
  or diffused as a result of regulation.  In all four of these areas, the concept of regulation is
  to support basic property and contract rights, not necessarily to come up with something
  different.  
  Ultimately, consumers want regulation where the benefits of regulation exceed its
  costs.  This simple idea has yet to arrive in Washington where the benefits of regulation
  are often touted but the costs are never tabulated. 
  There are some groups that claim they speak for all consumers on regulation. Frankly,
  however, it is impossible to speak for all consumers because each of us is different. 
  Individuals have different demands and preferences.  When a group says, "We are here to
  represent the consumer interest," that can be a little self-serving and sanctimonious
  because, in fact, they cannot possibly be there representing all consumers. 
  There is also a bureaucratic demand for regulation.  There are a lot of bureaucrats who
  have jobs as regulators.  They do not want to lose those jobs.  It is also a source of power. 
  There is a sort of realpolitik involved in regulation.  People not only make careers out of
  regulation, but they do a lot of things   some things good, some things not so good  
  based on regulatory power.  
  There is a third source of demand for regulation.  It is a constituency group, if you
  will, which advocates regulation.  It is the service industry the lawyers and the
  accountants whose job it is to interpret the regulations, to do lobbying on issues of
  regulation, to provide the public with ways of understanding how to deal with regulation. 
  It is a huge industry in Washington and state capitals around the country.  
  Finally, businesses demand regulation.  Some businesses favor regulation. 
  Various forms of regulation may favor some businesses and may harm others.  But
  businesses are a very large part of the need for regulation.  
  Economists look at the demand for regulation and note that there are three types of
  influences on demand:  (1) the own-price effect; (2) the cross-price effect from other
  forms of regulation and; (3) the income effect.  Let us examine each of these in turn.  
  Own-price effects
  The own-price effect of regulation varies for different consumers.  Consider the
  fuel efficiency standards for cars.  The standards can be costless for some consumers who
  do not own a car, yet can be very costly for other consumers who own cars that expend
  large volumes of fuel.  As the standard for fuel efficiency is tightened, the cost of the
  regulation to the consumer increases and consumer preferences for the regulation
  decreases.  Still, for other consumers, the own-price effect of a regulation is unknown
  because the regulation only indirectly affects the consumer.  The same can be said for
  practically every sort of regulation.  
       What is the own-price effect for businesses?  Just as varied as it is for consumers
  and perhaps more so.  This is because regulations directly affect businesses; regulations
  do not directly affect consumers.  We cannot change a consumer's preference.  We can
  tell businesses what they can or cannot do.  That is what regulation is.  
  From an economist's perspective, regulation affects the supply side of the market.  
  Let me assure you:  businesses approach Congress and independent agencies early and
  often to lobby on various regulations.  They always want less for themselves and more for
  their competitors.  That is the nature of business. 
  Cross-price effects
  What are the cross-price effects of the demand for regulation?  Prices for some
  goods and services can affect the demand for certain regulations.  For example, as the
  price of gasoline increases, consumer demand for larger automobiles decrease as does the
  incremental cost of fuel-efficiency standards on large cars.  Conversely, as the price of
  gasoline falls, the more some fuel-efficiency standards become a binding constraint.
  The cross-price effect which derives from alternative forms of regulation is
  perhaps the most interesting but least observable form of cross-price effects.  These are
  even harder to observe than the own-price effects.  Consumers are often unaware of
  competing forms of regulation that might be available and that might have the same or
  greater beneficial effects than the one that is actually in place.  Consumers are even less
  aware of the price that might have to be paid in order to obtain the alternative form of
  regulation.
  Large corporations that routinely lobby Washington have the clearest sense of the
  cross-price effects of the demand for regulation.  As the likelihood of implementing
  alternative regulatory regimes fluctuate, corporations channel lobbying resources to
  increase the likelihood of adoption of regulatory structures most favorable to the
  corporation.  In some sense, the shadow price of an alternative regulatory structure is the
  present discounted value of the cost required to get the alternative structure selected and
  implemented plus the ongoing maintenance cost for the regulatory structure once it is in
  place.  The calculus of quantifying these costs and likelihood of implementation is
  necessarily very crude.
  What are the alternatives to a specific form of regulation?  Well, this turns out to
  be a very interesting question--perhaps the most interesting one on the demand side of
  regulation.  In many cases, consumers do not have alternatives to a specific form of
  regulation because paradoxically, regulation is a government monopoly.  Consumers
  must take it or leave it.  They do not have a choice of saying, "I would like that regulatory
  structure over there please."  
  That is not the way it works.  
  There is, however, a limited extent of consumer choice on regulation in our federal
  system.  That is, consumers can drive across the state boundary and go to Rhode Island or
  Massachusetts to purchase certain goods that may have a lower tax than applies in
  Connecticut. Or one can go on the Internet and make certain purchases without state and
  local taxes.
   But if a consumer wants an alternative regulatory regime for the chemical
  treatment of the tap water to wash dishes in his home or apartment, there is not really a
  lot of choice on that issue.  Consumers must accept the regulatory regime in place.
  There are however, some services for which consumers have an increasing choice of
  regulation.  
  One example is long distance phone service a heavily regulated business. 
  Increasingly, however, consumers have the alternative of going to the Internet for
  equivalent services.  This is true whether they are simply sending an email or using
  software to actually do voice-grade services over the Internet thereby avoiding a lot of
  regulations that affect long distance phone service as well as avoiding a lot of the access
  charges.  In this case, it is very clear that the cross-price effect on the demand for
  regulation is quite substantial.  That is to say that an increase of Internet regulation in all
  likelihood would increase demand for long distance phone services.  Alternatively,
  regulation on the Internet is kept very low, demand for long distance phone services will
  decrease.  
  It is not surprising to see a lot of telephone companies come into the FCC to lobby
  for more regulation on the Internet precisely because the Internet is cutting into their
  business.  As regulated businesses, they do what they do.  Businesses also have another
  type of cost-price effect, that is, they always have the option of lobbying to have
  regulations changed and they do this every day.  Thus, the cost and success of this
  lobbying effort in part determines what the cost-price effect is on demand on other forms
  of regulation.
  Income effects
  What are the income effects of the demand for regulation?  As income increases,
  does demand for regulation wax or wane?  No one knows for sure.
  It is a little hard to tell.  There are some societies that have very high incomes and
  have a lot of regulation the Scandinavian countries for example.  There are other
  economies that have high incomes but do not have nearly as much regulation, and the
  United States probably falls into that category.  There are a lot of economies in the world
  that do not have much regulation at all.  A lot of them tend to be poor, and they tend to
  have informal rather than formal regulation.  In general, it is difficult to associate
  increases in income with a specific regulatory scheme.
  Other demand characteristics
  I talked briefly about the economic characteristics of demand for regulation.  Let
  me discretely mention some other types of consumer demand characteristics for
  regulation.  First is transparency.  It is important to know how choices are made and 
  implemented.  Second is predictability:  It is important to know how regulations are
  going to be applied.  For example, citizens like to know before they go to the state
  department of motor vehicles exactly how one should apply for a driver's license.  People
  generally like to know what the booklet says before going to take the test lest they arrive
  at the DMV and only to discover "Oops, they have a different set of questions today." 
  Thus we need to know that the process is going to be both predictable and applied in a
  consistent manner.   Third, it is also important to know that there is certain rationality for
  it that the benefits will exceed the costs.  
  Nondiscrimination in the regulatory process
  A final characteristic and I'm going to discuss this in some detail is regulations
  should be applied in a nondiscriminatory manner.  That is, we would like to know when
  we are at the department of motor vehicles that the clerk is going to treat us no differently
  than the person ahead of us or behind us.  This turns out to be a very important concept to
  regulation and it becomes particularly important when there is some concern that
  regulations may be applied in different ways depending on the political views of the
  people who might be regulated.  
  Americans are an opinionated lot.  We have personal views on politics and just about
  anything including the weather.  We like to express our views but we do not necessarily
  expect other people to change their behavior based on our particular personal views.  
  Try this experiment the next time you are in a grocery store:  Strike up a conversation
  with the cashier and say what your personal views are on environmental policy and see if
  the cashier will reduce your bill.  Needless to say, your efforts will probably be
  unsuccessful.  Of course, there will be no difference in the amount charged.  A few
  comments might provoke a smile or a frown but little else.  
  Americans demand and expect to be treated the same as every other American. 
  Now, flip the experiment around.  Suppose the cashier strikes up a conversation with you
  and says, "These are my views on the environment" and offers you a 10% discount if you
  will sign a petition supporting the cashier's view on the environment.  Additionally, the
  cashier says she will charge you 10% more if you refuse.  Would you be offended?  Of
  course you would.  Quite possibly you would march to the manager's office and demand
  that that cashier at least refrain from this practice, if not be fired on the spot. 
  When it comes to business dealings, Americans expect to be treated the same as anyone
  else regardless of the policy viewpoints we hold or the policy viewpoints that other
  people may hold.  Businesses that treat customers differently tend to go out of business.  
  Expectations of nondiscriminatory treatment based on viewpoint extend not only to
  business dealings but to government activities as well.  A parent would be dismayed if
  the principal of the school set school rules that favor or disfavor children based on the
  political viewpoint of the child or the parent.  A property owner would be offended if the
  county council set property taxes based on the political viewpoint of property owners.  
  Americans are not so nave as to believe that lawmakers and rulemakers have no political
  views.  Of course they do whether they are members of the Congress, state legislature,
  county council or the local school board.  But Americans do expect the laws and rules
  that such entities write to apply equally to individuals and businesses.  Citizens also do
  not expect laws or rules to single out individuals for reward or punishment based on
  viewpoints that they may hold.  
  Our expectations of neutrality also extend to those who enforce laws and those who
  adjudicate disputes.  Do not expect a sympathetic view on an environmental policy issue
  the next time a police car stops you for speeding on the turnpike.  The traffic officer is
  simply going to write a ticket regardless of your viewpoint.  Do not expect the traffic
  court judge to be sympathetic with your environmental policy either.  It will not help to
  explain your environmental policy viewpoint in an attempt to get out of the ticket.  
  Again, it would be equally shocking if the experiment were reversed.  If a person was
  stopped on the interstate for speeding and the policeman said, "You know, here is my
  view on the environment.  Sign this petition or I will give you a ticket."  We would be
  outraged.  Similarly, it would be shocking if the judge said, "You know your stock of
  good will in this court has been greatly diminished because you wrote to your Senator
  requesting support of environmental legislation with which I personally disagree.  You
  should do something to improve your good will for parking in the no parking zone."  
  Americans expect government officials   whether federal, state or local   to treat
  everyone anonymously.  It is not expected that behavior in unrelated matters will be held
  against us by government officials.  
  Now, why have I gone through this lengthy discussion about nondiscriminatory
  application of regulation?  I have gone through it because all too often regulators in
  Washington would say, "You know, you want these licenses transferred so your merger
  can be approved.  Well, we have a little problem over here that is unrelated to the license
  transfer, but maybe we can work something out."  
  Or: "You are pushing for this legislation up on Capitol Hill.  It would help you
  and this agency, if you did not push that legislation."
    Or: "You are involved in this litigation over at that court.  Things might happen a
  little speedier over here if you drop that litigation."  
  Actually, people in Washington are quite public and brazen about it.  An irate
  official in my agency recently admonished a major Washington trade association.  The
  official said, "The stock of good will of this trade association has gone down because of
  their lobbying activities on Capitol Hill."  
  Now stop and think about that.  What does it mean to have good will at a regulatory
  agency?  Does it mean you get treated differently than the other people waiting in line at
  the agency?  Does it mean that regulators treat people or groups differently depending on
  how much good will they have?  And how do you get good will?  And how do you lose
  it?  Must you check your First Amendment privileges at the door when you walk into a
  regulatory agency?
  Supply of regulation
       But let me just move on to the supply of regulation.  I have spent most of my time
  talking about the demand for regulation.  The question is whether federal regulators
  supply regulation.  Keep in mind my earlier point that regulators are monopolists.  We are
  the only game in town.  In economic terms, that means regulators are not price savers. 
  We do not look out into the marketplace for regulation and say, "Well, this is the price for
  this type of regulation." 
  In economic terms, there is simplicity in having monopolists set marginal revenue
  and marginal costs. What does this concept mean for the monopoly supply of regulation? 
  Whose revenue and whose costs does the government consider when setting prices? Is
  revenue defined as cash revenue to the government or some other certain social welfare
  function? Who knows what that is?  Are the costs those incurred by the government, the
  regulated entities, consumers, or some combination of the above?  Is it the same calculus
  of regulation, and the same process for its development, at all government agencies?
  If regulation were competitively supplied, one would like to believe that, on
  balance, only regulation for which benefits exceed costs would survive in the
  marketplace.  But in part, because of the nondiscriminatory principle that I just described,
  there would have to be a single set of regulations applied equally to everyone.  It is likely
  that, even in a competitive market, some regulations would have costs that exceed
  benefits for some individuals and not for others.
  Some political scientists think that all regulators are captured by some industry
  group.  I do not think that is accurate, but certainly it can be said that different industries
  are regulated in different ways, and that businesses within the same industries are
  regulated in different ways.  The net effect of this is something that is far different from
  uniform regulation.  
  What else do regulators do on the supply side?  They can and do write extraordinarily
  complex regulations regulations that favor the service industry.  They favor all the
  lawyers, accountants, lobbyists, and even economists who make their livelihood based on
  interpreting regulations.  If it were too simple and transparent there would not be
  anything for these people to do.  
  My favorite example is a cost model for telephone service that the FCC
  developed.  Now, I do not know if any of you are computer programmers.  You do not
  really have to be a computer programmer to understand this example.  The FCC came up
  with a cost model to predict the costs to provide telephone service anywhere in the United
  States and the cost model takes 180 hours to run not 180 minutes, not 180 seconds, not
  180 nanoseconds 180 hours.  That is more than a week to get one run out of this
  computer.  
  Now, in my formative years, I used to actually be a computer programmer.  Even
  in the Dark Ages years ago, if a program ran for more than 18 seconds, it was probably
  broken--there was something wrong with the program.  180 hours.  I cannot tell you how
  much it costs the government to pay these bright computer programmers to write a cost
  model that takes 180 hours to run.  Let me assure you it probably cost a lot of money
  because no self-respecting computer programmer would possibly write such an ill-
  conceived program.  
  But that is not the end of the story because the FCC insists on using this cost
  model that everyone in the world knows does not work.  No one believes the results that
  come out of this cost model but the FCC insists on using it in lots of different
  proceedings.  It is mind-boggling that this occurs; but it helps promote the service
  industry.  Lawyers, accountants and now computer programmers who specialize in
  writing computer programs that do not work have greater job security. 
  Guiding principles of regulation
  There are four potential guiding principles for regulators.  The first is to simply
  follow the laws as written.  That is what I always say, just "follow the law"   when in
  truth, the law is often vague.  So, what do you do then?  
  Well, another guiding principle might be "deregulate."  What if that is contrary to the
  law?   Sometimes the law requires regulation, and then you must regulate.  But other
  times, regulation is neither required nor contemplated in the law.  Ultimately, both
  regulation and deregulation must be based on the law.  So, even if you believe in
  deregulation, I think it has to be sort of a secondary principle to the primary one of
  following the law.  
  The third principle that we all hear about is to "protect the consumer."  Again, this
  is best accomplished by either following the law or by something within the purview of
  the Federal Trade Commission.  
  The fourth principle and perhaps most dangerous is called "promoting social
  values."   That is fine if that is what the law tells you to do.  If it is not, then it is an
  uncontrolled license to go off and do "good" things.  It is important for the government to
  do good things, but it is more important for the government to do that in a way that is
  consistent with the law not just what some individual happens to believe at any given
  point in time.  
  If one follows the first two principles, one has a realistic chance of having
  regulation that does not prevent competition.   Competition is very important, and more is
  always better than less.  Some agencies are assigned by law specific responsibility for
  competition in certain aspects of certain markets, and this is certainly the case for the
  Federal Communications Commission.  Our mandate for competition, however, is not
  unbounded.  Nor can just any form of regulation be rationalized under the broad rhetoric
  of "competition."  Indeed, in its purest form, competition occurs only in the absence of
  government intervention.  Consequently, it is difficult to craft regulations that create
  government intervention for the ostensible purpose of promoting competition.  The most
  rational form of such regulation indeed is often to dismantle other forms of government
  interference that inhibit the development of competition.  Ultimately "competition" as an
  objective of regulation is about following the law.
  Techniques of regulation
  Even if one has the right principles of regulation, what techniques can regulators
  follow?  The ultimate aim of these techniques is to minimize arbitrary discretion.  There
  are three elements necessary to meet this goal.  
  The first is to have simple, visible rules.  
  The second is to have a transparent process.  The Department of Motor Vehicles
  is a prime example of a good, well-run agency.  Many think it is grossly inefficient. 
  There may be a long wait in line, but everyone is treated the same.  The process is very
  predictable, everyone knows how it works.  DMV's handle millions of people all the
  time.
  The third element would be nondiscriminatory treatment ensuring that everyone
  is treated equally.
  Following these three techniques results in benefits that are greater than costs. 
  There is, however, another approach.  
  Maximizing agency discretion
  A different type of technique might be to maximize the discretion of an agency
  This is the bureaucrat's dream.  A lot of agencies try to maximize the discretion of the
  agency.  One might wonder how this is accomplished.  
  First of all, there would not be written rules.  One might say, "well of course, they
  would have certain rules."  This is not the case at the FCC.  The Commission does not
  have written rules about a lot of things.  For example, there are not written rules about
  how license transfers are reviewed.  There are hundreds of thousands FCC licenses out in
  the world.  Tens of thousands of these are transferred between parties every year.  But
  there are not any rules about how the Commission will review those.  Instead, the FCC
  has a "public interest standard." This ultimately means that 99% of licenses get
  transferred without any questions and 1% of licenses get pushed into a separate category
  for special treatment.  
  The second way to maximize discretion is not to have a transparent process.  Do
  not let the public know what is going on.  
  The third is to have discriminatory treatment to treat different parties, different
  industries, different businesses differently depending on who they are.  Promote the idea
  that there is such a thing as good will at the agency.  Capitalize the agency.  Apply its
  criticisms and threats and never calculate the costs or benefits of regulation.  
  If you take a class on public finance here at the University, one of the first things
  taught is cost/benefit analysis.   There is a lot written by economists on how to perform
  cost/benefit analysis.  I regret to tell you that there is not a single agency in Washington
  who does cost/benefit analysis on many regulations promulgated by that agency.  At the
  vast majority of agencies in Washington, absolutely no cost/benefit analysis is ever
  attempted.  The FCC is one of these agencies.  
  When I worked with the House Commerce Committee, each year I would send
  out a form to every agency requesting a list of all the regulations for which the agency
  had conducted cost/benefit analysis.  That would go to about 20 agencies overseen by the
  Committee.  Not a single agency came up with a list.  Most probably 18 had none, and
  only a couple had done one or two cost-benefit analyses.  
  Hence, this is how agency jurisdiction and discretion is maximized.  You say that you
  have the authority to do whatever you want to do.  The net result of this maximization of
  discretion is that there is no way to know if the benefits of regulation are going to be
  good.
  Let me just conclude with a story that is a little bit too close to home.  There was a
  broadcaster who was trying to get a license transferred at the FCC.  He was having a lot
  of problems.  The broadcaster went to visit a regulator who showed him all sorts of forms
  that had to be filled out, all sorts of fees that had to be paid, all sorts of taxes that had to
  be paid, and all sorts of petitions that had to be filed.  
   The regulator asked him, "Do you know how to do this?  Do you know how to
  fill out these forms?"  
  The broadcaster was stunned and kept saying, "Well, I do not know.  The good
  Lord has looked after me, and I am sure the good Lord will see me through this."  
  At the end of the day, the regulator shakes his head and goes to see one of his colleagues
  and says, "Well, I have good news and I have bad news.  The bad news is this broadcaster
  has no idea how this agency works, no idea how we expect broadcasters to behave.  The
  good news is, he thinks we're God."  
  With that I will close and open for questions.