In the last podcast episode, there was a point in which I asked Bryan the question of whether government intrusion could be accepted on the basis that it advocated for competition, citing the United States and the FCC or Federal Communications Commission as an example. Well, turns out I have been slightly incorrect in my question, and recent articles have served to reinforce Bryan’s response, which is that you cannot improve the competitiveness of an industry by including government.
The first article that I came across was this opinion piece on the Wall Street Journal. The article, titled “Why ‘Net Neutrality’ Drives the Left Crazy”, is helpful for several reasons. Firstly, it offers a quick summary of the issue of Net Neutrality, which writer Tunku Varadarajan neatly states as “government oversight of the internet aimed at protecting the consumer from exploitation by internet service providers”. Before going on to the second reason, I would like to just touch on this definition and contrast it with the incorrect definition I gave during the interview. In actuality, the FCC’s involvement with net neutrality is not an agency set up to promote competition, but rather an institution that serves to protect consumers from the abuses of the big bad internet providers. Recall again, that as we discussed in the last podcast episode, intentions are often the guise by which government seeks to introduce regulatory measures. If such measures are introduced, firms offering to provide internet services will be burdened with compliance costs. However, the effect of this extra cost will reduce, rather than promote competition! Think about this, not only will increased compliance make it more difficult for smaller internet providers to operate relative to the big players (AT&T, Sprint, T-Mobile, etc), the increased cost will also serve as a deterrent for new competitors to come in. By way of example, Ajit Pai, who is the current head of the FCC and interviewed for this article, pointed out that “Among our nation’s 12 largest internet service providers, domestic broadband capital expenditures decreased by 5.6%, or $3.6 billion, between 2014 and 2016.” That is a $3.6 billion decrease in capital expenditure that would have gone towards expanding an internet provider’s operational capability. The effect is of course more detrimental to the smaller players, who Pai points out “are the kinds of companies that we want to provide a competitive alternative in the marketplace.” This is thus a classic case of a government induced barrier to entry, and in the long run, instead of helping consumers by punishing the big players as intended by the regulation, the big players actually benefit at the cost of the consumers because the increased regulatory burden reduces their competition and their ability to invest in better service offerings.
The second reason why this article is helpful is because it lays out the political battle underlying the issue of Net Neutrality. Essentially, as Pai points out, what all consumers want from internet providers is “better, faster, cheaper internet access”. The big controversy however, surrounds the regulatory framework that would be ideal for firms to be able to provide this better, faster, cheaper internet to consumers. For people on the Left – the pro big government, anti-corporation types – their idea of a regulatory framework is based on the presumption that without regulation to keep the big players in check, these large internet providers will abuse their consumers by charging them exorbitant prices for internet access, or even by limiting access. Their ideal framework is thus pre-emptive, saying that in order to operate as an internet provider you must comply to these measures, follow these rules, such that you will never harm the consumer. The approach from the Right of course, is entirely the opposite. As Pai himself adequately summarizes, government should only act insofar as to “let the marketplace develop, unfettered by federal and state regulation, and take action against anticompetitive conduct as the facts and laws warrant”. In other words, government should just get out of the business of regulating the internet and leave it to the way it was and had always been prior to the establishment of federal agencies such as the FCC.
Are the Left’s worries justified? Well, based on another Wall Street Journal article, not really. While the article, titled “How Cell-Phone Plans With Unlimited Data Limited Inflation,” does not directly answer this question, it does reveal some startling facts. To summarize, price inflation in the United States for the recent months of March and April have been weaker than estimated by the Federal Reserve. As the writer, Ben Leubsdorf points out, “core inflation rose just 1.9% in April from a year earlier, decelerating from 2.3% growth in January, as measured by the Labor Department’s consumer price-index.” If you are unfamiliar with inflation, how a central bank normally calculates inflation from one year to the next is to look at a basket of goods and compare the value of this basket across years. So, if inflation came in below expected, which goods do you think contributed to this? The recent glut of used cars helped in pushing down car prices, and so did a slow down in medical inflation, but quite astonishingly, half of the decline in inflation this year can be attributed to just one thing: wireless telephone services. As Leubsdorf states, “Cell-plan prices dropped 7% in March and fell an additional 1.7% in April, according to Labor Department data. From April last year, wireless service prices were down 12.9%, the largest decline in 16 years”. Further, Paul Ashworth, who is chief U.S economist at Capital Economics, said this drop was due to “the price war that has broken out among cell-phone providers, with all the big providers now offering unlimited data plans at cheaper rates.” To make the point clear then, the myth of the monopolist internet provider is completely unfounded. Why does the big player not abuse its consumers by charging exorbitant prices for lower quality services? Because he can just go to the next big player who can offer better services at a better price. This is the key point that Bryan brought up during our interview, where capitalism offers a system by which self-interest results in greater welfare for the whole. The free market and competition is thus the best check and balance against these supposed greedy corporations , as in order for firms to survive and be profitable in the long run, they have to out-compete other firms. As a result, competition among the various firms provide a wealth of choice and options for consumers, and consumers exchange their hard-earned dollars as a sign of their approval of these services or products.
As of the time of the article, Pai’s FCC had just secured a political and certainly economical victory, with a 2-1 vote to begin the process to scrap Obama-era net neutrality regulations. Since the vote, he has been met with activists who picket his house and take photos of his family. Also, the news-comedian John Oliver targeted him in a recent segment, with discontent viewers crashing the FCC’s website. However, Pai remains resolute, staunch in principles and his beliefs. When asked during his interview if he is wary of the risk that his position poses, he replies “I suppose that’s a risk, but it’s a risk I’m willing to take. At the end of the day, I’m not going to be intimidated. No one is going to sway me from the course that I truly believe is the right one for the American people.”