Obama administration embraces cost-benefit analysis: Why can’t the FCC?

Rejecting recent criticism about the high price of government oversight, Council of Economic Advisors Chair Jason Furman said in a CNBC interview last week that the Obama administration must and does weigh the costs of regulations against their likely benefits, and “scrubs” those that do more harm than good.   

That, of course, is both an uncontroversial and common sense policy, echoed in statutes and executive orders going back to President Clinton.   Today, a groaning hulk of federal rules imposes costs not only on industry but on consumers, jobs, and U.S. competitiveness—and swell the ranks of federal regulators needed to enforce them.  So executive agencies must ensure benefits will outweigh costs before regulating, and diligently review and reconsider rules that have become, as Furman says, “outmoded.” 

{mosads}A 2011 executive order extended those requirements to independent agencies as well, but only “to the extent permitted by law.”  That caveat has left one gaping exception:  the Federal Communications Commission.  According to data compiled by the Administrative Conference of the U.S., the FCC consistently issues more rules than any other federal agency, but never weighs often very high costs against low or even speculative benefits. 

From 2007 to 2012, for example, the FCC issued over 400 final rules, four times the number of the next most prolific agency, the SEC.  Yet an OMB review found that the FCC was one of only two independent agencies that did not include at least “some information on benefits or costs” in even its major rulemakings.

Instead, a disturbingly partisan FCC increasingly engages in a free-ranging and opaque decision-making process that has become the butt of late-night comedians and the source of political scandal.   In this environment, imperious chairmen can ignore mountains of data collected by their expert staff, executing bizarre last minute reversals and backroom deals that have drawn the ire of Congress.

A dangerous case in point is the FCC’s recent order regarding the open Internet or “net neutrality.”  What started in May, 2014 as a straightforward exercise to correct legal infirmities of an earlier effort, following what Chairman Tom Wheeler himself referred to as a simple “legal blueprint” provided by the court, dissolved over the fall into a three-ring political circus.  In November, President Obama weighed in with his own ill-considered plan, hatched by a radical shadow FCC operating inside the White House.

At the last minute, Wheeler ditched the court’s blueprint and pressed his Democratic colleagues to pass a raggedy patchwork of new regulations that left the open Internet to the footnotes.  Wheeler’s 400-page Open Internet Order transformed access and content providers large and small, private and public, into common carriers, subject to byzantine public utility regulations known as Title II, originally crafted for the former Bell monopoly in the 1930s.

Yet the Open Internet Order offers no hint that the architects of the scheme, now the subject of a massive court challenge before the D.C. Circuit, made any effort to estimate the costs or benefits of Wheeler’s radical departure from twenty years of “light touch” Internet regulation. Let alone ensure that the value of a government takeover of the Internet ecosystem would come close to covering massive and far-ranging costs.

That failure was the subject of a friend of the court brief filed in August by the Georgetown Center for Business and Public Policy.  The brief, which we co-authored with a dozen leading economists, argued that the agency failed to offer any economic analysis or justification for its paradigm shift in policy. 

Worse, the agency ignored or mischaracterized a mountain of evidence that made clear the extraordinary benefits—obvious to any American consumer—of the long-standing bi-partisan promise to let the Internet develop without micromanagement by the FCC or any other regulator, at home or abroad. 

The FCC’s refusal to follow good government practices of nearly every other federal agency has legal as well as economic consequences.  Long-standing Supreme Court precedent requires at least some analysis of the economic impact of new rules, even by independent agencies whose governing statutes don’t explicitly mandate it.

A neutral determination that the benefits of new regulations outweigh their costs is a minimum condition of what the Court calls “reasoned decisionmaking.”  But it was willfully ignored in the FCC’s rush to usurp engineering-based Internet governance.  That failing alone could signal the downfall of the chairman’s Title II folly.

The Commission has the capacity to operate reasonably in the future, but it must first be weaned from the dangerous practice of fiddling with well-functioning markets that are evolving rapidly and generating substantial consumer benefits in the absence of slow-moving and costly regulation. The FCC’s expert staff stands ready, willing and able to help the Commission make timely decisions based on sound economic principles grounded in real data.  If only Chairman Wheeler would let them.

Mayo is professor of Economics, Business and Public Policy at Georgetown University’s McDonough School of Business and executive director of the Georgetown Center on Business and Public Policy. Downes is director of the Center’s Evolution of Regulation and Innovation Project, and co-author, most recently, of “Big Bang Disruption:  Strategy in the Age of Devastating Innovation.”