Telecommunications in the 20th century offered case study after case study in what happens when economics are sidelined in policy discussions. The negative effects of decisions to protect the Bell telephone monopoly and allocate spectrum via “beauty contests,” rather than markets, still linger today in the form of inefficiencies and depressed competition.
It’s not that economics didn’t have contributions to make in these areas; they simply were not incorporated into Federal Communications Commission policy. Nobel laureate economist Ronald Coase showed in 1959 why it was nonsensical not to price the spectrum, but the first spectrum auction didn’t happen until 1994. This sad tale of eschewing economics continued in the 21st century with the “economics free zone” of the 2015 order that imposed heavier regulations on internet service.
The current FCC seeks to change this pattern. Chairman Ajit Pai announced last year that he wanted to “create a culture of economics at the FCC” and was seeking to develop an office in the FCC that would “give economists early input into the decision-making process.” The commission appears likely to do just that later this month, when it votes on an order that would create an Office of Economics and Analytics. The OEA would provide a focal point for FCC economists currently spread across different bureaus, allowing them to identify and analyze economic issues associated with everything from complex auctions to communications policy writ large.
The proposed order helpfully identifies many specific areas in which the OEA will coordinate and contribute economic analysis to FCC actions. It also directs the bureaus to collaborate with the OEA in carrying out their functions, suggesting the office will not be merely symbolic but will meaningfully impact the commission’s decision0making.
One result of a greater role for economics might be increased regulatory humility. As another Nobel Prize-winning economist, Friedrich Hayek, once wrote:
The curious task of economics is to demonstrate to men, how little they really know about what they imagine they can design.
Pai and future FCC chairs should be prepared to incorporate economic analysis even (and especially) when it’s unpopular or doesn’t fit with their own designs. A more central role for economic analysis may uncover fundamental shortcomings in policies and programs that have worthy goals but unseen costs that make them economically harmful.
Some universal service programs may be examples. “Closing the digital divide” is good political rhetoric, but making it a reality through subsidies requires accounting for opportunity costs. As University of Florida professor Mark Jamison recently argued:
If we’re talking about taking money from one place and putting it to broadband that people are unwilling to pay for, then we get less housing, we get less food, we get less education — something else is given up.
Communications regulation is littered with such trade-offs. From paperwork to pole attachments, ferreting out opportunity costs and countervailing benefits is essential to making rational (let alone smart) policy. We should welcome an increased role for economics and hope the OEA becomes a significant voice at the FCC.
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