Net Neutrality, and Regulation by the Unicorn State

“Net Neutrality” is a hot issue. It refers to equal service quality for all web-based traffic, against a fear that Internet providers (like Verizon) will allow (or effectively force) some to pay more for faster data delivery, making others second class netizens. So some advocate designating the Internet a “public utility” subject to FCC regulation to enforce net neutrality. This plea is highly seductive.

Similar regulation by the Interstate Commerce Commission was imposed on railroads in 1887. No; “imposed” is the wrong word; actually the railroads wanted this, seeing ICC regulation as a tool to protect their market power against upstart competition.

I spent my professional career as a public utility regulator. One of my first cases targeted a small moving company breaking the rules. Its transgression? Prices too low. Were we protecting the public? Certainly not; we were protecting the established moving companies. This is the face of regulation in the real world.

Columnist L. Gordon Crovitz in the 8/18 Wall Street Journal notes that the ICC enforced a kind of “net neutrality” on the railroads: prohibiting “discriminatory” volume discounts or other market-oriented pricing schemes.* Result: a stagnating U.S. rail industry. The ICC was finally abolished in 1995, but the lingering effects of this deadening regulation leave American train service shabby compared to spiffier European or Far East rail systems.

Crovitz also discusses the heavily regulated taxi industry. He quotes the New York City regulator’s website explaining that before it stepped in, the taxi business was a free-for-all with numerous competitors using “underhanded tactics” – like “drastically lowering fares to get more business.” The horror! The horror!

But today, across the globe, the taxi business is being up-ended by innovators like Uber and Lyft giving smartphone-using consumers service better tailored to their needs. And a battle royale is underway between these feisty upstarts and the old regulators (backed by the stodgy old taxi firms) struggling to hobble them. A similar war pits the old hotel industry against newcomers like Airbnb disrupting their business model by providing alternatives more attractive to consumers. This is what economist Joseph Schumpeter famously called “creative destruction” – it’s how an economy progresses – a great virtue of a truly free market.

Do we really want to give the FCC regulatory power to squelch this by enforcing its ideas of service and pricing for the Internet? Or let creativity rip, with businesses free to innovate on services and pricing tailored to a swiftly changing technological landscape, responding to market forces and consumer preferences and needs?

Business-hating lefties think government must keep them on a tight regulatory leash lest abuses occur. And absent regulation they would occur. But I believe the costs and harms to consumers would be simply overwhelmed – overwhelmed – by the benefits in better products and services, lower prices, and greater overall societal wealth, if all regulation were abolished.

Think I’m nuts? Then look at China, where that’s exactly what happened. Since 1978, China’s private sector has been virtually free of regulation. And, yes, abuses have occurred. But meantime average per-capita income has grown 3000% – thirtyfold. I repeat: thirtyfold. (99-percenters take note.)

I wrote recently about an abuse by government, the unjust prosecution of innocent Muslim-Americans on phony “terrorism” charges. I marched in protest with local liberals. But they, I said, are like battered spouses who still profess undying love for their batterers – no matter how much it tramples their ideals, still liberals love government. The same Wall Street Journal issue elsewhere quotes economist Michael Munger: “My friends generally dislike politicians, find democracy messy and distasteful, and object to the brutality and coercive excesses of foreign wars, the war on drugs, and the spying of the NSA. But their solution is, without exception, to expand the power of ‘the State.’ That seems literally insane to me . . . Then I realized they want a kind of unicorn, a State that has the properties, motivations, knowledge and abilities that they can imagine for it. [They] imagine a State different from the one possible in the physical world.”

I just got a call from a car repair business asking if I was “completely satisfied” with their service. I’ve never received such a call from a government agency.

* America’s first federal conviction of a corporation, in 1909, was for a railroad’s crime of cutting prices.