Address by FCC Commissioner Harold Furchtgott-Roth. Title: The Realpolitik of Regulation. Location: American Enterprise Institute. Date: April 28, 2000. Editor's Notes:  • Tech Law Journal transcribed this from a poor quality audio tape. There may be errors.  • Inaudible words are indicated with an underscore: ___.  • The introduction by Christopher DeMuth has not been transcribed.  • The question and answer session has not been transcribed.  • Hypertext links have been added by Tech Law Journal.  • Copyright Tech Law Journal 2000. All rights reserved.

[The introduction of Furchtgott-Roth by Christopher DeMuth, and Furchgott-Roth's opening comments have not been transcribed.]

I have thought about writing a book on regulation. And someone recently put me in touch with a leading ___ and this was the person who was the most sympathetic to the idea of a book on regulation. So I called him up for a lunch appointment to discuss the book possibility. And he said, "Well, uh. Personal. Tell me. What is this book you want to write about?"

I said. "Well, it is about regulation."

And he said, "Well, you know, thank you. But, really, there is no market for books on regulation. No one wants to read about it anyway."

So I deepened my voice a bit, to sound important, and say, "Well, I think I really have some new ideas here."

And he said, "Uh, save yourself some trouble kid. Photocopy your pages and hand them out to your ten closest friends. No one else really wants to read about this. If you have a book on sex, or health, or something like that, that is a book I can sell. Regulation. Never."

I am just glad I did not talk to one of the agents who is not sympathetic to the idea of a book on regulation.

People in government sometimes have an inflated sense of self importance. Much of the outside world does not really care about what goes on in government. I once met a venture capitalist in California who asked me what I did. I said I was an FCC Commissioner.

He said, "Oh, well that is interesting. I have a friend who is on some blue ribbon panel in Washington who flies there once a quarter, and has a good time. So tell me, what is your real job?"

And, I said, "Well, I'm an FCC Commissioner." And he was started to discover that that was a full time job. A lot of people in Washington are startled too.

There was, uh, while the outside world does not know much about what regulators do, those who have to deal with us ___ all to well.

There is a story of the regulatee going in to a regulator. And you can pick your favorite regulator to fill the blank here. And, um, this regulatee was in a lot of trouble. So they sent some junior officer of the corporation to go in to speak to the regulator. And, uh, it was just really all day long.

"So, have you filled out these forms?"

"What forms?"

"Do you know how to fill out the forms?"

"What forms?"

"What are you going to do?"

"Well, I am sure in the past whenever I have had troubles the good Lord from on high has looked down and had mercy on me and saw me through."

This goes on all day, and at the end of the day the regulatee says "I have no idea what you have told me. I don't understand what I am supposed to do. But, I am sure the good Lord will see me through."

The regulator shakes his head, and goes in to see one of his colleagues, and says, "Well, I have good news, and I have bad news. The bad news is this corporation has no idea what they are supposed to be doing, and really don't understand. The good news is, he recognizes that we actually are God."

I am going to look at regulation as an economist would. But, at times there is this element of the God-like nature of regulators. That is the trouble. That is, sort of, the theme of my talk today. Because ultimately, that is, as a ___ of regulation.

I am going to suggest that there is a market for regulation, with demand and supply characteristics. But I am also going to suggest that pure economic analysis alone can only take us so far in understanding regulation. We also need to understand some of the institutional and political considerations of the regulators themselves.

One of the main themes of the talk is that regulation today is monopoly provided. There is a government sponsored set of regulators that we all have to deal with. We cannot choose a different set. The monopoly position of regulators gives them substantial power in regulated markets. All of which may harm both competition and consumers in the market.

Regulators expand their power in markets by enhancing their discretion to make market affecting decisions through a series of techniques: the realpolitik of regulation.

I am going to list ten of these, which are going to be scattered throughout the talk. And these are:

1. A lack of strict adherence to the law;
2. Expansion of agency jurisdiction;
3. Refusal to write procedural rules;
4. Refusal to have transparent processes;
5. Refusal to have predictable processes;
6. Refusal to collect, disseminate, analyze, or systematically evaluation information on the costs and benefits of regulation;
7. Complexity;
8. Inefficiency;
9. Promotion of benefits, and hiding of harms to consumers; and finally
10. The treatment of similarly situated parties in different ways.

Each of these ten attributes contributes to the ability of a regulatory agency to make discretionary decisions that may affect regulated markets. The offensive strategy for regulators is the realpolitik of regulation. It is to expand these characteristics, and to fully utilized them as much as possible.

And, the defensive strategy for the rest of us is to diminish those powers.

Let me give a disclaimer. I will speak about regulation generally. And by regulation I mean government decisions that restrict what can be provided in the market. It can occur at any level of government, by any agency, and by any level of employee at that agency. Many of my examples will come from the FCC, because that simply the agency I know the best. But it is by no means the only one that these principles apply to. And my comments are academic in nature ___ academic institutions, ___. They are not intended as a criticism or endorsement of any particular agency, or any particular person.

The employees of government agencies in general, and the FCC particularly, have to the best of my knowledge, the highest integrity and standards. Chairman Kennard of the FCC has, in many areas, done much to limit agency discretion, and I commend him these efforts. But all of us, as regulators, and as employees of regulatory agencies, must understand how best to administer the agencies the public has entrusted with us. In that spirit, I offer these comments, which apply equally well, or poorly, to the FCC and to every other government agency.

Before I describe in more detail these ten characteristics of the realpolitik of regulation, let's examine briefly the economics of the market for regulation. What is the demand for regulation? There are at least four sources of demand for regulation.

And I am sure that everyone in this room is familiar with the spot and future markets for environmental regulation being traded on the Mercantile Exchange. Haven't heard ___?

How about the special on environmental regulations at Safeway this week?

Well, there are at least four sources of demand for regulation: the consumer, the businesses, the support industries, and bureaucrats.

Consumer demand for regulation is the public finance, textbook description of regulation. That is, regulation is a mechanism for pure market failure to internalize externalities. Thus, we have environmental regulations that provide for a cleaner environment, because there are externalities to environmental quality. And many have thought that all consumers want a cleaner environment. But, there may be non-market failures, such as high transaction costs, high enforcement costs, high litigation costs, that peculiar distribution of risks in a certain market. And thus we have a county recorder of deeds, not because there is externality or market failure, that prohibits a purely private market solution, but because the transaction costs of deed recordation, and the enforcement costs associated with property and contract, may be lower with governmental recordation of deeds.

Similarly, there may be cases of peculiar distribution of risks in a market. And the government steps in with risk sharing mechanisms such as government subsidized health care. There may or may not be better market based solutions. But my discussion today is not premised upon whether or not a specific regulation meets some form of economic rationality. Indeed, the general result is that all the above forms of government interdiction can be rationalized in world in which common law property rights, and contract rights, are paramount, and in which government intervention is merely there to enhance some form of identifiable social welfare benefits that regulation demonstrably exceed the costs.

Economists will quibble with about how best to quantify. But, today, I simply want to discuss something different.

The second source of the demand for regulation are the bureaucrats themselves, folks like me, folks like employees of the federal government. A lot of jobs at stake. They also want power, and that is part of the theme of realpolitik of regulation.

In the service industry of lawyers and accountants that demand regulation, their livelihood depends on regulation. The more regulation, and the more complex, the more demand there is for service ___.

Businesses also demand regulation. And they want regulation favorable to themselves, and unfavorable to their competitors. In Washington, it is called the "level playing field." Much academic work has been directed at all of these sources of demand for regulation, but I am not going to dwell on it today.

But I am going to do, talk a bit about is what economists would describe as the demand for regulation. ___  depends on various price effects, but ___ the price of alternatives, certain quality characteristics and income. I am not going to belabor all of these today. They are the topics of the chapters of the book that won't be written because no one will read it. I will, however, discuss in some detail the characteristics of the demand for regulation.

Let me just ___ in passing that the ___ price, the cost of regulations is substantially, is substantially different for different individuals in an economy. For some consumers a regulation, as the ___ fuel efficiency standards, is a regulation that may be costless. There are others, may be extremely costly.

Consumers like those regulations that favor them individually, and hate those that harm them individually, and are indifferent to the vast majority of regulations that don't really have any direct effect on these individuals.

There are some groups who claim they speak for all consumers on regulation. But, this is impossible. Actual consumer views on regulation are as varied as there are many people. And indeed, it seems at times that some consumer groups always get it exactly wrong, on. As an example, on, about two years ago AEI sponsored a paper here that, in this very conference room, in which Professor Gerry Houseman, who ___, an extremely interesting paper on the distributional effects of taxes on various forms of telecommunications services. And the result of Professor Houseman's paper was that placing taxes on the elastically demanded minutes of use charges of telecom services is one of the most punishing taxes in the arsenal of the American government. It is a tax that probably ought to be gotten rid of. In contrast, the far more efficient tax would be one that's, uh, not use insensitive -- simply a flat tax on lines. Consumers would lose far less welfare with that form of tax. But both of these forms of taxes are far less efficient than the simple personal income tax that the government administers.

Well, you would think that consumer groups would be all in favor of the tax that is the most efficient -- the one that harms consumers the least. But, paradoxically, in a proceeding before the Commission right now to reduce access charges on long distance telephone calls, many consumer groups are calling to shift access charges, which are use insensitive taxes, not to a flat tax, or to some other mechanism, but to another use insentitive tax -- the universal service fee. This is, to me, an extraordinarily anti-consumer outcome, and one that I find quite paradoxical, that is being advanced by consumer groups.

But we also know that the cross price effects of the demand for regulation ___. In many cases, consumers do not face other price effects, because they have no alternatives. Regulation is a government monopoly. Consumers must take it or leave it. There simply isn't much choice for consumers who want to clean their clothes in their own home. They have to purchase tap water from the local water source.

Consumers may be able to substitute demand for some unregulated services and goods. For example, consumers can switch to the Internet for long distance service. In this case, less Internet regulation substantially lessens demand for consumer regulation of ___ services. Conversely, raising Internet regulation likely would increase demand for long distance ___.

Let me illustrate the quality characteristics of the demand for regulation at one of my favorite agencies -- your friendly department of motor vehicles. Every adult in America is familiar with it. It is where you go to get your drivers license, change titles to a car, have your car tested for emissions, and so on. The department handles hundreds of thousands of people every year. It is slow, tedious, frustrating. But in the end it works.

In their demand for regulation consumers care about, at least seven of the characteristics of the realpolitik of regulation, that I introduced earlier, some, but not all, consumers care about written rules. When you go to the department of motor vehicles, most procedures are written down in simple detail.

Required documentation. Documents are written down. Even the questions for a drivers license. There is a written standard for appeal if the rules are not followed department of motor vehicles.

Predictable processes. Not only are procedures written down, they are followed in a predictable manner.

Rational rules. While some people may not think that everything that the department of motor vehicles does is rational, it is difficult to fault them for the processes, and if you don't think they are doing it efficiently, you can complain. And yes, it is true, they could hire more clerks. But they probably are fairly responsive if you have a useful suggestion.

Simplicity. You don't need to hire an army of lawyers and accountants to go and apply for a drivers license.

Full disclosure. The department of motor vehicles does not try to hide from the public its failings. If it is going to take half a day standing in line, you call up and say, "how long is it going to take?" They will tell you, "half a day."

Efficiency. All right. This is not the strong side of the department of motor vehicles.

And finally, and to me perhaps most importantly, similar treatment of similarly situated parties. We don't expect to be treated differently from the person in line in front of us or behind us at the department of motor vehicles. We certainly don't expect to be pulled out of line and put in a separate building and told we will face an entirely different process from everyone else.

On the other hand, consumers do not seem to care much about a regulator is acting according to the law, expanding jurisdiction, or whether the regulator has transparent processes. Just this week a high ranking official at the FCC sent a letter to Congress to saying we are not going to ___ auctions as required by law. I am sure most consumers will have a big yawn. "Well, what's the big deal?" The law says do it. The agency says "nah, we won't do it. What is the big deal?"

Nor do consumers care about the expansion of jurisdiction. A few years ago the Food and Drug Administration decided to regulate tobacco. It is not what the law said they could do. But they decided they wanted to do this. This would be good. There really was not enormous consumer outrage. It was eventually thrown out by the courts. But, this was, it took years, during which the FDA asserted it had jurisdiction.

Nor do consumers particularly care about transparency. Some government agencies have transparent, are supposed to have transparent processes, others don't. The Department of Justice is not supposed to have transparent processes. No one knows exactly how the Department of Justice Antitrust Division is coming to its conclusions about Microsoft case. But, there isn't profound consumer outrage about that. All right.

But, we do care about discrimination. And, and we Americans like to express our views. But, we do not necessarily expect anyone to change his or her business behavior as a result of our opinions. Try this experiment the next time you go to the grocery store. Tell the cashier your views on the environment. And see if the cashier charges you any more or any less, depending on your views about the environment. Of course, there will be no difference. A few comments on the environment may provoke a smile, a frown, but little else. We Americans demand and expect to be the same as everyone else. Now, flip the experiment around. And suppose the cashier lectured you on the environment, and then offered you a ten percent discount if you would sign a little petition. Or, if you decide not to sign the petition, charge you ten percent more. Would you be offended? Of course you would be. You quite possibly would march into the manager's office and demand that the cashier refrain from these practices or be fired on the spot.

When it comes to business dealings we Americans expect to be treated the same as anyone else regardless of our policy. Businesses treated, businesses that treat their customers or suppliers differently based on their viewpoint would likely soon go out of business. Expectations of non-discriminatory treatment based on viewpoint extend not only to business dealings, but to government activities as well. But, a parent would be dismayed if the principal of the school set up school rules that favored or disfavored children based on political viewpoint of the child or a parent. A property owner would be offended if the county council set property taxes based on the political views of the owners, so that identically situated property owners  were taxed at different rates. We Americans are not so naive as to believe that lawmakers and rule makers have no political views. Of course they do,  whether they are Members of Congress, state legislature, or county council, or the local school principal. But we do expect the law and rules that they write to apply equally to equally situated individuals and businesses. And we don't expect laws and rules to single out for reward or punishment individuals based on their viewpoint. Our expectations of neutrality also extend to those who enforce laws, and those who adjudicate disputes. Don't expect a sympathetic ear on environmental policy from a policeman as he writes you a ticket for a parking violation. Nor should you expect a traffic court judge to be amused by a long testimonial about your good ideas on the environment. You would be shocked, however, with the experiment, as the policeman is writing us a parking ticket, the policeman said, "You know, this is what I think about the environment. If you agree with me I won't write you the ticket." Now what is the traffic court judge said, "You know, your stock of goodwill in this court has been greatly diminished because you wrote to your Senators to support environmental legislation, which I personally disagree. Now, if you were to withdraw your letter to your Senator, perhaps this parking ticket might go away."

We Americans expect our government officials, with federal, state, or local to treat each of us anonymously. We don't expect our views, or our behavior in unrelated matters to be held against us government officials.

But, let me go on to the supply of regulation. Keep in mind regulators are monopolists. In economic terms, they are not price takers like competitive entities. They implicitly set marginal revenue to marginal cost. But in this case, we're ___. What is the cost? It is like the revenue is likely to be a ___ associated with some welfare profit, but what welfare profit? The public's? The agency's? The individual regulator's? Who knows? It can and does vary by the ___.

Is the welfare function to follow the law? Promote competition? To protect consumers? Promote certain social values?

You listen to regulators in Washington, and you will hear each of these and other welfare functions described. But all too often it is not simply to follow the law. Something else. In any case, we do not have the typical monopoly result of profit maximization for a normal good, in which the supply by monopolist will be less than would exist in a competitive market. If anything, there is far more regulation than exists in some hypothetical competitive market, although it is very difficult to describe what such a competitive market for regulation would look like.

The actual economic description of prices and technology in the formulation of regulation by government monopolists is a fascinating topic for yet another chapter of this unwritten book. Suffice it to say, one could take any standard textbook from public finance or regulation, and develop a fairly accurate description of what rational regulation might look like. And at the end of the day, it would likely have many of the quality characteristics of the demand side, the consumer's demand for regulation. It certainly would have rationality where benefits exceed the costs.

But for anyone who has spent any time in Washington, one realizes that that is not how regulation is done in Washington. That is, there isn't this kind of textbook model where people go out and look at the social welfare function and try to calculate the costs and benefits of regulation. It is simply doesn't happen.

Moreover, in a textbook setting, one might expect a some consistency in the ten characteristics of the real politick of regulation that I discussed. In practice, as we shall see, they diverge substantially. This divergence persists in some agencies because of the absence of competition and accountability of regulation.

Let me just focus on these ten attributes that I described. In a sense, one way of looking at this is that they develop and diverge ___ of an objective function that some regulators go out and simply do good. Some doing good is what regulation is all about. And to do the most good, you want to the most, by have the most discretion, which will give you the opportunity to do even more good. So how does an agency do what is good?

A lack of strict adherence to the law. Well, frankly, the law is often vague. What do you do when it is vague? Sometimes it is even self-contradictory. Why follow it if you are not required to do so? There are times when agencies don't follow the law ___.

Expansion of agency jurisdiction. Never miss an opportunity to expand agency jurisdiction. This goes on in every agency in town. They go into courts. They assert they have lots of jurisdiction. The next time they are in court they have even more jurisdiction. For instance, the FCC has held in packet switched telecommunications services interstate in nature ___ jurisdiction. This might put the state regulators out of business. It probably extends to central Australia, central Africa, and outer space. There is no limitation on the assertion of FCC jurisdiction. But, it is a good way of getting rid of potentially competing forms of regulation.

Refusal to right procedural rules. This is one of my favorites. The FCC has tens of thousands of license transfer applications every year. The FCC has few written rules, though, on how to deal with these tens of thousands of license transfer applications every year. If you want to know how you are supposed to be treated, you don't know. You hire a Washington lawyer. You try to figure it out. But at the end of the day, you have no written rule on which you can go to the FCC and say, "my procedural rights are not being followed here."

Refusal to have transparent processes. Well, you have a bit more discretion is people don't know exactly what you are doing. For example, the SBC Ameritech license transfers of a year ago ___ weeks, months, meetings, ___, public testified, the list went on. At the end of the day, said we came out, a lot of conditions on license transfers that had nothing to do with the licenses. But had everything to do with unrelated matter involved in the merger. The parties agreed to it for lack of an alternative. Basically, monopoly regulated. Many of the conditions broke the law. But, they have not been held accountable for that.

A refusal to have predictable processes. At the FCC, timelines, and possible conditions for license transfers, are unpredictable. If you are one of the tens of thousands of license transferees, you really don't know where you stand in the process.

Refusal to collect, disseminate, analyze, and systematically evaluate information on the costs and benefits of regulation. When I was Chief Economist for the House Commerce Committee, we would send out every year survey forms for about a dozen and a half agencies that the Commerce Committee had jurisdiction over, and asked them simple questions about rules that they made in the past year that had cost benefit analysis. Not a single agency had any information on cost benefit analysis. Well, one or two had a couple of ___. The vast majority had no information, because the vast majority of agencies in Washington do absolutely no cost benefit analysis. They haven't a single clue about whether a single regulation they have promulgated in the past, or any time in its history, had benefits that exceeded costs.

And if they had ___ the cost benefit analysis, they did no follow up to determine whether in fact the benefits of the rule ultimately exceeded costs.

Complexity. It just defines regulation. My favorite example is at the FCC. We have a computer cost model that is supposed to describe the cost of telephone service. You might think, the cost of telephone service, what could it be? Thirty-five cents at a pay phone? What's a cell phone cost? Who knows? What does it cost? Look at some books. Look at something. Couldn't be that hard. Well not for the FCC. We needed a cost model that no one could possibly understand. Because, if people understood it, then they might challenge it. So how do you develop a cost model that no one can understand? Well, you go out and hire a bunch of programmers to develop different models, and you kind of, force them to work together. They weren't built that way. And that result is a cost model that takes one hundred and eighty hours to run. I don't think that you have to be a rocket scientist to know that there aren't any other models in the world that take one hundred and eighty hours to run that work. By definition it doesn't work. No one believes it works. Everyone knows it doesn't work. But, it is too complicated to say precisely why it doesn't work. Because, it takes more than a week to do one run. And yet this is a cost model the FCC insists be used for universal service, insists be used for all sorts of other proceedings at the agency. They model, which no rational person would ___. And it hides behind its complexity to be able to say, "well, we have to use it, it is so complex, it must be right."

Inefficiency. We will leave that for another day.

Promotion of benefits and hiding of harm to the consumer. Part of the game of regulation is to persuade people you are doing a lot of good, and you are not doing any harm. So one way of doing that is to prohibit people from describing any harms that they ___. And so, for instance, last year, the FCC had a proceeding called the "truth in billing" proceeding. And any time a government agency employs the word "truth", watch out. That's words that is used in governments like Cuba, or China, or something like that, but not in the United States. So what this proceeding did was essentially prohibited telephone companies from describing details of universal service programs. Prohibited by law, by regulation, not by law ___. And the public does not know. Cal Thomas wrote an op ed piece earlier this week in which he praised Bell Atlantic the amount that was universal service ___. But, Cal Thomas was really told what the money was going for. He probably wasn't even told precisely how much Bell Atlantic was contributing ___.

Treatment of similarly situated parties in different ways. This is the fundamental basis for the realpolitik of regulation. For maximum discretion you want to get to a situation as a regulator where you can treat different parties in different ways, to have the maximum amount of discretion to treat different industries different ways, treat different businesses in the same industry different ways. And how do you do this? Well, one way you do this is to promote the idea the idea that there is such a thing as good will and political capital at the agency. Recently, a high ranking official at the FCC suggested that a certain industry had lost good will at the FCC by lobbying for legislation on Capitol Hill. But it this was a terrible thing.

Are industries treated differently at regulatory agencies depending upon their stock of good will at any given point in time? Do agencies keep running tabs on good will? Does one lose free speech rights if one is involved a regulatory proceeding? The answers to these questions is too chilling to go into detail.

But let me tell you that the net result is that when all of these ten attributes of the realpolitik of regulation, it is impossible to determine whether the benefits exceed the costs. It is not surprising government agencies used to engage in collection and dissemination and analysis of the costs and benefits of their regulation.

Different agencies have different combinations of these characteristics. In general, we are at a disequilibrium, where consumer demand does not match the regulatory supply, because regulators often have no incentive to do so.

Perhaps the regulators really are God. The offensive strategy for regulators in the realpolitik of regulation is to expand these characteristics. The defensive strategy for everyone else is to diminish them. Although a regulator by trade, I am interested in diminishing these attributes at the FCC and at other agencies.

This concludes my remarks. Thank you all very much. I would be happy to entertain questions.