May 5, 2015
With Responses From
May 5, 2015
3 Min read time
Public utility regulation has discouraged competition.
Sabeel Rahman’s provocative essay ignores the problematic history of public utility regulation, which, despite the best of intentions, has been anything but progressive.
Economists, political scientists, historians, and legal scholars have studied public utility regulation and related public interest mandates for generations, documenting time and again how those rules failed to live up to advocates’ lofty promises. Specifically, these scholars have consistently found that public utility regulation distorted incentives and discouraged new entry, competition, investment, and innovation. Worst of all, public utility regulation was frequently captured by covered sectors to serve corporate ends, thus converting public interest regulation into private interest privilege. The result of progressive public utility regulation is often corporatism.
Public utility regulation has discouraged competition and innovation.
No amount of wishful thinking can make this inconvenient history disappear, yet Rahman disregards it. This is curious because most of this history was written by progressive reformers. Alfred Kahn, the godfather of public utility economics and a lifelong Democrat, meticulously documented the problems associated with public utility regulation in his two-volume tome The Economics of Regulation (1970, ’71). Kahn was later appointed by President Carter to oversee the reform of the Civil Aeronautics Board (CAB), which had allowed incumbent airlines to cartelize the industry, close off new routes and competition, and drive up rates.
The CAB’s problems were so chronic that Kahn and the Carter administration burned the old regulatory playbook and abolished the agency. They were assisted in this effort by a roster of progressive stars: congressional Democrats including Senator Edward Kennedy, future Supreme Court Justice Stephen Breyer (then a Senate staffer), and consumer advocates such as Mark Green and Ralph Nader. These steadfast left-leaners were convinced by the evidence before them: public utility regulation was actually harming consumer welfare. Several other heavily regulated sectors—including trucking, telecommunications, and natural gas—were liberalized for similar reasons. Again, liberal Democrats had a major hand in these deregulations, which produced billions in consumer savings.
Given the history, it is unclear why public-minded progressives such as Rahman want to extend this failed model to the most dynamic sector of the modern economy: the Internet and information technology platforms. If the concern really is the market power or “bigness” of given firms or platforms, then antitrust law already addresses that. Importantly, antitrust is ex post and remedial in character, allowing competition and ongoing innovation every chance to counter market power before the law intervenes. By contrast, public utility regulation imposes preemptive controls and, worse, can empower entrenched market actors.
That distinction is important for another reason that Rahman fails to identify: today’s tech titan can quickly become tomorrow’s punch line. Indeed, companies in many of the information technology sectors he identifies have only been around for ten to fifteen years, and they often displaced other firms once thought of as too big. Should we have applied public utility regulations to AOL in the late 1990s or MySpace or Blackberry in the mid-2000s? At the time, their market power seemed unassailable. Today, however, many of those firms’ investors wish they could get their money back. This is a rapidly evolving sector. Heavy-handed public utility mandates could have the perverse effect of extending the lives of companies that would otherwise be disrupted.
Even more surprising is Rahman’s handwringing over the sharing economy. Just a few years ago, no one had even heard that term, yet Rahman is already prepared to apply public utility regulation to this nascent and fast-moving sector, even though the innovation and choices it has offered are wildly popular and represent a genuine improvement over earlier comparable services.
The sharing economy has overcome market imperfections without recourse to traditional forms of regulation or costly bureaucracies subject to regulatory capture. Best of all, the sharing economy and online review sites such as Yelp have empowered the public with reputational feedback mechanisms, which significantly diminish the problem of asymmetric information between producers and consumers. These mechanisms create incentives for transacting parties to perform better, and they help lower both search and transaction costs for everyone. A century’s worth of public utility regulations never produced benefits of this magnitude.
In sum, public utility regulations have not promoted consumer protection and they won’t today, even if public utility regulations were once justified on those grounds. There is nothing pro-consumer or progressive about foreclosing opportunities for greater choice, competition, and innovation. We should avoid extending such inefficient and anti-consumer policies to the exciting technologies and services that consumers now enjoy.
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May 05, 2015
3 Min read time