Economics Justified Eliminating Net Neutrality

September 26, 2019 | by Andrew Regitsky

Economics Justified Eliminating Net Neutrality

Any day now the DC Circuit Court of Appeals will release its opinion regarding the appeal of the FCC’s 2017 Restoring Internet Freedom (RIF) Order. In that Order, the Commission eliminated the net neutrality rules put in place in 2015 by the Obama-era FCC. Those rules forbid blocking, degrading or paid prioritization of Internet traffic while establishing onerous government supervision of all future ISP Internet conduct. The basis for this was that Commission’s reclassification of broadband Internet access service (BIAS) as a Title II telecommunications service which provided the authority to regulate the Internet as a public utility.

When the current FCC threw out the net neutrality rules, it had eight economic studies to review, all with conflicting conclusions. Some said Title II hurt investment, others the opposite. The Commission found flaws with six of the eight. Instead, it relied largely on an economics study conducted by the Phoenix Center for Advanced Legal & Economic Public Policy Studies (Phoenix Group) and its chief economist Dr. George Ford. Dr. Ford performed a “counterfactual” study, meaning he analyzed what Internet investment would have been without a decision to classify BIAS as a Title II service. He found that Title II classification hurt investment.

According to Ford’s counterfactual analysis, between 2011 and 2015 (the last year data were available), telecommunications investment differed from the counterfactual by between 20 percent and 30 percent, or about $30 to $40 billion annually. Ford’s counterfactual analysis indicated that the U.S. was due an investment boom in telecommunications following the recession of 2008, but that was apparently foreclosed by the FCC’s proposals to impose Title II regulation on broadband services. Ford also found no decline in investment following the release of the FCC’s “Four Principles” to promote an Open Internet in 2005, suggesting it is reclassification—and not Net Neutrality principles—that reduced investment. (Insight: Net Neutrality Goes Back to Court, but Will the Economics Hold Up? Lawrence J. Spiwak, Bloomberg Law. January 31, 2019, at p. 3).

In the appeal of the RIF Order, the Ford study was attacked, with the appellants submitting their own economic study of course reaching the opposite conclusion, that Title II did not hurt Internet investment. The DC Circuit or the Supreme Court will make the final decision on which study it believes.

While waiting for the Court’s opinion, Dr, Ford decided to conduct an additional analysis to determine if the FCC was correct not to use the conclusions of the six studies it rejected in the RIF Order. According to Ford, the FCC was correct to reject the six studies because they were defective.

Ford’s latest study was released on September 23, 2019 and discusses the four principles the Commission relied on to eliminate the defective studies.

In all, the Commission considered eight primary works but relied on only two of them, a culling process that relied on four principles: (1) simply comparing outcomes before-and after an event is not a valid impact analysis; (2) before-and-after comparisons are more probative if regression analysis is used to condition the outcomes by accounting for potentially relevant factors like economic growth, sales, and so forth; (3) the causal effects of a regulation are best determined with reference to a counterfactual; and (4) the application of proper methods does not excuse the use of bad data. (Net Neutrality and Investment in the US: A Review of Evidence from the 2018 Restoring Internet Freedom Order, George S. Ford, September 23, 2019, at p. 1)

Ford concludes that following these principles enabled the FCC to reach the correct conclusion that Title II regulation of the Internet hurt investment.

In all, I believe the FCC’s assessment of the record evidence on the investment effects of Title II regulation was reasonable even if incomplete...I do believe that empiricists would likely agree with the general empirical principles that can be extracted from the RIF Order, which I take to be the following. First, simply comparing outcomes before-and-after an event is not a valid impact analysis, though such comparisons may be suggestive. Second, regression-based means difference tests of policy changes (i.e. event study) are probative but only if the model is adequate. Third, the causal effect of a regulation is best determined with reference to a counterfactual. Fourth, the application of proper methods does not excuse the use of bad data. As detailed here, the conclusions of the RIF Order follow from these four basic principles. As these four principles are consistent with modern impact analysis, the RIF Order offered a reasoned and reasonable assessment of the evidence before it. (Id., at p. 28.)

As a disclaimer, critics of Dr. Ford will note that the Phoenix Center is generally known to be conservative and has never supported net neutrality. However, before dismissing his conclusions, please note that Dr. Ford and the Center are well respected by the entire telecommunications industry.

Moreover, there is no assurance that the DC Circuit will primarily rely on economics in its opinion on the RIF Order. Unfortunately, too many court decisions today are made on partisan rather than reasoned grounds. We will find out exactly what the DC Circuit decides soon. Let’s hope its decision rests on economic and legal principles.