Beware the Unintended Consequences of Regulation

History is full of examples of government regulations that had effects very different from what their drafters intended. My favorite example is the Interstate Commerce Commission, which was created in 1887 to regulate the railroads. The Interstate Commerce Act was strikingly similar to today’s network neutrality proposals: it prohibited discrimination by railroads toward their customers and created the ICC to enforce the regulations.

The very first ICC chairman was a railroad ally, and the railroads quickly gained full control of the commission. By the early 20th century, it was using its power to restrict competition and raise prices. When the trucking industry emerged in the 1930s, the railroads lobbied to extend the ICC’s authority to all surface transportation in order to reduce competition from that sector. By 1970, things had gotten so bad that none other than Ralph Nader called for the ICC’s abolition, describing it as “a forum at which transportation interests divide up the national transportation market.” The ICC was supposed to protect consumers from the railroads, but in practice, it mostly protected the railroads from competition.

The fundamental problem is that any network neutrality regulation Congress passes will be enforced by the FCC, and no one has more influence over the FCC than telecom companies. It’s simply naive to expect an agency that has repeatedly promoted the interests of large telecom companies to suddenly become strong advocates for the rights of consumers. If Congress passes network neutrality regulations, the FCC will almost certainly interpret them in a way that renders them toothless.

Even worse, the telecoms could do what the railroads did a century ago and transform network neutrality regulations into a barrier to entry for new firms. Filing network neutrality complaints against competitors could become a useful harassment technique, forcing entrepreneurs to waste valuable time pleading their case before the FCC. This, too, has ample precedent. For example, during the 1960s, AT&T used regulatory barriers to delay the entry of MCI into the long-distance market by about a decade.

Our top priority in the broadband market should be to promote more competition. We should therefore be wary of enacting new regulations that could tie up new entrants in red tape. There is no reason to think that network neutrality is in imminent danger, and so it would be foolish to enact major new regulations based on purely speculative dangers.