Regulations Rob the Internet of Its Dynamic Evolution

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President Obama recently weighed in on the Federal Communications Commission's (FCC) net neutrality proceedings, basically endorsing a government takeover of the internet. Given the president's predilections for executive orders, the decision is not surprising. Imposing sweeping new regulations on the internet would continue the expansion of the administrative state that the president favors. But new regulations come at the price of reduced innovation and lower levels of capital investment, which is unfortunate, because neither the administration nor the FCC have yet to make the case that current internet policies have been problematic.

In fact, a look at the internet's development demonstrates just the opposite: limited regulation has fostered the development of one of the most important and disruptive technologies of our time. In spite of-or, more likely, because of-light-handed regulation, the internet has evolved at a pace that is transforming large swathes of the economy. Today, there are 2.5 billion people connected to the internet. By the 2016, the internet is expected to generate $4.2 trillion in economic activity among the G-20 nations.

The president's announcement is the latest skirmish in a long battle over the internet's future, a debate dating back to the Clinton era, when FCC Chairman William Kennard led the effort to ensure the internet was allowed to expand on its own, free of the burdensome regulations that governed telecommunications. But there has always been a tension between regulators and broadband providers, with increasing efforts to place the internet under greater government scrutiny. Under the guise of protecting a free and open internet, proponents of net neutrality rallied to the call for tighter regulations. They have been joined by internet giants such as

Google and Netflix, who have their own economic interests at heart in their push for increased regulation.

President Obama's call for Title II regulations addresses the U.S. Court of Appeals' rejection earlier this year of the FCC's 2010 "Open Internet Order." The court concluded that because the agency refused to classify the internet as a telecommunications service, it could not be subjected to the Title II regulations, which were adopted to regulate the telephone system. Reclassifying internet service as a telecommunications service, therefore, would remove any legal impediments to Title II regulation. In response to the court's decision, current Chairman Tom Wheeler opened a new rulemaking on how best to regulate the internet, which is the source of the current debate.

Title II was first enacted in 1934 to regulate the telephone network as a utility, or common carrier. Utility regulation is a cumbersome, time-consuming process typified by ratemaking hearings where providers and regulators dispute what comprises a "just and reasonable" price. And more often than not, this type of economic regulation benefits the regulated industry, not the consumer. This is why, starting under President Jimmy Carter, there was a concerted move away from this form of regulation, a move that saved consumers billions of dollars. With the FCC, the Federal Trade Commission, and the Department of Justice already looking at anticompetitive practices, is a massive new regulatory structure required?

Throttling back the internet to the speed of bureaucracy benefits no one, while dampening innovation and investment in the networks of the future. Proponents of net neutrality regulations appear to assume that handing the FCC the reins of the internet somehow freezes in place the internet as it exists today. This is false.

The internet is still evolving and placing federal regulators in charge will alter that evolution in ways that net neutrality advocates do not expect. It is not intuitively obvious that FCC regulators would be better managers of the internet. One only need recall the Hush-A-Phone case, where it took eight years and a legal challenge to overrule the FCC's decision that adding a plastic mouthpiece to a phone was somehow "deleterious" to the integrity of the telephone network.

The statutory basis for the FCC's desire to impose Title II regulations on the internet is tenuous at best, as demonstrated by the court's consistent rulings against the FCC's past attempts at internet regulation. Given the legal uncertainties and the explicit pressure from the White House on a supposedly independent agency, it may be time for Congress to revisit this issue to resolve the current regulatory uncertainty, which has already led one significant broadband provider to delay further investments in broadband deployment. If the courts are questioning the FCC's statutory authority, perhaps the new Congress should clarify the FCC's regulatory limits, and allow the internet to continue its dynamic evolution free from unnecessary federal regulations.


Wayne Brough, Ph.D is Chief Economist and Vice President of Research at FreedomWorks.  

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