Friday, May 27, 2005 - The Progress & Freedom Foundation Blog

The Competition and Industrial Policy Paradox

I agree with Patrick on the encouraging words of Chairman Martin in his talk with Tech Daily's Drew Clark. The Chairman has his priorities exactly right in noting that market competition enhances consumer welfare, and that government's role is to set rules within which market competition can thrive. The Coasian translation of this point would have the government define property rights and enforce private bargains -- and Coase would have it that this would predominately benefit consumers over state superintendence of bargains and manipulation of property rights.

The Chairman's challenge is that he presides over an agency where the Coasian enterprise is quite foreign (excepting the counsel of Messrs. Atkinson and Barnkov). This is not because of some anti-market malevolence within the agency, but rather becuase of an institutional history, structure and mission aimed at industrial policy -- the manipulation or preclusion of market outcomes so that some other thought-to-be beneficial social end can be achieved. In telecommunications, we call that end "universal service;" in broadcasting, we call it "diversity;" in spectrum, we call it "small business set asides." If you look at questions of spectrum, merger conditioning, unbundling, intercarrier compensation, and universal service, they all nearly involve calls to reorient or define the property rights to achieve a given argued-for beneficent outcome.

Accordingly, applying the competition catechism at an agency like the FCC is not an easy feat by any means. Take for instance the Chairman's properly held priority for broadband deployment. The temptations to get off the market path he counsels are many. "Special" incentives, which at an extreme would involve granting an exclusive franchise like we de facto did to AT&T at the beginning of the last century, are an always present political temptation so the agency can look like it is "doing something." By contrast, the market path seems more boring, at least from the agency's perspective. Defining property rights and allowing private capital and agreements to be the driver of broadband deployment do not make for dramatic sweeping programs; nor instantaneous political rewards. Nevertheless, history shows that these market-making institutional moves generate more dynamism and consumer benefits than the industrial policy favoritism alternative (they also generate less rentseeking, to the extent the agency is believed in its constancy to market beliefs).

The Chairman's political skills are beyond compare, and his policy instincts in the right place. It will be difficult given the legal inadequacy of the Act, the perverse incentive structure that tends toward industrial policy reward-giving, and the political-driven as opposed to policy-driven outcomes that are the agnecy's history. Nevertheless -- if he is joined by colleagues that share his vision -- he does have a chance at a historic chairmanship.

posted by Ray Gifford @ 1:26 PM | The FCC