Economic regulations always have consequences

Originally published by Sun Herald newspaper here. When asked, even most well-educated Americans don’t understand the Federal Communications Commission’s purpose, nor how its policy decisions affect us. Even more elusive […]

Originally published by Sun Herald newspaper here.

When asked, even most well-educated Americans don’t understand the Federal Communications Commission’s purpose, nor how its policy decisions affect us. Even more elusive is the economic impact that those decisions have on American enterprises, both large and small.

After receiving well over one million comments this summer, the FCC has the unusually difficult task of deciding whether to change its current policies regulating network neutrality, the idea that all Internet content should be treated equally regardless of its source. Despite having only a vague understanding of what “net neutrality” is, almost no one seems to understand the economic implications behind proposed policies, including the authors of dozens of articles that this author has read.

At the heart of the net neutrality debate is the proposal to regulate Internet service providers under Title II of the 1934 Communications Act, which would greatly increase the number of regulations that businesses have to comply with. (You might wonder how a 1934 law can apply to technologies of today. Well, you have a valid point.) Proponents favor the proposal to protect against their concerns of future Internet discrimination. Whether the fear of the unknown is a valid excuse to change public policy has been long debated but is a topic for another discussion.

Increasing the number of regulations that businesses must comply with has an economic impact in any industry. The argument revolves around whether the resulting social benefit outweighs the negative economic one. Regardless of one’s social goals, the economic ramifications can’t be ignored as they also have numerous social side effects.

Without a successful, private economy, we wouldn’t have the means to help anyone in need, for example.

It should be noted that additional regulations (no matter how minute) lead to reduced investments, which impacts both services to consumers and our nation’s economic output. Regulations that increase compliance costs and uncertainty are guaranteed to increase investment risk, reducing returns and overall industry investment. Whether that risk is increased high enough to dissuade substantial future investment is the question, but it will always reduce investment. In the case before the FCC, applying Title II regulations to Internet service providers will guarantee that several business groups suffer negative economic consequences.

First, large providers will have higher labor costs in order to comply with a new set of government regulations. Legal fees, accounting fees, and the initial costs to transform a business’ current operations will be substantial, along with subsequent ongoing costs. Whether in a monopolistic environment, or one of substantial competition, these costs will be passed on via internal cost restructuring (think layoffs) or in the form of increased consumer prices (think higher cable bills).

If a company incurring such costs is willing to internalize them, which none will, they will lose their competitive advantage to others who are more concerned with the bottom line. The return to investors that a company can offer will fall, instigating a financial capital flight to competitors, or if industry-wide, to another industry altogether. Any stock market analyst will tell you that one of the things that scares investors the most is when Washington starts kicking around the idea of increasing regulations on an industry. Market caps (a company’s valuation) drop every time, quite often overnight.

Large providers won’t be the only ones affected, as small Internet service providers will be the least able to continue competing with the likes of Comcast, TWC, Verizon, AT&T, Cox, etc. Wikipedia lists at least 126 Internet service providersacross the country. Many of the smaller ones won’t be able to survive substantial new costs, meaning that many competitors who offer cheaper or highly differentiated services to communities that otherwise might not be served will go bankrupt. The effective market consolidation will lead to fewer consumer choices, higher prices, less innovation, and less economic opportunity.

For the millions of existing businesses, and budding entrepreneurs, who are inclined to use the Internet to market, expand, and offer their own services, the additional cost of doing business means virtually the same as it does to the Internet service providers: reduced profits, which leads to reduced hiring and investment.

Since the inception of the Internet, many of the country’s impoverished communities have been afforded opportunities to advance that they otherwise would not have had. If their costs also increase, the opportunities they have had under a lightly regulated business environment will diminish.

The FCC’s debate surrounding potential Title II Internet provider reclassification has mostly avoided the real and total impacts to our nation’s economy.

Rest assured, however, increasing the number of regulations that businesses have to comply with won’t simply impact the biggest Fortune 500s, they will impact millions of small businesses, and hundreds of millions of American consumers.

Justin Vélez-Hagan is an economic policy researcher at the University of Maryland. He can be reached at or@JVelezHagan.