Estimating the True Cost of FCC Regulation

Ever since the FCC began kicking around the idea of new Internet regulations (a.k.a. “net neutrality” regulation), economists, attorneys, and politicos have been arguing what, if any, cost will be […]

Ever since the FCC began kicking around the idea of new Internet regulations (a.k.a. “net neutrality” regulation), economists, attorneys, and politicos have been arguing what, if any, cost will be incurred by Internet Service Providers (ISPs) as well as the general public.  Although the exactitude and underlying assumptions of some estimates have been disputed, few have considered the real, total economic cost of the new policy.

The Progressive Policy Institute (PPI) recently circulated its study, for example, attempting to estimate the additional taxes and fees from the FCC’s net Internet order.  After originally deciding upon a figure of $15 billion in new costs, it revised its numbers down to $11 billion after Congress subsequently renewed the Internet Tax Freedom Act prohibiting taxes on Internet service.  The $11 billion figure is still disputed by some, but regardless of what these particular costs will be, estimates still fail to capture compliance costs, as well as what economists call “opportunity costs,” and the additional burden these shifts will have on consumers.

First, it should be noted that, as difficult as it is for any researcher to estimate direct costs of doing business (such as through fees or taxes), it becomes an even more burdensome process to calculate the additional indirect costs to companies, financial markets, and consumers.  Much research has been conducted attempting to introduce theoretical models for estimating these costs, but none have been able to accurately estimate the dynamic economic repercussions associated with regulatory changes.  In the following, however, I will attempt to offer some context to why these estimates are so difficult to assess, in the hopes that it will provide a better understanding of the various cost burdens associated with new regulations.

One way to estimate regulatory costs is to use the Office of Information and Regulatory Affairs’ (OIRA) good faith estimate of the number of hours of paperwork that a new regulation will require.  A recent figure by OIRA suggests that federal government regulations result in more than 10 billion hours of time spent on paperwork each year.  The one flaw with OIRA’s estimate of the total cost of these 10 billion hours, however, is that it is created using an hourly wage rate of $7.45 an hour, below the minimum wage rate in at least 27 states.  No one working on compliance in this country will earn so little.

More contemporary research, including the BLS’ estimated wage for a “general compliance officer,” puts the cost of an individual working on regulatory compliance paperwork at closer to $30 per hour.[1]  Although it is impossible to accurately estimate the total cost associated with industries impacted by the FCC’s new “net neutrality” order, ball-park figures may help to understand the economic burden from compliance alone.

According to some estimates there are approximately 7,000 ISPs that fall under the FCC’s reclassification order.  Some estimate a lower number, so in order to keep it simple, I’ll round down to 5,000.  Reading the new order will take most an average work day (if it only takes you 90 seconds per page, faster than the average reading rate for your basic novel), but consider that most companies will have more than one person analyzing the order.  Further legal comparative research, considerations of the impact on existing company practices, and intracompany discussions and briefings will take some time, but again, to keep it simple, we’ll just say it will take a couple of weeks (total of 80 hours) of time for a single individual to figure out the implications of the order, educate and train compliance staff, and reconfigure paperwork and filing procedures for the entire company.

For a single ISP, 80 hours of time will therefore cost $2400.  However, for all 5000 ISPs, the number jumps to $12,000,000.  In the scheme of things, this might seem like a small number.  But, realize that these numbers are just estimates to allow for a basic understanding of how such costs can be estimated.  Consider the time spent on compliance by publicly traded companies when putting together their annual 10-k reports (as required by the SEC) as an example of the real time spent on compliance.  On average, more than 5,000 hours are spent reporting on the overall operations of a single company.  A new regulation, with highly specific compliance requirements, could easily take 1000 work hours to review, research, change practices, and file paperwork.  And the wages of expert compliance officers with a specialized understanding of telecommunication laws and FCC regulations is, most assuredly, greater than $30 per hour.  The total costs of paperwork compliance alone, not including the possibility of having to reconfigure business operations or the cost of ongoing compliance (substantial costs by themselves) can easily reach into the hundreds of millions.

This is partially why so many regulatory studies fail to consider the true costs and often underestimate the compliance burden of new regulations.  For example, when the SEC evaluated the costs resulting from Sarbanes-Oxley, subsequent research showed that total compliance costs “significantly exceeded SEC estimates,” often my more than 70 per cent.[2]  Legal analysts, as well as bureaucrats working in the confines of agency-defined measurement parameters, often misunderstand or underestimate the costs of doing business, and always underestimate the real economic costs that the country must bear.

Most estimates also fail to consider opportunity costs, which in the context of the FCC’s newest order, economists would define as the possible gains that companies could have had if they were not required to expend resources on the new regulation.  Since such costs are usually implicit and impossible to accurately estimate, policymakers often irrationally choose to ignore the economic impact in their analyses,[3] which has led to a bias towards the implementation of regulation.[4] [5]

Companies who have increased compliance costs miss out on the opportunity to invest in research and development, which leads to new technology, better and cheaper services, company expansion, and employment gains, for example.  However, opportunity costs can also include the missed opportunity to shift resources to programs that improve citizens’ welfare, such as those that cater to the needs of impoverished communities.

When estimating the advantages of government spending, researchers and economists often cite what is called the “Keynesian multiplier” as evidence that a single dollar spent by the government will equal more than a dollar of additional benefit to the economy.  Under this theory, earnings snowball throughout the economy as the person or company receiving the dollar, spends the dollar at other businesses who pays its employees and so on.  Although there is some debate about the magnitude of the multiplier in our economy (including research showing a negative multiplier at times), it has come back en vogue in the world of economic policy since the Great Recession, and can also be applied to estimations of costs.  These costs don’t simply impact companies’ bottom lines, but also its employees, the businesses that would have otherwise received patronage from these employees, etc.  Compliance and opportunity costs may well have an effect that is multiplied many times over as it reverberates throughout the economy.

Regardless of the magnitude of the estimated direct costs associated with the FCC’s recent Internet ruling, we should all realize that they are a pittance compared to the real and total costs that will be effectively felt throughout the economy.  Legislators debating the rationale for a bill that negates the FCC’s ruling should pay special attention to the long-term deleterious effects, and not just the taxes and fees that federal, state, and local governments may apply to consumers.

[1] Batkins, S. (2012). What Does an Hour of Regulatory Compliance Cost?. Regulation, 35(2), 11-12

[2] Janson, K. R., & Scheiner, J. H. (2007). Compliance Costs in the Second Year of Sarbanes-Oxley: The Evidence from Bank Audit Fees. Bank Accounting & Finance, 20(2), 10-14.

[3] Lucas, J. M. (2015). Out of Sight, Out of Mind: How opportunity cost neglect undermines democracy. New York University Journal of Law & Liberty, 9(1), 249.

[4] Benson, B. L. (2008). Opportunities Forgone: The Unmeasurable Costs of Regulation. In M. Henrekson, R. Douhan (eds.) , The Political Economy of Entrepreneurship. Volume 1 (pp. 92-116). An Elgar Reference Collection. International Library of Entrepreneurship, vol. 11. Cheltenham, U.K. and Northampton, Mass.: Elgar.

[5] Sherrington, C., & Moran, D. (2007). The accuracy of regulatory cost estimates: a study of the London congestion charging scheme. European Environment: The Journal of European Environmental Policy (Wiley), 17(2), 106-123. doi:10.1002/eet.441

Justin Vélez-Hagan is an economic policy researcher at the University of Maryland-Baltimore County, the founder of The National Puerto Rican Chamber of Commerce, and author of the upcoming book, The Common Sense behind Basic Economics (2015). @JVelezHagan