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Speech by Harold Furchtgott-Roth

Regulation in the 21st Century
KMB Video Conference
April 28, 1999

Mike Beilis has asked questions about regulation in the 21st Century

Will it be different from 20th Century regulation. We have heard much about technology of the past two days. I want to talk about people.

Many of us here are regulators.

We have enormous responsibility and power under the law.

Businesses fear and hate us.

Consumer misunderstand and hate us.

There is a common theme here.

We are simply human. Fallible. Capable of great things.

Capable of great mistakes.

Why should we, as individuals, have this power?

It is not because we are special.

Nor is it because we have responsibilities to discover new technologies.

Lots of companies do that.

Or to make consumers rich. Various advocates do that.

Our job is not to be advocates.

Our job is to follow the law.


All of which brings me to my second topic - regulation, or as it's paradoxically and mischievously called in Washington, "deregulation."

Based on what I have just said about competition, what is the proper role of a regulatory agency. There is such a thing as "good" regulation. I will summarize my views with six points.

A. Follow the law.

First, follow the law. Few concepts promote consumer welfare and deter corruption more than willingness of government agencies to follow their legal authority humbly, and not to exceed it. Laws are typically written, and when followed they are predictable in their application and appealable. When agencies do not follow the law, everyone loses, except those with the power to influence the extra-legal activities. I wish that I could say that the FCC steadfastly follows the law, but I cannot.

Regulators are not legislators.

It the law is imperfect, it is the legislators, not the regulators, who must correct it.

If the law has obvious problems, legislators can and will fix it. By trying to perfect a law by going beyond it, regulators are doing no one a favor. We are not helping the public because they look to the legislature, not regulators to write law.

We can never be self-anointed legislators. Our only legitimacy comes in the legitimacy of the law. When we go beyond the law, we tarnish it, reduce its legitimacy, and by extension ourselves.

The most effective way to force a legislature to correct a bad law is to implement it as written.

As government officials, we must be simple pensive, indifferent implementations of the law, not advocates for its change, and not advocates exceeding it.

We do not create new technologies. We do not create new services. We do not create consumer's benefits. Markets do all of these. And more. Regulators are merely people. But we help markets by following the law diligently. And merely doing that helps markets immeasurably.

We can claim to do nothing more.

B. Economic Basis.

Second, good regulation has a simple economic basis. Ultimately, benefits demonstrably and unequivocally exceed costs. These benefits may derive from capturing economic externalities in market transactions or reducing transactions costs for access to government-owned assets. Much regulation at the FCC is of another type - mimicking competition where competition does not exist. All too often, the reason competition does not exist is, in fact, precisely FCC regulation. In few if any instances, however, does the FCC actually document that the benefits of our regulations closely exceed the costs.

C. Simplicity

Good regulation should be simple. It should be accessible and visible to ordinary Americans, not an arcane art for Washington lawyers. Mere citizens should be able to go to a Web site and understand immediately the status of a regulation or the status of a license application. They should not have to hire high priced specialists to do this job. They should have every confidence that the information they find from such public sources as a Web Site contains all relevant information. No one is meeting behind closed doors at the FCC. Decisions aren't made without public explanation. There is no secret hand shake, no need to hire fancy lobbyists. No deals are made based on influence or power.

Simple rules are also easy for everyone to understand, interpret, and if need be: appeal. They follow the motto - "Better to be approximately right than exactly wrong." Simple rules are rules that have a chance of casting for a long time. They do not depend on a complicated computer model and endless data: a computer model and data that constantly change beyond the view and vigilance of mere citizens. Simple rules mean that mere citizens do not have to hire experts to interpret regulation nor insiders to lobby for it.

C. Non Discrimination in Application of Rules.

Good regulation is not only simple but it is non-discriminatory. Have you ever wondered why regulated firms hire lots of regulatory consultants? Sometimes it is to understand better written rules. Sometimes it is to understand better-informed rules. Sometimes it is to help explain technical issues. All of these are good purposes.

But what happens to the firm that does not hire regulatory consultants? Or hires the wrong ones? Do the decisions reached by the regulatory agency differ depending on which candidates are hired?

When an individual applies for a driving license, consultants may be hired to help prepare for a standardized test, but not to influence an agency about whether or not to grant a license to a person who has passed a standardized test. Consultants usually are not hired when individuals apply to transfer motor vehicle registrations or apply for a fixing license.

Individuals sometimes hire consultants when they file income tax returns. The consultants help fathom the paperwork and forms but not personally lobby the IRS. The IRS computers treat tax returns prepared by hired professional no differently than applications prepared and filed directly by individual. In each of the cases, the government agency has exhaustive written rules that describe how the process works, and the process works in an impersonal, anonymous, but efficient manner. Individuals know throughout the process that they will be treated the same as everyone else and not subjected to different standards simply based on their identity.

Some agencies that handle large numbers of license applications do not have written rules about how to handle those applications. These agencies necessarily make up the rules as they go along. Some applications receive close scrutiny. Some receive light scrutiny, and some receive no scrutiny. And those that receive close scrutiny have no way of knowing how that scrutiny will be applied. But they know scrutiny is never exactly the same for any two applications.

What would you do if you were applying for a license and were faced with such a situation? Why, you would hire an army of consultants familiar with that regulatory agency. If any of this sounds familiar, it should.

Good regulation is non-discriminatory. It treats all similarly-situated parties alike. There are no individualized rule makings; there are only general rules that apply to everyone. Waivers are, of course, considered individually, but on standard criteria.

At the FCC, we do not have written rules for many forms of applications for license transfers. Application reviews vary, and, in this area, we could not easily defend ourselves against claims that our decisions are arbitrary.

Usually, license transfer reviews at the FCC are secretly conducted outside of public view. Currently however, we have a highly publicized review of license transfer applications for the proposed merger of SBC and Ameritech. As a matter of public record, these companies and FCC staff are negotiating.

But exactly what are they negotiating? Not about the proper application of our rules because, in this area, we have no rules. Not about conditions on granting an application, because we could not possibly develop individualized conditions for all of our licensees.

Or are they? No one knows what goes on behind closed doors. Whether this or other proceedings are discriminatory is fact specific, and the public will never know for sure. But the perception is unmistakable. A perception of discrimination tarnishes the agency and reduces the public's trust in the agency.

Ultimately, individual proceedings and rulemakings leave agencies with enormous discretion about the success or failure of individual applicants -The application process, without written rules, can be used to favor "friends" and punish "enemies." Even if there are no "friends" or "enemies," discretion places an agency in the uncomfortable position of picking winners and losers. Applicants come before the agency and plead not "Grant the applications because it complies with your rules" but "Please grant the application because I can succeed with it but not without it."

Agencies can apply written rules in a non-discriminatory manner. Meet certain written criteria and you win, otherwise, you lose. Agencies are rightfully blinded to the activities of applicants outside of the application process. But when agencies consider information not specifically germane to the application process, the agency unavoidably places itself in a discriminatory role, picking winners and handicapping losers.

In most government agencies, licenses are neither granted nor denied on the basis of stipulations about future behavior. Based on written rules, a drivers license may be conditioned on the licensees using corrective eye glasses or contact lenses, but licensing agency's cannot and does not condition a license on the licensee agreeing to go to night school or to buy a new car. The agency has no authority to condition licenses in such a manner and prescribing such individualized conditions could never be consistently applied with hundreds of thousands of license applicants.

E. Decentralization of Decision Making

Even simple rules may may require the consideration of detailed localized information. And, it is possible that different localities may have different sets of simple rules with which to evaluate the same information.

Good regulation is not necessarily centralized regulation. Where the law permits decentralization, it should be decentralized.

State regulators can and must do what is necessary under their state laws regardless of what the FCC does. Conversely, the FCC must follow federal law regardless of what the States are doing.

F. Humility

Finally, and perhaps most importantly, we must have humility about our role as regulators.

Many of us profess to be pro-consumer.

As if anyone is anti-consumer?

But consumers don't look to us for friendship. Or for lower prices. Or for new services.

They look to markets.

The best friend a consumer ever had is not a government official but a new competitor with a better service at a lower price.

And then a new best friend appears with even better service and lower prices.

G. Bad Regulation

There is such a thing as bad regulation. At times, there seems to me to be quite a lot of it. In essence, it is regulation that interferes with competition. I gave a speech about competition in St. Louis earlier this week. I won't repeat it now. Let me simply say that the following sorts of regulations impair competition.

1. Limitations on entry into a market.

2. Limitations on exit from a market.

3. Regulatory determinations of what goods and services will be offered in a market.

4. Regulatory determinations of quality of goods and services in a market.

5. Regulatory determinations of prices in a market.

6. Regulatory determinations of quantities in a market.

7. Interference with information, insurance, and intellectual property in a market.

Sometimes laws require regulators to impair competition through one or more of these interventions. But often, we are not required to do so. Yet we do it anyway.