Federalist Society of Silicon Valley
Palo Alto, California
December 7, 1999
It is a great honor and privilege for me to be here today before the Federalist Society of San Francisco Bay area. It really is a great privilege to be back here in the Silicon Valley. This is the most successful place in America today.
And its success is not just limited to comparisons within America. Everyone in this country, and a good many of the six billion people around the world, would like to be in the Silicon Valley. It's where things are happening. It's where the future is.
I'm very pleased to say that much of the great accomplishments of Silicon Valley has occurred not because of extensive government regulation.
How did Silicon Valley achieve its success? Through innovations, and new technologies. They are what Silicon Valley's all about.
People want to come to the U.S. for identifiable reasons. Most importantly, this is a country that respects contracts and property. Moreover, we have relatively limited taxation in this country -- although it's not as limited as some of us might like. And, despite those of us who rail against regulation, the US probably has less terrible forms of regulation than other countries. And those are some of the themes in my talk tonight.
Let me return to the success of Silicon Valley. Success brings problems and one of those problems is envy. Not just from other parts of the world but from other parts of America. Every part of America has its imitation of Silicon Valley. It sounds like "Silicon Valley," but it is a little different, and somehow falls a little short. Have you noticed how many places in America now have a "Silicon" adjective placed in front of a broad area: "Silicon Hill," "Silicon Alley," "Silicon this and that."
But there is another form of envy. That's the envy of government, particularly the federal government in Washington. I have a message today; it's very simple.
You have succeeded. Don't let government claim the success that you've accomplished on your own. And don't let the federal government take it away.
I'm reminded of a recent press release that I've been told about from China. It's an excavation of an ancient burial site and they found some unknown herbal substances. The scientists spent a lot of time discovering this ancient herb, and they issued a press release hailing the ancient Chinese as very advanced in medicine.
Recently, in an ancient burial site in Egypt, Egyptian archeologists found ancient writings that were very much earlier than anyone had known about. And the Egyptians issued a press release, and they claimed that ancient Egyptian culture was very advanced.
Well, some California archeologists, not to be outdone, did some excavation and they dug down and down. And they found nothing, nothing, nothing. They thought about it for a long time, and they issued a press release claiming that the ancient Californians had discovered wireless technology.
We can laugh at these anecdotes because we know that technology moves in one direction-- always for the better. It is true that there are ancient mysteries that we do not fully understand today. But generally what can be done technologically in the past, we can do today, and we can do it better.
Technology is information about people organizing themselves, organizing transactions, and exchanging anything and everything. The best practices in technology can be taught. They can be taught to your children, to your colleagues at work. They can also be learned by your competitors, and you can learn from your competitors.
It's pretty easy to be quite conceited about technology. Technology and time march inexorably in the same direction. We do technology better today than we did in the past. We have every expectation in the future that people will do technology better than we do today.
Unfortunately it is less easy to be conceited about government and law. History is not a uniform improvement in either area; good governments and law can and have been followed by bad ones, and vice versa. We can't simply teach good government and law to our children, to our colleagues. It's not always easy to learn about it from our competitors.
Moreover, improvements in technology have not always led to improvements in government. Technologists do not claim to having created better government. But, oh, the conceit of government about having created better technology. It must be very painful for people from Silicon Valley to go to Washington, D.C. or to listen to people from Washington D.C. talking about technology. Is it really credible that someone in Washington could have created the Internet? Or is it any more credible that Washington politicians can claim any and all credit for all sorts of wonderful new technological innovations? As if nothing would happen but for the presence of government officials from Washington, DC.
Four roles of government
There is a very important role that Washington, D.C. and government officials play for technological innovation. It comes back to the simple four themes.
1) respect for property
2) respect for contract,
3) limited taxation and
4)limited involvement in regulation beyond what is necessary.
About a year ago, I met a venture capitalist from Silicon Valley, and it was a delightful meeting. He told me about the wonderful things he was doing. He turned to me, and he said, "What do you do?"
And I said, "I'm with the FCC."
he said, "Well what's that?"
And I explained that it's a government regulatory authority.
Then he said, "Oh, I've got some friends who are on some of these blue ribbon panels in Washington, D.C., and they fly to Washington once a quarter. So, tell me: what's your real job?"
And I sheepishly explained that the FCC is really a full time job, and I'm not allowed to do anything else.
He was kind of amazed about that-- it was refreshing I was very delighted to understand. He had no idea about the FCC.
And tonight sitting next to Troy - he turned to me and said: "What are you doing now now that you've left government?"
I said: "Left government?"
And he said "Yes, I thought I read in your bio that you were formerly with the government."
I said that I have to check with my office -tomorrow.
I suspect that are a few people who long for the day when I've left government. My wife is probably one of them.
Regulation following technology
The empirical observation could probably be made at times that regulation follows new technology. Much of the regulation of the railroad, for example, didn't occur until 50 years after the railroad started.
But it doesn't always work that way. Many new innovations were delayed after there were invented by federal regulations, sometimes for decades. One of these is wireless phone service. Back in the 1950s, there were petitions to create new wireless phone services--similar to cellular services and PCS today. The FCC sat on these and other applications for about 30 years.
Then, when it came out in the early 80's, who claimed credit for this wonderful technology? The FCC . It claimed to be doing wonderful things for America
No one has actually sat down to try to calculate how much consumers were harmed by having this wonderful new technology delayed for decades. The number would be staggering.
The Internet and fees
Where does the Internet fit into all of this? I think it's fair to say that the Internet is slightly regulated today. There is no formal federal Internet regulation at the Commission yet, but there are a lot of folks in Washington who would very much like to see that.
Daily clips at the FCC are often filled more with stories about the Internet than stories about the FCC. I'm sure that's true at other agencies around Washington as well. Every agency protests that it does not regulate the Internet, while, at the same time, plotting how to regulate the Internet, directly or indirectly. There is much bureaucratic power to the agency or agencies that eventually regulate the Internet.
When people in Silicon Valley look at the Internet, they see success, the triumph of markets. In Washington many people look at the Internet, and they see failure- the failure of markets.
In Silicon Valley, you may see new technologies that flourish without regulation. In Washington, people see more opportunities for more regulation or new regulation.
You may see the prospect for broadband access as an opportunity to invest and innovate to meet consumer demands for lots of new Internet services. Washington sees broadband access as an opportunity for more regulation or mandates by government not governed by the laws of supply and demand.
Discussion of government-mandated universal service requirements for broadband service is going on at this very moment in Washington. DC. For example, you may see services such as the Internet operating just fine without common carriage requirements. Common carriage means ostensibly requirements for terms and conditions that are equally available to everyone, and it also means an awful lot of regulation. And yet there is a lot of discussion about common carriage obligations for various parts of the Internet.
And just exactly where would the common carriage requirements for the Internet be imposed? Would it apply just to ISPs? To cable operators? To Internet telephony? To electronic commerce?
It's very easy to understand the concept of common carriage for railroads, for airlines, but it is very difficult, I think, to understand the concept of exactly how it would work on the Internet. Designation of common carriage is not merely an obligation to serve. Bound up in the common carriage regulations are a lot of obligations, taxes, and fees. And also limitations on liability.
The taxes and fees are alone are sobering, There is a 3-percent excise tax on all common carrier telecommunication services. It's been in place since the Spanish-American War. And there's approximately a five-percent fee that applies on interstate telecommunications services to pay for universal service. Added together, that's an 8-percent user fee just for the privilege of being a common carrier.
What's universal service? It's about a five billion-dollar federal program nearly half of which goes for schools and libraries. The rest goes to extend telecommunication networks.
And how do we pay for all of this as consumers? Well, Jerry Hausman of MIT has estimated that the fees structure imposed on common carriers, including universal service, is one of the most punishing taxes in the arsenal of the American tax collection system. American consumers pay more than $2 for every dollar that's raised for universal service. Suddenly the 5 billion dollar universal service program cost the American consumer 10 billion dollars.
There has been much public discussion about taxation on the Internet. And of that discussion much has been focused on whether taxes can be collected by state or local governments, or whether the Internet will become a tax free zone. Relatively little discussion however is focused on the tax implications of the Internet being labeled telecommunications service or a common carrier service.
And why should you worry about the FCC? Well, because it's the FCC that will ultimately determine whether the Internet, or some portion of it, is a telecommunications service and thus subject for all these fees.
The Commission has started to take steps that could lead inevitably to that result. We've declared that all internet traffic is interstate in nature. That is, all traffic originating at home or office and terminating at any server anywhere in the world is subject to FCC jurisdiction. Even by the standards of Washington, claiming jurisdiction in central Australia is a pretty big stretch, I must say.
We issued a report to Congress in 1998 saying that the content of internet services is not a telecom service. If, however, you make a mistake of using a telephone hand set attached to a computer to call someone who picks up another handset--now that is a telecommunications service. Of course, the set of bits and bytes is indistinguishable whether one uses hand set or not
Now this technologically naive idea has implications not just for internet telephony, it has implications for all the internet because it is impossible to distinguish those bits and bytes that originate and terminate with a hand set from other information that goes over the Internet. And who would tell the difference. Who would try to tell the difference?
The federal government in general, and the FCC in particular, are at their best when they are not out trying to regulate. They are at their best when they are out trying to do the four things that I described earlier: enforcing property rights, enforcing contracts, providing minimal and rational taxation, and in keeping regulation to a minimum.
I've already addressed the tax issue, let me just address the other three briefly and then I'll open up to questions. America stands for property rights, and usually our government defends the rights of property owners all over the world, whether it's intellectual property or real property.
But, at the FCC we do things to erode the edges of property rights. We issue licenses for the use of spectrum, and yet we restrict the use of those licenses. We don't provide for flexibility in the use of licenses. We tell people they have to use a license in a certain way, often if alternative uses wouldn't harm anyone.
We also erode property rights for people who have to deal with the FCC by imposing "public interest: standards which are not codified anywhere. Even worse, the public interest standards vary depending on the identity of the party and the type of service providing, sometimes even within the same service.
Contracts are negotiated agreements between private parties. While government agencies can and do prescribe certain requirements for contracts, and can and do require certain narrow terms and conditions that must be included in certain contracts, it is very rare for the government specify all the terms and conditions it must be included in every contract, including prices. But, at times, this kind of regulatory approach has been the preferred option at the Commission. The threat of common carriage obligations, is in essence a forced contract that might potentially apply to some new services.
Economists have long noted that the potential need for government intervention where there is market failure. Markets may fail for several reasons including information problems and problems of what economist refer to as externalities -factors that are not taken into account in the consumption patterns or supply patterns of market participants
When the Commission uses it power to regulate, it often attributes the decision to "market failure." Markets can and do fail, but not as often or as systematically as one might believe in Washington. When it comes to markets, contempt in Washington is rarely the product of familiarity.
One of the most frequently cited market failures of the Commission has been low demand. To me, that is not market failure. It is a sign the market is working just fine. It's just that there is not a lot of demand out there.
Affordability is another often-cited basis for market failure at the Commission. Again, to an economist, affordability is not a sign of market failure.
The combination of affordability and demand is leading to a lot of discussion about making broadband access to residences part of universal service. Well there may be some here in Silicon Valley who would jump for joy at the prospect of the government-subsidized broadband access to the home. But it's a very heavy price to be paid when the government gets involved in these programs, and it's a very heavy price that in the end it is very difficult to justify.
Failing to act
At the same time, there are instances where the Commission can and ought to be involved, where there is a form of market failure, and yet the Commission routinely turns a blind eye. One of these has to do with Section 253 of the Act, which outlaws state, local and federal regulations that establish barriers to entry for businesses to enter telecommunications markets. There is no doubt there are a great many barriers to entry, the telecommunications markets at the state and local level. But the Commission refuses to even look at these very seriously. As a great fan of federalism, I certainly don't want to be out there leading a charge to overturn the state and local sovereignty. But we have a federal responsibility that we often shirk.
The Commission also has obligations under section 11 to review all telecommunications regulations every two years, and if they are no longer needed we ought to get rid of them. The Commission has consistently refused to review all telecommunications regulations. Well, heck, we've hardly reviewed any of them! And why is that? We're too busy. We're too busy off doing a whole bunch of things where we have no legal authority to do.
The Federalist Society
I want to thank all of you for coming tonight and to thank the Federalist Society which has its on its emblem James Madison. Some people think of the Federalist Society as some right-wing, nut case group. Perhaps, some people think that James Madison is a right-wing nut case. I'm here to tell you that Madison was not a right-wing nut case.
I don't think people of America in the late 18th & early 19th century thought of James Madison as conservative in any way. He was if anything a great moderate. He was a believer that rules and laws mattered, that the Constitution mattered, that the Constitution was necessary, not just for the proper function of government, but to protect individuals from the abuses of government.
I hope that the Federalist Society will continue to champion the cause of insisting that laws be followed and that the constitution be followed. Nowhere can the Federalist Society serve a greater role than here in Silicon Valley where individuals, not government, have brought so much great wealth to this country. The wealth has come through the exercise of property and contracts. And yet it is here where there is very much that the government can do to threaten this great wealth.
I believe that the Federalist Society can do very much to help preserve a great deal that has been created here in Silicon Valley. Thank you very much.