‘Yes’ to the FCC’s Proposed Office of Economics

by Veronique de Rugy

Under the leadership of Chairman Pai, the FCC just released a proposed Order to create an Office of Economics and Analytics. The office would provide an important and systematic feedback during the regulation-making process on whether a real problem exists that regulation might solve, as well as about what the costs and benefits of proposed rules and orders. The feedback is clearly lacking today not for lack of economists working at the FCC but because as the chairman noted in a speech in April:

[E]conomists are not systematically incorporated into policy work at the FCC. Instead, their expertise is typically applied in an ad hoc fashion, often late in the process. There is no consistent approach to their use.

In other words, the FCC hires economists but does not always use their specific skills to of systematically informing the regulatory decision making process about what we theoretically and empirically know works or doesn’t work, what the expected costs and unintended consequences of rule may be, and whom the winners and losers should be expected to be. My college Brent Skorup explains:

Several years ago when I was in law school, I was a legal clerk for the FCC Wireless Bureau and for the FCC Office of General Counsel. During that ten-month stint, I was surprised at the number of economists, who were all excellent, at the FCC. I assisted several of them closely (and helped organize what one FCC official dubbed, unofficially, “The Economists’ Cage Match” for outside experts sparring over the competitive effects of the proposed AT&T-T-Mobile merger). …

And since the economists are sprinkled about the agency, their work is often “siloed” within their respective bureau. Economics as an afterthought in telecom is not good for the development of US tech industries, nor for consumers.

It is the problem considering the regulatory reach that the FCC has and the consequences of over-regulation. Well, now this will change. Skorup rightfully notes:

Bringing economic rigor to the FCC’s notoriously vague “public interest” standard seemed to be occurring (slowly) during the Clinton and Bush administrations. However, during the Obama years, this progress was de-railed, largely by the net neutrality silliness, which not only distracted US regulators from actual problems like rural broadband expansion but also reinvigorated the media-access movement, whose followers believe the FCC should have a major role in shaping US culture, media, and technologies.

Good for the FCC. Hopefully, this will inspire and influence changes in other federal agencies. Unfortunately, there are many instances where bureaucrats ignore economics entirely when making decisions that will affect millions of American individuals and companies. In some cases, like in the case of the FCC, it is because economists are not systematically integrated in the decision making process. In other cases, it is because by law, the decision-makers are required to ignore the economic impact their decisions will have. A great example, and very timely, is the way the antidumping cases are decided.

When an American firm accuses a foreign firm of dumping in the U.S. market, the company files a petition to the International Trade Administration at the Department of Commerce. If the Commerce Department decides that there is merit to the claim (the process itself is biased toward deciding in most cases that it is), an investigation will take place to determine whether the foreign company’s competition is causing “injury” to the domestic industry. The determination is based on:

(1) whether there is a “reasonable indication” that an industry is materially injured or is threatened with material injury, or (2) whether the establishment of an industry is materially retarded, by reason of imports under investigation by the Department of Commerce that are allegedly sold at less than fair value in the United States or subsidized.

Ignoring for now the problems with the arcane and arbitrary way by which Department of Commerce determines that “dumping” has occurred, it is striking that by law the determination about whether or not an injury has taken place can only take under consideration effects that could very well be the result of regular competition between firms. In addition, the ITC Commissioners that vote (decide the case) can’t take under consideration the things that an economist would look at like the impact of the import duties on consumers or firms downstream of the industry. Commissioners can only look at the competition effects on the industry of the petitioner and none of the effects on the economy overall.

Now, this is not to say that in some cases the importer is not largely subsidized by their home country, or that the imports don’t hurt domestic firms. However, if you want to assess the real economic impact of the imports, you need to allow commissioners to look beyond the domestic firms. Imports could hurt domestic companies on some margins and yet be a tremendous net positive for the economy as a whole. Indeed, the reverse is true. As you have heard me complain about many times, a subsidy to a domestic firm can be beneficial for the company and yet be a net negative for the economy.

Failing to take under consideration the overall economic impact of a given import as the law requires, more than anything else, creates a fundamental bias against importers whose activities were targeted by US companies. It also is a system built to give an incredible edge in the fight to the US firm complaining about a given import.

Making a small change to the law in order for the ITC to get a full view of the impacts before they make their decisions would go a long way towards bringing some sanity to this process.


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