Regulatory Capture

Beyond Revolving Doors and Against Regulatory Nihilism.

The Murder of Net Neutrality Was Wild

Here’s a story about “regulatory capture”: Donald Trump appointed Ajit Pai, a former Verizon lawyer, to run the Federal Communications Commission, which is in charge of regulating companies like Verizon. Verizon — and the other big telcos and cable operators — wanted to kill Net Neutrality.

Net Neutrality is the idea that your ISP should send you the bits you request as quickly and reliably as it can. That means when you click a link, your ISP does its level best to get that link for you.

Net Neutrality’s opposite is net discrimination. That’s when your ISP is allowed to slow down or otherwise degrade your connection. Why would ISPs do this? Because it represents a new revenue source: ISPs get to charge you for your internet connection, and then charge the companies that run the services you value for “priority” access to you. If they don’t pay, your ISP can slow down their services so they’re less useful to you, prompting you to switch to a rival who did pay for priority carriage.

Internet users really don’t like network discrimination. How do we know that? Well, the FCC had to ask them (all US federal administrative agencies have to accept public comments before changing policy).

John Oliver made one of his trademark scorching videos explaining the Net Neutrality issue, urging his viewers to go to the FCC’s website and tell Ajit Pai that they didn’t want network discrimination.

It was a resounding success. Oliver’s video went viral. The FCC received so many pro-Net Neutrality comments that its website crashed (this is the same thing that happened in the previous administration, when Obama’s FCC chairman, Tom Wheeler — a former cable lobbyist —created the Net Neutrality rules that Pai wanted to kill).

The Dead Hate Net Neutrality

Then things got really weird. The FCC denied that its website had crashed because of pro-Net Neutrality hordes. Instead, they blamed the outage on a hacking attack, claiming that they had been brought down by floods of junk denial-of-service traffic (they later admitted to lying about this, and also admitted that they’d lied about lying about this).

In reality, the FCC’s website went down because 1.6 million Americans — an unprecedented number — had submitted pro-Net Neutrality comments to the agency.

In response, the FCC shut down its public comment system, saying it needed to “reflect” on the public’s resounding opposition to its plans. When it re-opened its web-form, it got 22 million comments. Talk about unprecedented!

But there was something fishy about those 22 million comments. One million of them — all identical — came from people with @pornhub.com addresses. Millions more came from dead people. Two came from sitting US Senators who denied having written them. There were huge piles of comments sent by real email addresses — addresses collected from massive data-breaches (the people involved denied having sent these comments).

All of these fishy comments had one thing in common: they all wanted Net Neutrality dead. The FCC refused to investigate all of these obviously fake comments. Worse: they obstructed law-enforcement investigations into the fake comments.

Even worse: they claimed that the comments represented the will of the people. They did this under cover of a “public” meeting held over Thanksgiving weekend, where they told outrageous lies about the process.

Exit Ajit Pai, Twirling His Mustache

That was how America lost Net Neutrality. Pai celebrated with a bizarre Harlem Shake mashup video, in which he insisted that Net Neutrality advocates were hysterical Chicken Littles who didn’t understand that America’s monopolized ISP sector had our best interests at heart and wouldn’t exploit deregulation by degrading service.

Days later, Comcast quietly deleted its service guarantees from its website. It would have been nice to hear Pai explain this discrepancy, but instead, he cancelled all his public appearances, starting with his planned main-stage Q&A at the Consumer Electronics Show in Las Vegas.

Killing Net Neutrality was Pai’s major accomplishment, but it wasn’t his only gift to his former employer Verizon and its (nominal) competitors. Verizon — a company with a long history of underserving rural and poor communities — got caught lying about how much it had improved its coverage. Pai buried the agency’s finding.

Reality Has An Anti-Pai Bias

To be fair to Pai, reality has a completely unfair anti-Ajit Pai bias. Pai kept telling Americans that “competition” (not regulation) was going to fix their internet, which is both slower and more expensive than the internet of people in other countries (countries that, unlike America, didn’t invent the internet). When Americans pointed out that they didn’t live in markets where ISPs competed for their business, Pai solved the problem: he redefined “competitive market” to include places where there was only one ISP.

Pai went on to kill the mandatory “speed tests” that produced an official evidentiary record of ISPs’ performance. Instead, Americans just had to trust ISPs’ assurances about the quality of their services.

Operating in this evidentiary vacuum, Pai handed the ISP sector $45,000,000,000 in public funds to improve rural service. Instead of installing future-proof fiber, they wasted $45 billion on slow, 20th Century vintage copper lines.

Look, there’s no mystery about how all of this came to pass. Just look at Pai’s official calendar, which records who he met with in the run-up to the Net Neutrality decision. It’s a completely unsurprising, unbroken stream of friendly chats with telco lobbyists, Pai’s former co-workers, whose employers stood to make billions in profits thanks to Pai’s corruption.

The Revolving Door Spins

Today, Pai is a partner at Searchlight Capital, a private equity fund that is buying up and merging the few remaining independent ISPs in America to create a new monopolist (they call this “closing the digital divide”).

It will not surprise you to learn that when the New York Attorney General eventually concluded its investigation into the millions of obviously fake comments that Pai used as a pretext to kill Net Neutrality, it concluded that these were sent by dirty-tricks firms hired by the telcos and cable companies.

This is regulatory capture.

Ajit Pai was supposed to be overseeing the ISP sector, but he was a former high-ranking executive from that sector. During his term in office, Pai ignored the authentic will of the American public whom he had sworn to protect.

Instead, he destroyed and ignored evidence about the harms of killing Net Neutrality, lied about the process, and refused to explain himself to the American public.

John Oliver likened the practice of hiring corporate executives and lobbyists to oversee their former employers to “hiring a dingo to babysit for you.”

That’s a good, colorful, memorable phrase, but long before “dingo babysitters,” corruption-fighters used the “revolving door” as a metaphor for the practice of executives cycling from industry to regulatory agencies and back again.

The Surprising Origins of “Regulatory Capture”

“Regulatory Capture” is the process by which firms take over their regulators and use them to crush competitors. Usually, we think of Regulatory Capture as being an anti-corporate doctrine, grounded in suspicion of big business and its ability to corrupt the state.

But that’s not how “regulatory capture” entered the public’s understanding of corruption. Our modern conception of regulatory capture comes from big business’s loudest — and best-funded — cheerleaders: the “public choice theory” school of economics.

Public choice theory is a cynical, far-right economic orthodoxy that is closely related to “Chicago School” economics — the economics that drove the neoliberal era, which celebrated monopolies as “efficient,” argued in favor of inequality, and championed the idea that “money is speech.”

No Regulators, No Regulatory Capture

In public choice theory, the root problem with regulatory capture is regulators. According to this theory, most of us don’t care about regulation, but the companies that regulators oversee care a lot. Because we don’t care and they do, they will gradually suborn their regulators and use them to dominate their industry.

This is viewed as an inescapable outcome. Giving regulators more power won’t help (the theory goes), because this makes regulators even juicier takeover targets for the companies they oversee.

In public choice theory, the only way to solve the problem of regulatory capture is to do away with regulators. Freed from regulation, corporations will compete amongst each other and that fierce competition will benefit us all, as corporate rivals vie to expose each other’s bad acts, giving us the information we need to “vote with our wallets.”

Reality Has an Anti-Public Choice Bias, Too

That’s not how it’s worked out, of course.

Ajit Pai’s murder of Net Neutrality is not a story about how a corporation cares more about its ability to harm the public than the public itself cares.

Let’s think about the three factors that let to Pai’s neutracidal spree:

• America’s telecoms sector is incredibly concentrated. The sector consists of a handful of gigantic firms. These firms refuse to compete with one another (they’ve divided up the nation into exclusive territories). They are incredibly cozy with one another. Most top telecoms execs have held senior roles at most of the other telcos. They are executors of each others’ wills, best men and maids of honor at each others’ weddings, godparents to each other’s children.
• A concentrated tech sector extracts monopoly profits. Telecoms is wildly profitable. For decades, cable price increases have outstripped inflation. The highest-paid CEO is America runs a cable monopoly. Telcos reliably beat profit estimates, even as they’re slashing service, firing workers, and raising prices.
• The FCC is grossly underesourced. It lacks the money and staff to effectively investigate the companies it oversees. It doesn’t even have enough commissioners to produce a rulemaking, thanks to right-wing Democrats and their Republican allies, who’ve been holding up the confirmation of the excellent, eminently qualified Gigi Sohn.

Ajit Pai was appointed to run the FCC and confirmed by a GOP Senate majority, who have been firehosed with telco money.

That telco money depended on two factors: first, the companies had to have monopoly profits, something they got thanks to monopolistic market concentration. Second, the companies had to agree on how to spend that money, something they’re able to do because there are only a few companies in the sector, and their top execs are all pals with one another.

Once Pai was in the chairman’s seat, he had to ask the public whether killing Net Neutrality was a good idea. Here again, the ISP sector’s market concentration played a vital role.

First, the ISPs were able to come to an agreement on Net Neutrality. The industry submissions to the Net Neutrality docket didn’t consist of 50 mid-sized companies hoping to kill Net Neutrality and 50 more mid-sized companies who wanted to keep it, which would help them poach customers from the anti-Neutrality side.

Instead, the industry comments spoke in unison: all the large telcos and cable operators agreed that Net Neutrality should die. They were backed by a bleating chorus of industry-funded think-tanks.

Now, the public definitely disagreed. Contrary to the public choice theory hypothesis, Americans didn’t sleep through the Net Neutrality docket. Instead, they sent so many pro-Neutrality comments that they melted the FCC’s servers.

Here’s where the industry’s monopoly profits came to bear again: even after bribing all those senators who confirmed Pai as FCC chair, they had plenty left over to hire dirty tricksters to flood the docket with fake comments from dead people, one million imaginary Pornhub employees, identity-theft victims, and two pro-Net Neutrality US Senators.

On top of all this, the FCC itself is too weak — understaffed and underbudgeted — to conduct its own comprehensive investigation into the Neutrality question. The agency couldn’t examine and confirm (or disconfirm) every claim made in the industry submissions.

And so Net Neutrality died, and Pai got a cushy job.

Regulatory Capture is Real

That’s regulatory capture. A monopolistic industry, so concentrated that it can rob us blind and then agree on how to spend the booty to suborn a weak regulator.

The industry is so concentrated most of the people who really understand it well come from the industry itself. That’s why Obama’s “good” FCC Chairman, Tom Wheeler, who gave us Net Neutrality, was an ex-cable lobbyist; while the “bad” Trump chairman, Ajit Pai, was an ex-Verizon lawyer.

Making regulators weak doesn’t lead to strong, competitive markets. Rather, it paves the way for market concentration and regulatory capture. Weak agencies can be more easily captured than strong ones, after all, and whatever powers they have can be used to block competition.

Here’s an example: 18 US states have banned municipal broadband, ensuring that corporate monopolies don’t face any competition. These bans are incredibly broad — they even ban municipal broadband buildouts in places where there is no private sector ISP (it’s easier for broadband monopolists to argue that there is no alternative when there are no alternatives to point to).

The FCC has jurisdiction here, but Ajit Pai withdrew the FCC’s objection to this state lawmaking. That’s the regulatory capture that public choice theorists warned us against: a captured regulator using its power to freeze competitors out of the market.

But the FCC didn’t screw over municipal broadband because it was too strong. They acted because they were too weak: too weak to have blocked the mergers that led to the broadband monopolies, too weak to prevent price-gouging and underinvestment; too weak to resist telecoms companies’ use of the FCC’s authority to kill municipal broadband.

Starve the Beast

Public choice theory is a form of regulatory nihilism. It insists that it is impossible for public agencies to reliably uphold the private interest — and counsels us to let the market discipline companies whose self-interest might bring us all to harm.

That’s true…so long as you ignore all of human history.

Prior to the Pure Food and Drugs Act, Americans were routinely poisoned to death by the“medicines” and “food” sold in stores. Today, food poisoning is a rare occurrence, a tragedy, not just part of the American Way of Life. When drugs kill the people they’re supposed to be curing, it’s not because the regulator was too strong, it’s because they were too weak —helmed by industry insiders who hear “expert testimony” from their ex-co-workers from Big Pharma, who assure them that everything is fine.

When you point this out to public choice cultists, they’ll tell you that we’re just not trying hard enough. Once we get rid of all regulators, then companies will stop murdering us.

That’s not what happens, though. When we freed Boeing from the need to prove to a regulator that its planes were safe, it made defective jets that murdered hundreds of people.

The problem isn’t that regulators are too strong, it’s that corporations are too strong.

Regulators have to be stronger than the companies they oversee. Obviously. Obviously! To get good regulation, we have to starve the (corporate) beast. For the FCC to efficiently regulate the nation’s ISPs, we have to shrink Big Telco and Big Cable until they’re small enough to fit in a bathtub…

And then drown them.

The Public’s Monopoly

A common refrain from deregulators is that they oppose all monopolies, corporate and governmental. They’ve got a point: when the government makes a mistake, it can be a catastrophe.

But markets are a game, and regulators are the referee. A crooked ref can rig the game, but no ref doesn’t make the game better.

Corporations are accountable to their shareholders (who elect the managers) and to their customers (to the extent that customers take their business elsewhere). But this doesn’t make markets democratic.

Shareholders appoint corporate managers, but most of those shares are held by a handful of wealthy Americans, and the shares owned by the rest of us are predominantly held through index funds whose managers rarely intervene in corporate governance.

If you can’t influence a company by firing its managers, what about voting with your wallet? That’s pretty hard to do when weak anti-monopoly regulation means that only a handful of companies control nearly every industry. Remember, when there’s only a few companies in a sector, it’s easy for them to agree on a single set of policies.

But even when there are lots of companies in the market, there’s another problem with “voting with your wallet”: the people with the fattest wallets get the most votes.

We Need Politicians to Be Afraid of Voters, Not Donors

We live in an oligarchy. Lawmakers neglect policies with overwhelming public support, and enact policies with corporate support, even when the public overwhelmingly objects. As the 2014 study “Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens” put it:

Furthermore, the preferences of economic elites (as measured by our proxy, the preferences of “affluent” citizens) have far more independent impact upon policy change than the preferences of average citizens do. To be sure, this does not mean that ordinary citizens always lose out; they fairly often get the policies they favor, but only because those policies happen also to be preferred by the economically-elite citizens who wield the actual influence.

Or, to put it another way, the only reason you haven’t died of food poisoning yet is that no rich person has decided that you should.

That your roof hasn’t fallen in, that your car’s brakes work, that your kid learned to read in school, that your phone doesn’t explode in your pocket. That’s all thanks to good regulation.

We can make good regulations. The proof is that we have made good regulation.

For regulators and lawmakers to make good policy, they need good information and good incentives. Both of those require weak corporate power.

Take that FCC Net Neutrality docket. The experts best poised to understand and rebut the lies of the telecoms industry are the ISPs’ competitors. It’s true that some small companies — local ISPs serving their communities — filed thoughtful, evidence-based comments with the FCC, but they were bigfooted by Big Telco and Big Cable, who all agreed that killing Net Neutrality would be good for Americans.

The size of those companies — their market concentration — makes it far likelier that they will collude to back up each other’s lies, rather than going for each other’s throats, mercilessly exposing the flaws in their rivals’ arguments. Remember, these companies aren’t rivals. They’ve divided up the country into exclusive territories. They don’t compete with one another.

If we want policymakers to have good information, we need to make companies smaller, and keep them smaller. Letting companies merge with their rivals or buy up nascent competitors doesn’t just reduce competition to market good products to the public — it also reduces the competition to supply good information to regulators.

But it’s not enough for regulators to have good information. They also have to act on it. They have to be committed to the public interest — or, alternatively, they have to be afraid of losing their jobs if they screw us over.

This is why campaign finance reform and rules against the revolving door are foundational.

Our democracy can only produce good outcomes when lawmakers and regulators lose their seats or their jobs for acting against the public interest, and if newly unemployed lawmakers and regulators can’t parlay that betrayal into a cushy job.

To fight regulatory capture, we need weak companies and public servants who are accountable to the public they serve.

Self-Own

The right’s support of public choice theory is a giant self-own. Remember all those bans on municipal fiber? They all came from model legislation from ALEC, the corporate-backed lobbying group that coordinates monopoly-friendly laws at the state level across America

The American right loves ALEC, but ALEC doesn’t love them back. The monopoly-friendly, regulator-neutering policies that ALEC pushed have produced the online environment in which a handful of tech execs decide who gets to speak and what they get to say.

The fact that these tech execs don’t like the flamewars that right-wing culture warriors create, and kick far-right culture war heroes off their platforms has turned a bunch of right wingers into self-declared trustbusters who want to “break up Big Tech” (or at least force them to let Donald Trump back into Facebook and Twitter).

But these are the same people who blocked municipal fiber provision in the name of “keeping government’s hands off the internet.” They bought the absolutely false scare stories about how municipal broadband providers would “censor right wing points of view.”

The reality is that governments have less leeway to moderate content than private sector companies, not more, thanks to the First Amendment. You know how the Satanic Temple keeps trolling local governments by insisting that they be allowed to erect huge Baphoment statues next to the giant Ten Commandments monument some town council wants to stick on the courthouse lawn? That.

Fighting municipal fiber was a huge self-own for the right. With 100gb fiber in every house in town, they could be running their own 8-chans and 4-chans and whatever-chans in their own garages.

Regulatory Capture: The Left Edition

The footsoldiers of the right are too ideology-addled to understand that unlimited corporate power won’t help them, and if they are worried about government overreach (which is an absolutely reasonable thing to worry about!), then they should focus on blunting corporate power, because that’s the only way to get responsive government.

That’s a thing the left should understand. The left version of regulatory capture shares some common ground with the right wing version: both agree that when companies capture their regulators, they trample the public interest.

But the right says the solution to a crooked ref is no ref.

The left says: let us make the teams too weak to bribe or blackmail the ref, and let us make the ref accountable to the fans — afraid of disgrace and exile if they betray our trust.

Let’s make companies small, to they can’t easily come to agreement. Let’s strip them of their monopoly profits, so they can’t use them to corrupt our politics. Let’s make our politicians beholden to the voters, so they can’t betray us and get away with it.

Not Just ISPs

This isn’t just about Net Neutrality. It goes for every part of the administrative state — every issue complex and important enough that it needs an expert agency to oversee it.

If you don’t trust the finance sector (and really, you should not trust the finance sector), if you think finance regulators are crooked (finance regulators are totally crooked), the answer is to break up the banks and regulate the hell out of them. It’s not creating a shadow banking system in which finance is subject to even less regulation.

We know how that ends. The problem with finance isn’t that it’s regulated. It’s that it’s badly regulated. Eliminating regulation won’t fix that.