The Regression Investment Depression

While most of us were on vacation this summer, the Federal Communications Commission concluded its latest comment period in the long, ongoing saga of business data services regulation. The agency economists have published more than 100 analytical regressions in the past several months that try to show that competition has failed. Yet, the studies vary significantly among themselves rather than showing consistency.

Some economists the FCC hired pointed out a truth we learned in Statistics 101: that correlation does not equal causation and the regressions standing alone don’t make the case for market failure.

In short, just publishing a regression does not establish a fact, still less provide a justification for extensive regulation. And even “facts” are subject to a further test: whether the data are statistically significant. Flaws in developing the model (not least, bad pricing data) will have serious consequences in determining its accuracy and whether the data are, in fact, statistically significant.

But what do the data really show? And why is there such an interest in regulating prices, to begin with?

Simple economics suggests that the way to promote the most rapid deployment of the fastest business data services to the enterprises that need them is to rely on competition and the market forces that drive innovation and investment. The FCC, however, seems to start from the position that only regulation can ensure that adequate services are provided to businesses. And so the agency is seeking to set prices at a level that, while convenient for some competitors, doesn’t allow for a sufficient return on investment to stimulate broadband deployment. How this approach will spur investment and deployment is anyone’s guess; the FCC doesn’t have an answer.

Now a group of seven prominent economists has just made clear their opposition to the conclusions the agency is drawing from its plethora of regressions. In short, the economists argue that, because the FCC starts from the wrong place – the mistake that correlation implies causation – the agency, therefore, ends up at the wrong place – the idea that there is not only market power in the Ethernet market but market power that justifies price regulation. As they write, “[a]s commenters across the spectrum rightly acknowledge, the rationale for ex ante rate regulation hinges entirely on protecting customers from a dominant provider’s abuse of market power; in turn, there is no plausible argument for regulating BDS providers that lack market power.”

The FCC’s argument means that incumbent providers ought to lower their prices in a market that, due to the presence of competition, lacks the price flexibility that would enable the providers to raise other prices in order to offset the declines. That doesn’t make sense. There’s no reason for a fire sale on broadband services in a competitive market, particularly when companies will not make new investments without an assurance that they can recover their investment costs. And the agency’s reasoning makes even less sense when Ethernet prices are falling, as they are now.

The agency cannot simply pick and choose the regressions that support its arguments, like picking favorites from a box of chocolates, while dismissing the others. Overall, though, the data are clear: they do not justify a finding of market power in the Ethernet market – and certainly not one that would force a regulator to take the next step of actually imposing price regulation based on the data.

Among the economists who don’t buy the FCC’s arguments and who favor maintaining the ability of carriers to earn a reasonable return on their investments are professors Michael Katz and Joe Farrell. Professor Katz served as chief economist of the FCC from 1994 to 1996, during the time the Clinton administration and participated in passage of the Communications Act of 1996. Professor Farrell served in the Obama administration as director of the Bureau of Economics at the Federal Trade Commission, in addition to previous service at the FCC. Both also served in the Antitrust Division of the Department of Justice. So they know their stuff and have seen economic policymaking from the inside as leading officials in Democratic administrations. If both of them, as well as the other five economists, are crying foul at the FCC, then it’s time for the agency to go back to the drawing board, rather than picking and choosing a few favorite graphs as justification for moving forward with unwarranted regulation.

At this critical juncture the agency should take heed of the well-informed commentary pointing out the harms that unjustified price regulation will cause. To do otherwise will retard the facilities-based investment essential to the deployment of broadband networks and services. In short, we’d have an investment depression based on regression. The FCC can and must do better.


Rick Boucher was a member of the U.S. House for 28 years and chaired the House Energy and Commerce Committee’s Subcommittee on Communications and the Internet. He is honorary chairman of the Internet Innovation Alliance and head of the government strategies practice at the law firm Sidley Austin.

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