Jul 17, 2015 - 3:00pm

Why Net Neutrality is Bad News for Internet Investment


Senior Editor, Digital Content

bloomberg_yahoo_data_center_800px.jpg

Servers stand in a computer room at Yahoo's data center in Lockport, New York.
Servers stand in a computer room at Yahoo's data center in Lockport, New York. Photo credit: Andrew Harrer/Bloomberg.

Saying “Regulation is bad” paints too broad a brush. From Adam Smith onwards, economics understood that regulations that fix market failures are beneficial, while those that inhibit investment should be avoided.

Where does the FCC’s net neutrality fit on this spectrum?

In a paper on how public policy analysts should evaluate the likely effects of regulations, Robert Shapiro of the Georgetown Center for Business and Public Policy and Kevin Hassett of the American Enterprise Institute look at the FCC’s net neutrality regulation—Title II—and find that it will reduce communications infrastructure investment.

“Taken as a whole, then, the theoretical link between this specific form of regulation and the taxonomy of theoretical effects would suggest that the impact of Title II on investment will be negative,” they write.

Here’s their evaluation of net neutrality in a nutshell:

First, we showed that Title II regulation should be expected to increase costs, and therefore is the type of policy that should be expected to reduce investment. Second, we reviewed field-specific evidence that suggested that the scale of the negative effect could be quite large, from about 5.5 percent to as much as 20.8 percent. Next, we documented that the ratio of investment to the capital stock would be expected to decline to roughly that extent if Title II regulation in the United States would be comparable to the regulatory framework of the OECD continental European countries in the first decade of the 21st century. Next, we cited an analysis by a legal scholar that suggests that this analogy is reasonable. Finally, we found that the negative effects on investment may well be significantly understated by these factors because the new regulation’s threshold effect will maximize the negative effects of uncertainty.

Maintaining the blistering pace of innovation we’re seeing today will require continued investment in communications infrastructure. The FCC’s effort to regulate broadband like the 20th Century’s phone system will hamper innovation.

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About the Author

About the Author

Sean Hackbarth
Senior Editor, Digital Content

Sean writes about public policies affecting businesses including energy, health care, and regulations. When not battling those making it harder for free enterprise to succeed, he raves about all things Wisconsin (his home state) and religiously follows the Green Bay Packers.