The politics of competition: review of Clifford Winston's Government Failure Versus Market Failure: Microeconomics Policy Research and Government Performance and Mark K. Landy, Martin A. Levin & Martin Shapiro, eds., Creating Competitive Markets: The Politics of Regulatory Reform.

• Author: Hanser, Russell P.
• Position: Winston's 'Government Failure Versus Market Failure: Microeconomics Policy Research and Government Performance'; Landy, Levin, Shapiro's 'Creating Competitive Markets: The Politics of Regulatory Reform'

1. INTRODUCTION II. THE BOOKS A. Government Failure B. Creating Competitive Markets III. AN ASSESSMENT A. Perils B. Promise IV. CONCLUSION I. INTRODUCTION

   For a quarter of a century, debates over telecommunications policy have been dominated by deregulatory ideals. The growing force of deregulatory arguments reflects a confluence of multiple factors. Technological change has devastated old assumptions regarding the extent to which the industry is afflicted by natural-monopoly characteristics. At the same time, commentators in the academy, the industry, the think-tank community and the bar have developed a powerful critique of expansive government involvement in regulated industries. This critique is itself multifaceted, stressing both the ways in which markets often correct disturbances on their own and the ways in which well-intentioned policies can or do create more harm than good. Finally, these factors have coincided (whether or not coincidentally) with the ascendancy of a deregulatory politics, with Republicans holding the White House for all but eight of the past 25 years, and the one Democratic President, Bill Clinton, joining in praise for deregulatory reform. (1)

   Given this potent array of promarket forces, one would expect telecommunications policy to have followed a firmly deregulatory path. Indeed, many see that expectation realized in the current policy framework. These observers point to consolidated ownership of key infrastructure assets, the eradication of once-central line-of-business and structural-separation requirements, a shift from rate-of-return rate regulation toward incentive regulation in the form of "price caps," and the elimination of many network-sharing requirements as applied to next-generation facilities. Reactions to these developments, of course, are mixed. Proponents of deregulation cite the tremendous growth in broadband deployment, the dramatic expansion of wireless service and the advent of the Internet and related applications (including but not limited to voice over Internet protocol ("VoIP"), file-sharing and streaming media), and attribute these developments to the government's light regulatory touch. Critics gaze on the past twenty-five years and perceive a steady march toward reassembly of the monopoly-era Bell System, with Regional Bell Operating Companies ("RBOCs") merging and acquiring their long-distance competitors. (2) These critics are unimpressed with the competitive pressures exerted by new wireless and data offerings, which, they worry, are or soon will be controlled mostly by those who, in their view, already exert oligopolistic power over the traditional telephone network.

   But what if all these observers--proponents and critics alike--are simply wrong about the state of regulation? For all the talk about a move to liberalized markets, (3) and all the growing strength of market ideals, various critical indicia suggest that the government's presence in the telecommunications market is at least as pervasive today as it was twenty-five years ago. The Code of Federal Regulations contained about 600 more pages worth of communications regulation in 2007 than in 1983. Expressed in 2008 dollars, political contributions from telecommunications service and equipment providers rose from about $1.4 million in the 1989-90 period ($859,337 in 1990 dollars) to over $4.3 million in the 2007-08 period. And membership in the Federal Communications Bar Association more than doubled between 1983 and 2008, from 1,190 members to 2,462 members. Each of these figures suggests that whether or not policy has moved in a market-oriented direction since 1983, government involvement still permeates the industry, and regulated entities are investing in lobbying efforts accordingly.

   Two recent books shed light on the apparent tension between the ascendance of deregulatory talk, on the one hand, and the tenacity of regulation itself, on the other. In Government Failure versus Market Failure: Microeconomics Policy Research and Government Performance ("Government Failure"), Clifford Winston reviews numerous empirical studies of regulation and its alternatives, marshaling evidence that, from the perspective of welfare-maximization, economic regulation has quite often done more harm than good. (4) In Creating Competitive Markets: The Politics of Regulatory Reform ("Creating Competitive Markets"), editors Mark K. Landy, Martin A. Levin and Martin Shapiro collect essays that address in depth the political peril facing attempts at market liberalization, not only before but also--and especially--after that reform is enacted. (5)

   Winston insists that policymakers must respond first and foremost to the imperatives of microeconomic efficiency. These imperatives, he argues, require fidelity to the unfettered market in almost all cases. The contributors to Creating Competitive Markets are also sympathetic to market outcomes, but warn that market liberalization is an inherently political project. For these authors, "deregulation" is a misnomer, as liberalization nearly always entails the replacement of one set of rules by another on the path to genuine competition. Thus, reform always preserves an important role for government--and thus for political gamesmanship and rent-seeking behavior, which too often undermine or even eviscerate attempted deregulation. Each book contains crucially important lessons for communications policymakers and, while neither is perfect, each deserves attention as the possibility of broad legislative reform continues to loom large.

2. THE BOOKS

   1. Government Failure

      In Government Failure, Clifford Winston offers a short overview of microeconomic research into the welfare effects of regulation in various fields. The conclusion drawn by almost every study cited, and by Winston himself, is that governmental involvement in markets, whether in the form of regulation or the enforcement of generally applicable competition law, has reduced rather than increased overall utility. Winston makes two central points. First, market failure is less common, less harmful and less intractable than supposed by many observers. Second, governmental efforts to redress market failure are likely to create net harms, or, where they create net benefits, to do so at a higher-than-necessary social cost.

      Winston contends that "[m]arket failure is less common and less costly than might be expected," in large part "because market forces tend to correct certain potential failures." (6) For one thing, market competition is "robust" in that it "develops to prevent market power in input and output markets from being long-lived and olden develops in markets that are believed to have 'natural' entry barriers." (7) That is, the market itself can cure market failure. Thus, "the highly competitive U.S. environment has caused monopolies to be eroded, made it difficult for firms to maintain harmful collusive agreements, and led to mergers that ... provide efficiency benefits...." (8) Moreover, Winston finds that even those market failures that do arise "do not appear to create large efficiency losses to the U.S. economy." (9) Indeed, Winston argues that conditions often associated with market failure might at times enhance efficiency. For example, cartels "may reduce costs through shared advertising and research, which may tend to reduce prices rather than to increase them." (10)

      Winston then emphasizes the harm that results from government regulation, an outcome he refers to as "government failure." Assailing "refusals to acknowledge that government interventions can have costs as well as benefits," (11) Winston points to instances in which "government has created inefficiencies because it should not have intervened in the first place or ... could have solved a given problem or a set of problems more efficiently, that is, by generating greater net benefits." (12) He is particularly concerned about government failure "when economic welfare is actually reduced or when resources are allocated in a manner that significantly deviates from an appropriate efficiency benchmark." (13) For example, he faults antitrust regulators for blocking consolidations that would enhance overall efficiency; Winston observes that mergers can be procompetitive or anticompetitive, but views the historical record as demonstrating that "the authorities cannot evaluate mergers in a way that systemically enhances consumer welfare." (14) Likewise, Winston cites studies purporting to demonstrate (1) that government efforts to curb monopolization generally failed to increase overall consumer welfare; (15) (2) that trade protections have generated benefits "fall[ing] far short of the losses to consumers"; (16) (3) that FTC investigations into alleged false advertising have raised firms' costs without facilitating more informed decisionmaking by consumers; (17) (4) that securities-related disclosure requirements have "provided few benefits to investors"; (18) and (5) that Corporate Average Fuel Economy ("CAFE") standards have prompted Americans to drive more, consuming more fuel on the whole while driving smaller, more dangerous vehicles. (19)

      Winston's criticism is not limited to welfare-diminishing regulation. He also faults government actions that produce benefits that might have been achieved in a less costly manner. For Winston, a key example is the breakup of AT&T. He claims that while AT&T's divestiture of the RBOCs may have resulted in efficiency gains principally associated with equal-access requirements that opened long-distance markets to competition, this reform could have been promulgated by the FCC rather than the courts, and without the "large costs" that attended divestiture. (20) Similarly, he concedes that regulatory efforts to redress externalities have created some benefits, but argues that those benefits could have been captured at lower expense. (21) For example, he cites studies concluding that 1980's...