Bait-and-Switch -- Or Why the FCC's 'Virtuous Circle' Theory is Nonsense

[Commentary] For the past ten years, the Federal Communications Commission has struggled to write legally-defensible net neutrality rules. This March, under heavy political pressure from the White House, the FCC voted out another set of rules, this time invoking the proverbial ‘‘nuclear option’’ of reclassifying both wire-line and wireless broadband Internet access as a Title II common carrier telecommunications service. As to be expected, the appeals process (for the third time) is now underway in earnest.

While the various legal infirmities of the FCC’s arguments are well-documented, absent from the discussion has been any analysis of the Commission’s central economic justification for its radical intervention into the market -- namely, the Commission’s theory of a ‘‘virtuous circle’’ or ‘‘virtuous cycle’’ of investment. As I show below, while many take the Commission’s ‘‘virtuous circle’’ theory as accepted Gospel, the truth is that the Commission, in fact, adopted what I would describe as an ‘‘un-vituous circle’’ theory of investment under which profit-maximizing firms will do things willingly and knowingly to reduce the demand for their products, which will somehow lead to increased profits, which in turn will lead to reduced broadband investment. As the Commission’s logical flow cannot be squared with the plain language of the Commission’s depiction of the "virtuous circle’’ (or likely any plausible economic model either), the Commission’s core economic rationale for imposing Title II regulation on the Internet rests on shaky ground.

[Dr. George S. Ford is a co-founder of the Phoenix Center and currently serves as its Chief Economist]