Those Who Love Uber Should Also Love Unlicensed Spectrum. The Paradox of “Regulatory Property.”

I’ve decided that we should have a business with a limited number of licenses to conduct the business. All the people who got their licenses for free previously will, of course, be allowed to keep them. But now they can sell them as well. When we (very rarely) make more licenses available, we will sell them at public auction because, as we all know, auctions put the scarce resource in the hands of those who will use it for its highest, best use.” Letting people simply have free access would lead to wastefulness, inefficiency and devalue the resource.

Besides, by limiting the number of licenses and auctioning them off, we the government can make a lot of money without raising taxes. True, you can argue that by artificially limiting the number of licenses to make them valuable we are essentially creating a tax on the ability to do the business — we just collect it all up front. But we don’t like that argument so we will ignore it because “auctions put the resource to its highest best use” and if it is valuable, people ought to pay for it.

No, I’m not talking about spectrum. I’m talking about taxi cabs. State and local governments license taxi cabs. This creates an artificial scarcity. As a result, as anyone who owns a Taxi medallion will tell you, they are extremely valuable. And, as one might expect, the taxi cabs that benefit from this scarcity (and the states and localities that benefit from this scarcity) are less than happy at the thought of a new competitor, like Uber or Lyft, offering a competing service. It is a windfall to these guys to allow them to offer for free what we need to acquire — either at auction or in the secondary market — for money. If they want to compete, say the taxi cabs who have medallions, let the new entrants get medallions like us. When they become available.

OK, I was talking about taxi cabs, but y’all see where this is going right?

More below . . .

Thanks to Derek Khanna and a number of others, Republicans are starting to see the wisdom in embracing some pro-tech policies where “property rights” is actually a code word for “government regulation.” Mind you, as a good member of the Congregation of Pragmatic Progressives rather than a follower of the Gods of the Marketplace, regulation to achieve good public policy ends doesn’t trouble me. For example, I have no problem with granting limited monopolies  “to promote the sciences and the useful arts” through copyrights and patents. I don’t need to lie to myself that copyright and patent are some magic species of property rather than an artificial monopoly defined and regulated by the government in order to sleep easy at night.

 

I don’t have to believe that taxi cab licenses are property to recognize they are a form of government regulation. I would even go so far as to say there is some value to regulating taxi cabs as common carriers and giving them certain privileges in exchange for ensuring that we have a fleet of cars roaming the street performing the function of transporting members of the public from one place to another for hire. But my world is broad enough that it can accommodate both a licensed service and a competing unlicensed service for people that like that option.

 

Likewise, I don’t have to lie to myself that spectrum licenses are property to recognize them for what they are: a government regulation on behavior. As anyone familiar with spectrum policy knows, we started licensing the right to transmit energy at specified frequencies, at set power, for specific purposes back over 85 years ago to address a technical problem. AM Radios, the most common form of radio use, couldn’t handle multiple transmitters on the same frequency. The radio receivers got confused, so that listeners trying to hear a ‘hilarious’ racist caricature of two black men voiced by white actors , or the delightful anti-semetic rantings of the adorable Father Coughlin, got static instead. (we shall elide over whether the static represented an improvement).

 

But to return, what’s relevant is that the government began artificially restricting the number of people who could have licenses to transmit by wireless to achieve a technical goal — making sure that radio functioned reliably. Whether or not that was the right decision, it’s what we did and that shaped how radio and wireless technology evolved. As most everyone reading this blog likely knows, we eventually started using auctions to distribute these limited number of licenses because a real smart economics guy named Ronald Coase argued that using auctions to distribute licenses was certainly no less efficient than any other way to distribute licenses, and that allowing flexibility and free market transactions to govern the way in which licenses were assigned and used going forward would, over time, lead to more efficient results.

 

Unfortunately, since then, a mythology around spectrum licenses has sprung up with little (if any) basis in economic reality. The catechism of this “Property School” is that “auctions put spectrum to their highest best use.” As a preliminary matter of course, this contradicts what Coase actually said (that all initial distributions are equally likely to be inefficient, and that unregulated market transactions over time work to maximize efficiency — assuming lots of stuff that rarely happens in the world like friction free transactions and perfect information). More practically, it has led to an unfortunate religious refusal by True Believers to consider that, if we can use radio frequency energy without interference, we no longer need exclusive licensing. Like their coreligionists in the Intellectual Property school, they make the category error that by calling a regulation on an action “property” it magically ceases to be a form of regulation and becomes something sacred and holy.

 

Of Uber And Unlicensed Spectrum.

 

Which brings me back to Uber. Pretty much the same arguments about the value of spectrum licensing apply to the value of taxi cab licensing, or other forms of scarcity created by a government sanctioned monopoly. It is this point that critically distinguishes what I will call “regulatory property” from  plain old “intangible property.” Regulatory property is actually a restriction on the behavior of everyone else for the sole purpose of incenting some kind of policy goal. it is not rivalrous, it doesn’t get consumed. There is no reason why anybody else couldn’t just do whatever the action is (copy a book, transmit on a particular frequency, provide a taxi service) absent the government regulation. It is distinguished from plain old regulation (like a health certificate for a restaurant) in that it is deliberately made scarce to enhance its value.

 

If it were really true that “auctions put resources in the hands of those who will put them to their highest best use,” it’s hard to distinguish taxi licenses from spectrum licenses. In both cases, the argument for government-induced artificial scarcity applies. And, in fact, we have had times and places where governments restricted the right to engage in many trades in similar fashion. Governments licensed who could be bakers (or own large ovens needed for commercial baking), who could be blacksmiths, etc. The right to engage in this profession was heritable, and even transferable. Sometimes (like with the right to collect taxes) it was auctioned off. So there is nothing intrinsically impossible with establishing such a system.

But most of us would, I hope, agree that such a system would constitute pretty invasive regulation – and not in a good way. I think it’s a good idea to have standards you have to meet to practice as a doctor, but I don’t think we should have artificial limits on the number of doctors (or bakers, or whatevers) simply to guarantee to those professions the right to ‘monetize’ the scarcity and provide the government with an opportunity to generate revenue by auctioning off a limited number of “Doctor Licenses.”

So while maybe it makes sense to require some sort of regulation of services like Uber, or maybe not, it doesn’t seem to make sense to artificially keep Uber out of the market to protect the ability of taxi licensees to monetize their licenses. Taxis get certain privileges for their medallions, and accept certain responsibilities. Those who want non-interfering alternatives should be free to do so.

 

So why doesn’t the same logic apply to spectrum access? How can one defend artificial spectrum scarcity on the one hand, but also defend Uber’s right to operate without a taxi license? Windfall! Level playing field! Auctions put everything to their highest best use, remember?

 

Mind you, I’m not talking about potentially interfering uses. I’m talking about the straight up hostility to any form of unlicensed as inherently inferior to licensed spectrum, inherently a spectrum windfall/giveaway to . . . well . . . SOMEONE . . . because if the uses were really valuable they ought to pay for it! The exact same arguments that [Representative Upton and others] made when we were debating the Incentive Auction bill, and which we still hear from some folks every time the subject of “spectrum sharing” comes up.

 

And it doesn’t stop with unlicensed spectrum. Any infringement on the regulatory monopoly maintained by the government for the benefit of exclusive licensees is vigorously attacked by network operators as an infringement on their ‘right to monetize’ their ‘property.’ Republican FCC Commissioners Pai and O’Reilly dissented from the proposed cell phones on a plane Notice of Proposed Rulemaking because they saw letting an independent third party operate an in air system that would pass the cell phone signal through from the plane passengers to the cell phone providers as infringing on the ‘right’ of the cellphone operator to enjoy its government monopoly to the fullest (Pai statement here, O’Reilly statement here].) Instead of seeing this as intrusive government regulation to create artificial scarcity, they see it as protecting a ‘property right.’

 

 

Republicans Should Call “Regulatory Property” What It Really Is: “Government Regulation.”

 

I want to point out that not all Republicans feel the same way. Rep. Daryl Issa (R-CA), for example, recognizing the difference between real property and artificial “regulatory property” such as excessive copyright restrictions and resistance to unlicensed spectrum. He has called these efforts to cloak government regulation in property rights language what they really are – government regulation designed to stifle competition and artificially increase the value of the government monopoly. (Issa’s experience as an entrepreneur who built a business on consumer electronic devices gives him a different perspective.) In the Senate, Senator Moran (R-KS) has replaced retired Senator Snowe as the Republican champion for unlicensed spectrum on the Senate side.

 

To be clear, even I am not calling for the end of exclusive licensing tomorrow. Heck, I’m even willing to contemplate that, like copyright and patent, granting some form of exclusivity to encourage things like deployment of national networks, to protect public safety, and to provide for those uses that genuinely require exclusive interference protection. But we ought to recognize them for what they are – regulations in the public interest.

 

The Republican establishment has decided to double down on Uber, with RNC Chair Reince Preibus creating a petition to support “innovative businesses like Uber.” The GOP leadership hopes to demonstrate to the electorate that a deregulatory agenda translates into opportunity and jobs rather than translating into unrestrained corporate power and crony capitalism. While I can’t say I entirely agree with them (I see nothing intrinsically good or evil in regulation any more than any other tool of public policy), I want to encourage Republicans to think about other places where licensing serves no other purpose than to protect incumbent interests and where the concept of “property” is simply camouflage for “government regulation to create monopolies.” The GOP (and Dems, for that matter) should follow the lead of Rep. Issa and Senator Moran and embrace opening more spectrum for open flexible use by everyone, rather than continuing to focus on how to use regulation to create artificial scarcity for the benefit of a few.

 

Stay tuned . . . .

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