Adam Thierer's Blog, page 37

Important New White House Report Documents Costs of Occupational Licensing

Yesterday, the White House Council of Economic Advisers released an important new report entitled, “Occupational Licensing: A Framework for Policymakers.” (PDF, 76 pgs.) The report highlighted the costs that outdated or unneeded licensing regulations can have on diverse portions of the citizenry. Specifically, the report concluded that:

the current licensing regime in the United States also creates substantial costs, and often the requirements for obtaining a license are not in sync with the skills needed for the job. There is evidence that licensing requirements raise the price of goods and services, restrict employment opportunities,  and make it more difficult for workers to take their skills across State lines. Too often, policymakers do not carefully weigh these costs and benefits when making decisions about whether or how to regulate a profession through licensing.

The report supported these conclusions with a wealth of evidence. In that regard, I was pleased to see that research from Mercatus Center-affiliated scholars was cited in the White House report (specifically on pg. 34). Mercatus Center scholars have repeatedly documented the costs of occupational licensing and offered suggestions for how to reform or eliminate unnecessary licensing practices. Most recently, my colleagues and I have explored the costs of licensing restrictions for new sharing economy platforms and innovators. The White House report cited, for example, the recently-released Mercatus paper on “How the Internet, the Sharing Economy, and Reputational Feedback Mechanisms Solve the ‘Lemons Problem,’” which I co-authored with Christopher Koopman, Anne Hobson, and Chris Kuiper. And it also cited a new essay by Tyler Cowen and Alex Tabarrok on “The End of Asymmetric Information.”

Moreover, along with Christopher Koopman and Matt Mitchell, I recently submitted comments to the Federal Trade Commission for a sharing economy workshop. In those comments, as well as a recent paper on the same subject, we documented how occupational licensing rules were often “captured” by affected interests and are then used to discourage new forms of competition and innovation. This harms both consumers and workers by depriving them of new and better options. Many sharing economy operations are having great success in breaking down these barriers and proving that consumers and workers do better in an environment free of unnecessary and costly licensing restrictions. This suggests that consumer welfare would be improved even more by reforming other licensing regimes.

Mercatus has published dozens of other things related to this issue, many of which I have listed down below. Just recently, in fact, we published a new paper on “Breaking Down the Barriers: Three Ways State and Local Governments Can Improve the Lives of the Poor,” by economist Steven Horwitz. The report begins by documenting how “occupational licensure laws disproportionately burden the poor by requiring them to spend significant resources just to enter a market.” This is consistent with the findings from other Mercatus reports and other academic publications.

Anyway, check out the new White House report and, if you are serious about studying the issue of occupational licensing in more detail, you’ll want to take a closer look at some of these other Mercatus Center publications on the issue. The case for occupational licensing reform is strong and non-partisan, as the release of this White House report makes clear.

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Mercatus Center publications and related material on occupational licensing & barriers to entry 

Working Papers, Filings & Testimony

Mercatus research paper, “Breaking Down the Barriers: Three Ways State and Local Governments Can Get Out of the Way and Improve the Lives of the Poor” by Steve Horowitz (July 21 2015).
Testimony before the South Carolina Health Planning Committee department of Health and Environmental Control, “Certificate-of-Need laws: Implications for South Carolina” by Christopher Koopman, Thomas Stratmann, and Mohamad Elbarasse (June 12, 2015).
Mercatus on Policy, “Certificate-of-Need Laws: Implications for Arkansas” by Christopher Koopman, Thomas Stratmann, and Mohamad Elbarasse (June 9, 2015).
Mercatus on Policy, “Certificate-Of Need Laws: Implications for West Virginia” by Christopher Koopman and Thomas Stratmann (June 2, 2015).
Mercatus working paper, “How the Internet, the Sharing Economy, and Reputational Feedback Mechanisms Solve the “ Lemons Problem” by Adam Thierer, Christopher Koopman, Anne Hobson, and Chris Kuiper (May 26, 2015).
Mercatus FTC filing, “The Sharing Economy: Issues Facing Platforms, Participants, and Regulators” by Christopher Koopman, Matthew Mitchell, and Adam Thierer (May 26, 2015).
Mercatus on Policy, “Certificate-Of Need Laws: Implications for Kentucky” by Christopher Koopman, Thomas Stratmann and Mohamad Elbarasse (May 26, 2015).
Mercatus on Policy, “Certificate-Of Need Laws: Implications for Michigan” by Christopher Koopman, Thomas Stratmann and Mohamad Elbarasse (May 19, 2015).
Mercatus publication, “How state CON Laws restrict Access to Health Care” by Christopher Koopman Thomas Stratmann, and Mohamad Elbarasse (May 13, 2015).
Mercatus on Policy, “Certificate-Of Need Laws: Implications for Missouri” by Christopher Koopman, Thomas Stratmann and Mohamad Elbarasse (May 11, 2015).
Mercatus on Policy, “Certificate-Of Need Laws: Implications for Georgia” by Christopher Mercatus on Policy, “Certificate-Of Need Laws: Implications for South Carolina” by Christopher Koopman and Thomas Stratmann (May 5, 2015).
Testimony before the Indiana Senate Commerce and Technology Committee, “Occupational Licensing Gone Wild? Why Licensing is Not Always the Answer” by Edward Timmons (April 16, 2015).
Koopman, Thomas Stratmann and Mohamad Elbarasse (March 31, 2015).
Mercatus on Policy, “Certificate-Of Need Laws: Implications for Tennessee” by Christopher Koopman and Thomas Stratmann (March 24, 2015).
Mercatus on Policy, “Certificate-of-Need Laws: Implications for Florida” by Christopher Koopman and Thomas Stratmann (March 3, 2015).
Mercatus policy recommendations, “Florida Fiscal Policy: Responsible Budgeting in a Growing State” by Randall Holcombe (February 26, 2015).
Mercatus on Policy, “Certificate-Of Need Laws: Implications for Virginia” by Christopher Koopman and Thomas Stratmann (February 24, 2015).
Mercatus working paper, “Bringing the Effects of Occupational Licensing into Focus: Optician Licensing in the United States” by Edward Timmons and Anna Mills (February 17 2015).
Mercatus on Policy, “Certificate-Of Need Laws: Implications for North Carolina” by Christopher Koopman and Thomas Stratmann (February 12, 2015).
Mercatus on Policy, “Certificate-Of Need Laws: Implications for New Hampshire” by Christopher Koopman and Thomas Stratmann (February 4, 2015).
Testimony before the New Hampshire House Health, Human Services and Elderly Affairs Committee, “Certificate-of-Need laws: Implications for New Hampshire” by Christopher Koopman and Thomas Stratmann (January 28, 2015).
Mercatus publication, “The Sharing Economy and Consumer Protection Regulation: The Case for Policy Change” by Christopher Koopman, Matthew Mitchell, and Adam Thierer (December 8, 2014).
Mercatus interactive publication, “40 Years of Certificate-of-Need Laws across America,” by Matthew Mitchell and Christopher Koopman (October 14, 2014).
Mercatus working paper, “Do Certificate-of Need Laws Increase Indigent Care?” by Thomas Stratmann and Jake Russ (July 15, 2014).
Mercatus working paper, “Regulatory Reform in Florida: An Opportunity for Greater Competitiveness and Economic Efficiency” by Patrick McLaughlin, Jerry Ellig, and Dima Yazji Shamoun (March 18, 2014).
Mercatus on policy, “A Tale of Two Labor Markets: Government Spending’s Impact on Virginia” by Keith Hall and Robert Greene, (September 20, 2013).
Mercatus publication, “The Pathology of Privilege: The Economic Consequences of Government Favoritism” by Matthew Mitchell, (July 8, 2012).
“Beyond Bailouts: What is Cronyism?” by Matthew Mitchell, (July 8, 2012).


Journal Articles

Published in Econ Journal Watch, “Was Occupational Licensing Good for Minorities? A Critique of Marc Law and Mindy Marks” by Daniel B. Klein, Benjamin Powell, and Evgeny S. Vorotnikov (September 2012).
Published in Cato Journal, “Occupational Licensing and Asymmetric Information” by David Skarbek (Jan 2007).


Charts and Videos

“The Wrath of CON | How Certificate-Of-Need Laws Affect Access to Health Care” by Matthew Mitchell (May 12, 2015).
“Occupational Licensing: Bad for Competition, Bad for Low-Income Workers” by Veronique de Rugy (March 25, 2014).


Media

Christopher Koopman discusses certificate of need laws on The Bill LuMaye Show on WPTF in North Carolina (5/11/2015).
Edward Timmons and Anna Mills publish, “Short-Sighted Policy,” at S. News and World Report (2/17/15).
Veronique de Rugy publishes, “Free the Horse Masseuses!” in Reason Magazine (July 2014).
Veronique de Rugy discusses state occupational licensing on Richmond’s Morning News on WRVA in Virginia (6/6/14).
Veronique de Rugy publishes “Licensing laws protect special interests at the expense of opportunity,” at The Washington Examiner (3/28/14).
Patrick McLaughlin discusses occupational licensing on The Ed Dean Show in Florida (3/27/14).
Donald Boudreaux publishes “Occupational licensing: Reality differs from rhetoric,” in The Pittsburgh Tribune-Review (3/25/14).
Emily Washington blogs “Occupational Licensing Hurts Consumers and Limits Entrepreneurship,” at Neighborhood Effects (8/20/13).
Veronique de Rugy blogs “More State Occupational Licensing Law Abuse: Kentucky Edition,” at National Review’s The Corner (7/17/13).
Emily Washington blogs “Small steps in VA occupational licensing reform,” at Neighborhood Effects (6/25/12).

Spectrum NIMBYs and the Return of FCC Beauty Contests?

The FCC is being dragged–reluctantly, it appears–into disputes that resemble the infamous beauty contests of bygone years, where the agency takes on the impossible task of deciding which wireless services deliver more benefits to the public. Two novel technologies used for wireless broadband–TLPS and LTE-U–reveal the growing tensions in unlicensed spectrum. The two technologies are different and pose slightly different regulatory issues but each is an attempt to bring wireless Internet to consumers. Their advocates believe these technologies will provide better service than existing wifi technology and will also improve wifi performance. Their major similarity is that others, namely wifi advocates, object that the unlicensed bands are already too crowded and these new technologies will cause interference to existing users.

The LTE-U issue is new and developing. The TLPS proceeding, on the other hand, has been pending for a few years and there are warning signs the FCC may enter into beauty contests–choosing which technologies are entitled to free spectrum–once again.

What are FCC beauty contests and why does the FCC want to avoid them? From the 1930s to the 1990s (aside from a few short-lived spectrum lotteries), the FCC handed out valuable spectrum licenses for free to applicants who showed they would benefit the public with their planned services. TV broadcasters, taxicab dispatchers, satellite communications companies, medical facilities, and others lobbied to claim their stake when new spectrum became available.

These time-consuming proceedings became known as beauty contests, reflecting the subjective nature of giving away an input often worth tens or hundreds of millions of dollars to “deserving” applicants. The inefficiency, delay, and predictable corruption of beauty contests were widely criticized, but it wasn’t until the 1990s that Congress permitted auctioning spectrum. Allowing markets to allocate spectrum greatly improved the chances spectrum would go to the firms that had financial incentives to put it to good use, rather than the firms that had the most persuasive insiders.

But not all spectrum is auctioned today. Decades ago the FCC realized that short-range, innovative new services could be deployed without expensive and time-consuming licensing. The agency decided to authorize low-power devices in certain bands of spectrum. Essentially, any device maker could freely deploy technologies in these bands as long as they complied with a few basic FCC rules, the Part 15 rules. The FCC left technology choices to the device makers, who share the spectrum with other–sometimes interference-prone–device makers and users. While wifi technology is the most popular and most economically significant user of unlicensed spectrum, there are many other technologies coexisting in unlicensed bands. Today, hardware companies make dozens of short-range technologies like toy RC cars, wireless speakers, Bluetooth earpieces, baby monitors, garage door openers, cordless phones, and wifi routers.

Unlicensed spectrum has downsides for device makers, however. As the FCC said in a recent proceeding, “As a general condition of operation, Part 15 devices … must accept any interference that may be received from [licensed users] or other Part 15 devices.” Operators like AT&T, Sprint, and Dish pay millions or billions of dollars for their licensed spectrum at auction. In return, however, they can exclude other wireless operators from using their spectrum assignments. In contrast, using free unlicensed spectrum means you have no protection from interference from other unlicensed and licensed users. This is intended to create an environment of permissionless innovation, where wireless entrants can be free to try new services.

In theory, this means unlicensed users cannot object when other unlicensed users deploy new technologies. In practice, however, now that unlicensed spectrum is occupied by services like Bluetooth and wifi-delivered Internet, new entrants often modify their technology to be “good neighbors.” The potential for interference also motivates established players to prevent entrants like TLPS and LTE-U from using the bands.

Richard Bennett has a good explanation of the LTE-U engineering issues before the FCC. TLPS has slightly different issues. After a few years of testing, TLPS may be approved soon, but not without a fight. TLPS is a novel wireless technology that uses a channel of spectrum that straddles unlicensed spectrum and licensed spectrum. The licensed portion is currently used by Globalstar for satellite communications but the FCC generally wishes to get away from mandating certain services–like satellite communications–and to allow licensees to use their spectrum for whatever service is demanded by consumers. For that reason, the FCC has sought, since releasing the 2010 National Broadband Plan, to make this relatively unproductive “satellite spectrum” available for land-based wireless broadband use. Knowing that the FCC is willing to be flexible to meet growing consumer broadband needs, Globalstar saw an opportunity to merge its licensed spectrum with a portion of the free, adjacent unlicensed spectrum. With this wider channel, some of it shared with existing unlicensed users, wireless broadband delivered via TLPS technology became feasible. As TLPS approval nears the finish line, however, some unlicensed users are objecting that TLPS will interfere with their services.

The FCC proceedings reveal a technical debate about interference measurements. These claims distract from the larger issue: Either the Part 15 rules mean what they say–unlicensed users have no interference protection–or the FCC is increasingly back in the business of beauty contests and deciding which services are entitled to free spectrum.

Henry Goldberg, a communications lawyer who represented Apple years ago in getting more unlicensed spectrum allocated, predicted these fights at a 2008 Information Economy Project conference.

[I]f you are a company or a municipality or a port authority or a university who has invested in unlicensed spectrum to provide a WiFi services for a fee, you’re not so sure you want someone using unlicensed spectrum to compete with you. Such players may try to use contractual rights, lawsuits, etc. to seek to limit additional entry to what has become “their” spectrum. If a “not-in-my-back-yard” dynamic takes over, the very essence of Part 15 is compromised. Vigilance is needed to fight Part 15 NIMBY.

It’s this growing Part 15 NIMBYism that concerns many spectrum policy watchers. No one wants the return of beauty contests and the FCC picking winners among different technologies.

But Goldberg has a discouraging addendum to his prescient warning against NIMBYism in unlicensed bands:

Supporter of unfettered grazing rights that I am, it doesn’t offend me to have the town permit grazing by sheep and cows, but forbid elephants.

Herein lies the problem. The FCC is being pressured to declare that TLPS is an elephant that should not be allowed in the commons filled with wifi sheep and Bluetooth cows. LTE-U will be the next target.

If the FCC encourages these kinds of complaints, the result will be customary law that is destructive to innovation in unlicensed bands. Firms will sink investments in technologies and business plans that comply with the rules, and only later learn they are violating unwritten rules.

The bigger problem is that the FCC is entering beauty contest territory once again. Even if the FCC someday prohibits “elephants” in unlicensed–current Part 15 rules say unlicensed users have no protection against others–the agency has to determine what that means. The FCC does not want to go back to the bad old days of beauty contests, specifying, in the face of intense lobbying, that only certain technologies were allowed on certain frequencies in certain places.

As firms find ways to intensely use free unlicensed spectrum, more conflicts like these may arise. Unfortunately these fights politicize FCC decisionmaking and could stymie new wireless innovations.

It may be that NIMBYism in unlicensed is inevitable. If interference in unlicensed is a regular problem and the FCC finds itself picking winners, the FCC needs to be much more cautious about allocating unlicensed spectrum. It’s worth noting that auctioning spectrum removes the temptation to engage in the ad hoc dispensations of spectrum that plagued the agency for decades. In any case, the results of the TLPS and LTE-U proceedings will have ramifications beyond the approval or denial of those technologies.

Related Reading:

Super Wifi and Unlicensed Spectrum: “Spectrum Condos”

How the FCC Killed a Nationwide Wireless Broadband Network

How Attitudes about Risk & Failure Affect Innovation on Either Side of the Atlantic

“Why hasn’t Europe fostered the kind of innovation that has spawned hugely successful technology companies?” asks James B. Stewart in an important new column for the New York Times (“A Fearless Culture Fuels U.S. Tech Giants“).

That’s a great question, and one that I have tried to answer in a series of recent essays. (See, for example, “Europe’s Choice on Innovation” and “Embracing a Culture of Permissionless Innovation.”) What I have suggested in those essays is that the starkly different outcomes on either side of the Atlantic in terms of recent economic growth and innovation can primarily be explained by cultural attitudes toward risk-taking and failure. “For innovation and growth to blossom, entrepreneurs need a clear green light from policymakers that signals a general acceptance of risk-taking—especially risk-taking that challenges existing business models and traditional ways of doing things,” I have argued. And the most powerful proof of this is to examine the amazing natural experiment that has played out on either side of the Atlantic over the past two decades with the Internet and the digital economy.

For example, an annual Booz & Company report on the world’s most innovative companies revealed that 9 of the top 10 most innovative companies are based in the U.S. and that most of them are involved in computing and digital technology. None of them are based in Europe, however. Another recent survey revealed that the world’s 15 most valuable Internet companies (based on market capitalizations) have a combined market value of nearly $2.5 trillion, but none of them are European while 11 of them are U.S. firms. Again, it is America’s tech innovators that dominate that list.

Many European officials and business leaders are waking up to this grim reality and are wondering how to reverse this situation. In his Times essay, Stewart quotes Danish economist Jacob Kirkegaard of the Peterson Institute for International Economics, who notes that Europeans “all want a Silicon Valley. . . . But none of them can match the scale and focus on the new and truly innovative technologies you have in the United States. Europe and the rest of the world are playing catch-up, to the great frustration of policy makers there.”

OK, but why is that? Again, it comes down to those different cultural attitudes about risk and the stark differences over the potential lessons to be gained from allowing firms, business models, and entire professions to fail and/or be significantly disrupted.

Stewart quotes German economist Petra Moser on this point. He noted that “Europeans are worried. . . . They’re trying to recreate Silicon Valley in places like Munich, so far with little success,” she said. “The institutional and cultural differences are still too great.” In Europe, stability is prized,” she says. Here’s the key passage from the Stewart piece elaborating on this point:

Often overlooked in the success of American start-ups is the even greater number of failures. “Fail fast, fail often” is a Silicon Valley mantra, and the freedom to innovate is inextricably linked to the freedom to fail. In Europe, failure carries a much greater stigma than it does in the United States. Bankruptcy codes are far more punitive, in contrast to the United States, where bankruptcy is simply a rite of passage for many successful entrepreneurs.

Moreover, he notes, “Europeans are also much less receptive to the kind of truly disruptive innovation represented by a Google or a Facebook.”

And that remains the heart of the problem for Europe. What many leaders there fail to appreciate, as I noted in my earlier essays, is that:

Innovation is more likely in systems that maximize breathing room for ongoing economic and social experimentation, evolution, and adaptation. Societies that appreciate those values—and allow them to influence both social norms and policy decisions—are likely to experience greater economic growth. By contrast, those that deride such values and adopt a more precautionary policy approach are more likely to discourage innovation and languish economically.

The remarkable aversion to failure and its affect on deterring entrepreneurialism and long-term growth in Europe and elsewhere cannot be overstated. As I will argue in a forthcoming book chapter on this topic, we can conclude, paradoxically, that individuals, institutions, and countries that over-zealously seek to avoid the possibility of certain short-term failures are actually far more prone to potentially far more dangerous and systemic failures in the long-term. Put more simply: the more you try to avoid all the little failures, the harder you fail more generally. This is Europe’s fundamental predicament circa 2015.

Of course, changing long-entrenched cultural attitudes toward risk and failure can be challenging and take many years, even decades. But the path forward–at least in terms of legal policy and regulatory reforms–has been charted by Larry Downes in his new Harvard Business Review essay, “How Europe Can Create Its Own Silicon Valley.” EU policymakers, he correctly observes, will “have to learn to appreciate in the first place the profound role regulation (or the lack of it) plays in the creation of economic value in the Internet economy.” Downes then continues on to itemize some of the policy changes that would help put Europe on the right track to unlock the amazing entrepreneurial spirit that lies dormant across the continent.

Whether or not the Europeans are willing to take those steps remains to be seen. Regardless, the lesson for U.S. policymakers should be clear: If you want to continue to produce world-beating tech innovators, you must avoid Europe’s overly precautionary and highly risk-averse approach to policy. “Permissionless innovation” remains the better default policy position toward new entrepreneurs and technologies, no matter how disruptive they may be in the short-term.

The Challenge of Defining Privacy Harm

On Thursday, it was my great pleasure to participate in a Washington Legal Foundation (WLF) event on “Online Privacy Regulation: The Challenge of Defining Harm.” The entire event video can be found on YouTube here, but down below I pasted the clip of just my remarks. Other speakers at the event included:  FTC Commissioner Maureen K. Ohlhausen, Commissioner; John B. Morris, Jr., the Associate Administrator and Director of Internet Policy athe U.S. Department of Commerce’s National Telecommunications and Information Administration; and Katherine Armstrong, Counsel at the law firm of Hogan Lovells. Glenn Lammi of the WLF moderated the session.

My remarks drew upon a few recent law review articles I have published relating digital privacy debates to previous debates over free speech and online child safety issues. (Here are those articles: 1, 2, 3).

New Paper Surveying Growth Projections for the Internet of Things

The “Internet of Things” (IoT) is already growing at a breakneck pace and is expected to continue to accelerate rapidly. In a short new paper (“Projecting the Growth and Economic Impact of the Internet of Things“) that I’ve just released with my Mercatus Center colleague Andrea Castillo, we provide a brief explanation of IoT technologies before describing the current projections of the economic and technological impacts that IoT could have on society. In addition to creating massive gains for consumers, IoT is projected to provide dramatic improvements in manufacturing, health care, energy, transportation, retail services, government, and general economic growth. Take a look at our paper if you’re interested, and you might also want to check out my 118-page law review article, “The Internet of Things and Wearable Technology: Addressing Privacy and Security Concerns without Derailing Innovation” as well as my recent congressional testimony on the policy issues surrounding the IoT.)

 

Video of FTC Workshop Panel on Sharing Economy Policy Issues

On June 9th, the Federal Trade Commission hosted an excellent workshop on “The ‘Sharing’ Economy: Issues Facing Platforms, Participants, and Regulators,” which included 4 major panels and dozens of experts speaking about these important issues. It was my great pleasure to be part of the 4th panel of the day on the policy implications of the sharing economy. Along with my Mercatus colleagues Christopher Koopman and Matt Mitchell, I submitted a 20-page filing to the Commission summarizing our research findings in this area. (We also released a major new working paper that same day on, “How the Internet, the Sharing Economy, and Reputational Feedback Mechanisms Solve the ‘Lemons Problem.’” (All Mercatus Center research on sharing economy issues can be found on this page and we plan on releasing additional papers in coming months.)

The FTC has now posted the videos from their workshop and down below I have embedded my particular panel. My remarks begin around the 5-minute mark of the video.

New Filing & Working Paper on the Regulation of the Sharing Economy

Along with colleagues at the Mercatus Center at George Mason University, I am releasing two major new reports today dealing with the regulation of the sharing economy. The first report is a 20-page filing to the Federal Trade Commission that we are submitting to the agency for its upcoming June 9th workshop on “The “Sharing” Economy: Issues Facing Platforms, Participants, and Regulators.” We have been invited to participate in that event and I will be speaking on the fourth panel of the workshop. The filing I am submitting today for that workshop was co-authored with my Mercatus colleagues Christopher Koopman and Matt Mitchell.

The second report we are releasing today is a new 47-page working paper entitled, “How the Internet, the Sharing Economy, and Reputational Feedback Mechanisms Solve the ‘Lemons Problem.'” This study was co-authored with my Mercatus colleagues Christopher Koopman, Anne Hobson, and Chris Kuiper.

I will summarize each report briefly here.

In our new filing to the FTC, we address the five questions the Commission set forth in its workshop annoucement. Those five questions are as follows:

How can state and local regulators meet legitimate regulatory goals (such as protecting consumers, and promoting public health and safety) in connection with their oversight of sharing economy platforms and business models, without also restraining competition or hindering innovation?
How have sharing economy platforms affected competition, innovation, consumer choice, and platform participants in the sectors in which they operate? How might they in the future?
What consumer protection issues—including privacy and data security, online reviews and disclosures, and claims about earnings and costs—do these platforms raise, and who is responsible for addressing these issues?
What particular concerns or issues do sharing economy transactions raise regarding the protection of platform participants? What responsibility does a sharing economy platform bear for consumer injury arising from transactions undertaken through the platform?
How effective are reputation systems and other trust mechanisms, such as the vetting of sellers, insurance coverage, or complaint procedures, in encouraging consumers and suppliers to do business on sharing economy platforms?

We provide detailed answers to each of these questions as well as one additional major question that was not posed by the Commission in its workshop notice but which is, no doubt, on the minds of many at the agency and outside it: What should the FTC do about state and local barriers to entry and innovation that might be thwarting the growth of the sharing economy? (I blogged about that issue here a couple of weeks ago and our filing includes that discussion.)

Please take a look at our filing for detailed answers to each of these questions. (Incidentally, our filing is an extension of an earlier working paper that Koopman, Mitchell, and I released late last year on “The Sharing Economy and Consumer Protection Regulation: The Case for Policy Change.”) But, to briefly highlight the thrust of our argument, here’s a passage from our new filing:

As the debate surrounding the sharing economy moves forward, policymakers must keep in mind that merely because regulations were once justified on the grounds of consumer protection does not mean they accomplished those goals or that they are still needed today. Even well-intentioned policies must be judged against real-world evidence. Unfortunately, the evidence shows that many traditional consumer protection regulations hurt consumers; in the words of New York Attorney General Eric Schneiderman, they are often “cumbersome, and some are just plain protectionist.”

Markets, competition, reputational systems, and ongoing innovation often solve problems better than regulation when they are given a chance to do so. There are two reasons for this. First, market imperfections create powerful profit opportunities for entrepreneurs who are able to find ways to correct them. Second, regulatory solutions too often undermine competition and lock in inefficient business models.

We continue on to explain exactly why that is the case, while also offering some constructive solutions to other issues that are on the minds of regulators.

Meanwhile, the new working paper we are releasing today provides much greater detail on the fifth of the five questions the FTC posed in its workshop notice regarding reputation systems and other trust mechanisms. Here is the abstract from the paper:

This paper argues that the sharing economy—through the use of the Internet and real time reputational feedback mechanisms—is providing a solution to the lemons problem that many regulators have spent decades attempting to overcome. Section I provides an overview of the sharing economy and traces its rapid growth. Section II revisits the lemons theory as well as the various regulatory solutions proposed to deal with the problem of asymmetric information. Section III discusses the relationship between reputation and trust and analyzes how reputational incentives affect commercial interactions. Section IV discusses how information asymmetries were addressed in the pre-Internet era. It also discusses how the evolution of both the Internet and information systems (especially the reputational feedback mechanisms of the sharing economy) addresses the lemons problem. Section V explains how these new realities affect public policy and concludes that asymmetric information is not a legitimate rationale for policy intervention in light of technological changes. We also argue that continued use of this rationale to regulate in the name of consumer protection might, in fact, make consumers worse off. This has ramifications for the current debate over regulation of the sharing economy.

We believe that our research makes it clear “how the sharing economy relies upon—and has helped spur the growth of—sophisticated reputational feedback mechanisms that facilitate online trust and commerce, overcoming many of the information asymmetries that seemed intractable… just a generation ago. In combination with online review services and other information-sharing technologies enabled by the Internet,” we conclude, “these reputational tools can help create more effective, and largely self-regulating, markets that provide more information to more individuals than ever before.”

We look forward to continuing engagement with officials at the FTC and other policymakers at the federal, state, and even international level on these issues. We hope our research will help legislators and regulators find sensible ways to adjust policy for the sharing economy so as not to derail the sort of “permissionless innovation” that has thus far powered this exciting sector and produced the many pro-consumer benefits flowing from it. Check out our filing and new paper for more details.

What Should the FTC Do about State & Local Barriers to Sharing Economy Innovation?

The Federal Trade Commission (FTC) is taking a more active interest in state and local barriers to entry and innovation that could threaten the continued growth of the digital economy in general and the sharing economy in particular. The agency recently announced it would be hosting a June 9th workshop “to examine competition, consumer protection, and economic issues raised by the proliferation of online and mobile peer-to peer business platforms in certain sectors of the [sharing] economy.” Filings are due to the agency in this matter by May 26th. (Along with my Mercatus Center colleagues, I will be submitting comments and also releasing a big paper on reputational feedback mechanisms that same week. We have already released this paper on the general topic.)

Relatedly, just yesterday, the FTC sent a letter to Michigan policymakers about restricting entry by Tesla and other direct-to-consumer sellers of vehicles. Michigan passed a law in October 2014 prohibiting such direct sales. The FTC’s strongly-worded letter decries the state’s law as “protectionism for independent franchised dealers” noting that “current provisions operate as a special protection for dealers—a protection that is likely harming both competition and consumers.” The agency argues that:

consumers are the ones best situated to choose for themselves both the vehicles they want to buy and how they want to buy them. Automobile manufacturers have an economic incentive to respond to consumer preferences by choosing the most effective distribution method for their vehicle brands. Absent supportable public policy considerations, the law should permit automobile manufacturers to choose their distribution method to be responsive to the desires of motor vehicle buyers.

The agency cites the “well-developed body of research on these issues strongly suggests that government restrictions on distribution are rarely desirable for consumers” and the staff letter continues on to utterly demolish the bogus arguments set forth by defenders of the blatantly self-serving, cronyist law. (For more discussion of just how anti-competitive and anti-consumer these laws are in practice, see this January 2015 Mercatus Center study, “State Franchise Law Carjacks Auto Buyers,” by Jerry Ellig and Jesse Martinez.)

The FTC’s letter is another example of how the agency can take steps using its advocacy tools to explain to state and local policymakers how their laws may be protectionist and anti-consumer in character. Needless to say, this also has ramifications for how the agency approaches parochial restraints on entry and innovation affecting the sharing economy.

In our forthcoming Mercatus Center comments to the FTC for its June 6th sharing economy workshop, Christopher Koopman, Matt Mitchell, and I will address many issues related to the sharing economy and its regulation. Beyond addressing all five of the specific questions asked in the Commission’s workshop notice, we also include a discussion about “Federal Responses to Local Anticompetitive Regulations.” Down below I have reproduced the current rough draft of that section of our filing in the hope of getting input from others. Needless to say, the idea of the FTC aggressively using its advocacy efforts or even federal antitrust laws to address state and local barriers to trade and innovation will make some folks uncomfortable–especially on federalism grounds. But we argue that a good case can be made for the agency using both its advocacy and antitrust tools to address these issues. Let us know what you think.

 

 

The Federal Trade Commission possesses two primary tools to address public restraints of trade created by state and local authorities: advocacy and antitrust.

Through its advocacy program, the Commission can provide specific comments to state and local officials regarding the effects of both proposed and existing regulations. Commissioner Joshua Wright has noted that, “For many years, the FTC has used its mantle to comment on legislation and regulation that may restrain competition in a way that harms consumers.” Thus, at a minimum, the Commission can and should shine light on parochial governmental efforts to restrain trade and limit innovation throughout the sharing economy. By shining more light on state or local anti-competitive rules, the Commission will hopefully make governments, or their surrogate bodies (such as licensing boards), more transparent about their practices and more accountable for laws or regulations that could harm consumer welfare. However, to be successful, the Commission’s advocacy efforts depend upon the willingness of state and local legislators and regulators to heed its advice.

The Commission has already used its advisory role in its recent guidance to state and local policymakers regarding the regulation of ridesharing services. The Commission noted then that “a regulatory framework should be responsive to new methods of competition,” and set forth the following vision regarding what it regards as the proper approach to parochial regulation of passenger transportation services:

Staff recommends that a regulatory framework for passenger vehicle transportation should allow for flexibility and adaptation in response to new and innovative methods of competition, while still maintaining appropriate consumer protections. [Regulators] also should proceed with caution in responding to calls for change that may have the effect of impairing new forms or methods of competition that are desirable to consumers. . . .  In general, competition should only be restricted when necessary to achieve some countervailing procompetitive virtue or other public benefit such as protecting the public from significant harm.

This represents a reasonable framework for addressing concerns about parochial regulation of the sharing economy more generally.

Unfortunately, in areas relevant to the regulation of the sharing economy (e.g., taxicab regulations and rules governing home and apartment rentals) anticompetitive regulations have remained on the books—and in some instances have expanded—in spite of more than 30 years of Commission comment and advocacy.  In fact, as Public Citizen noted in a recent Supreme Court filing:

[M]any more occupations are regulated than ever before, and most boards doing the regulating—in both traditional and new professions—are dominated by industry members who compete in the regulated market. Those board member-competitors, in turn, commonly engage in regulation that can be seen as anticompetitive self-protection. The particular forms anticompetitive regulations take are highly varied, the possibilities seemingly limited only by the imaginations of the board members.

In these instances, the Commission’s antitrust enforcement authority may need to be utilized when its advocacy efforts fall short with regard to regulations that favor incumbents by limiting competition and entry. Many academics have endorsed expanded antitrust oversight of public barriers to trade and innovation. As Commissioner Wright has argued, “the FTC is in a good position to use its full arsenal of tools to ensure that state and local regulators do not thwart new entrants from using technology to disrupt existing marketplace.” He notes specifically that he is “quite confident that a significant shift of agency resources away from enforcement efforts aimed at taming private restraints of trade and instead toward fighting public restraints would improve consumer welfare.” We agree.

The Supreme Court’s recent decision in North Carolina State Board of Dental Examiners v. Federal Trade Commission made it clear that local authorities cannot claim broad immunity from federal antitrust laws. This is particularly true, the Court noted, “where a State delegates control over a market to a nonsovereign actor,” such as a professional licensing board consisting primarily of members of the affected interest being regulated. “Limits on state-action immunity are most essential when a State seeks to delegate its regulatory power to active market participants,” the Court held, “for dual allegiances are not always apparent to an actor and prohibitions against anticompetitive self-regulation by active market participants are an axiom of federal antitrust policy.”

The touchstone of this case and the Court’s related jurisprudence in this area is political accountability. State officials must (1) “clearly articulate” and (2) “actively supervise” licensing arrangements and regulatory bodies if they hope to withstand federal antitrust scrutiny. The Court clarified this test in N.C. Dental holding that “the Sherman Act confers immunity only if the State accepts political accountability for the anticompetitive conduct it permits and controls.” In other words, if state and local officials want to engage in protectionist activities that restrain trade in pursuit of some other countervailing objective, then they need to own up to it by being transparent about their anticompetitive intentions and then actively oversee the process after that to ensure it is not completely captured by affected interests.

Some might argue that this does not go far enough to eradicate anti-competitive barriers to trade at the state or local level that could restrain the innovative potential of the sharing economy. While that may be true, some limits on the Commission’s federal antitrust discretion are necessary to avoid impinging upon legitimate state and local priorities.

Over time, it is our hope that by empowering the public with more options, more information and better ways to shine light on bad actors, the sharing economy will continue to make many of those old regulations unnecessary. Thus, in line with Commissioner Maureen Ohlhausen’s wise advice, the Commission should encourage state and local officials to exercise patience and humility as they confront technological changes that disrupt traditional regulatory systems.

But when parochial regulators engage in blatantly anti-competitive activities that restrain trade, foster cartelization, or harm consumer welfare in other ways, the Commission can act to counter the worst of those tendencies. The Commission’s standard of review going forward was appropriately articulated by Commissioner Wright recently when he noted that, “in the context of potentially disruptive forms of competition through new technologies or new business models, we should generally be skeptical of regulatory efforts that have the effect of favoring incumbent industry participants.”

Such parochial protectionist barriers to trade and innovation will become even more concerning as the potential reach of so many sharing economy businesses grows larger. The boundary between intrastate and interstate commerce is sometimes difficult to determine for many sharing economy platforms. Clearly, much of the commerce in question occurs within the boundaries of a state or municipality, but sharing economy services also rely upon Internet-enabled platforms with a broader reach. To the extent state or local restrictions on sharing economy operations create negative externalities in the form of “interstate spillovers,” the case for federal intervention is strengthened. It would be preferable if Congress chose to deal with such spillovers using its Commerce Clause authority (Art. 1, Sec. 8 of the Constitution), but the presence of such negative externalities might also bolster the case for the Commission’s use of antitrust to address parochial restraints on trade.

——–

    See Maureen K. Ohlhausen, Reflections on the Supreme Court’s North Carolina Dental Decision and the FTC’s Campaign to Rein in State Action Immunity, before the Heritage Foundation, Washington, DC, March 31, 2015, at 19-20.

    Id., at 20. (“The primary goal of such advocacy is to convince policymakers to consider and then minimize any adverse effects on competition that may result from regulations aimed at preventing various consumer harms.”) Also see James C. Cooper and William E. Kovacic, “U.S. Convergence with International Competition Norms: Antitrust Law and Public Restraints on Competition,” Boston University Law Review, Vol. 90, No. 4, (August 2010): 1582, “Competition advocacy helps solve consumers’ collective action problem by acting within the regulatory process to advocate for regulations that do not restrict competition unless there is a compelling consumer protection rationale for imposing such costs on citizens.”).

    Joshua D. Wright, “Regulation in High-Tech Markets:  Public Choice, Regulatory Capture, and the FTC,” Remarks of Joshua D. Wright Commissioner, Federal Trade Commission at the Big Ideas about Information Lecture Clemson University, Clemson, South Carolina, April 2, 2015, at 15, https://www.ftc.gov/public-statements....

    Cooper and Kovacic, “U.S. Convergence with International Competition Norms,” at 1610, (“Competition agencies could devote greater resources to conduct research to measure the effects of public policies that restrict competition. A research program could accumulate and analyze empirical data that assesses the consumer welfare effects of specific restrictions. Such a program could also assess whether the stated public interest objectives of government restrictions are realized in practice.”)

    Cooper and Kovacic, “U.S. Convergence with International Competition Norms,” at 1582, (“The value of competition advocacy should be measured by (1) the degree to which comments altered regulatory outcomes times (2) the value to consumers of those improved outcomes. For all practical purposes, however, both elements are difficult to measure with any degree of certainty.”).

    Federal Trade Commission, Staff Comments Before the Colorado Public Utilities Commission In The Matter of The Proposed Rules Regulating Transportation By Motor Vehicle, 4 Code of Colorado Regulations, (March 6, 2013), http://ftc.gov/os/2013/03/130703color....

    Marvin Ammori, “Can the FTC Save Uber,” Slate, March 12, 2013, http://www.slate.com/articles/technol... (noting that, “not only does the FTC have the authority to take these cities to impartial federal courts and end their anticompetitive actions; it also has deep expertise in taxi markets and antitrust doctrines.”) Also see, Edmund W. Kitch, “Taxi Reform—The FTC Can Hack It,” Regulation, May/June 1984, http://object.cato.org/sites/cato.org....

    Brief of Amici Curiae Public Citizen in Support of Respondent, North Carolina State Bd. of Dental Exam’rs v. FTC, (August 2014): 24.

    Brief of Antitrust Scholars as Amici Curiae in Support of Respondent, North Carolina State Bd. of Dental Exam’rs v. FTC, (August 6, 2014): 24, (“Antitrust review is entirely appropriate for curbing the excesses of occupational licensing because the anticompetitive effect has a similar effect on the market—and in particular consumers—as does traditional cartel activity.”)

  See Mark A. Perry, “Municipal Supervision and State Action Antitrust Immunity,” The University of Chicago Law Review, Vol. 57, (Fall 1990): 1413-1445; William J. Martin, “State Action Antitrust Immunity for Municipally Supervised Parties,” The University of Chicago Law Review, Vol. 72, (Summer, 2005): 1079-1102; Jarod M. Bona, “The Antitrust Implications of Licensed Occupations Choosing Their Own Exclusive Jurisdiction,” University of St. Thomas Journal of Law & Public Policy, Vol 5, (Spring 2011): 28-51; Ingram Weber “The Antitrust State Action Doctrine and State Licensing Boards,” The University of Chicago Law Review, Vol. 79, (2012); Aaron Edlin and Rebecca Haw, “Cartels by Another Name:  Should Licensed Occupations Face Antitrust Scrutiny?,” University of Pennsylvania Law Review, Vol. 162, (2014): 1093-1164.

  Wright, “Regulation in High-Tech Markets,” at 28-9.

  Wright, “Regulation in High-Tech Markets,” at 29.

  North Carolina State Bd. of Dental Exam’rs v. FTC, 135 S. Ct. 1101 (2015).

  Id.

  Id. Also see Edlin & Haw, “Cartels by Another Name,” at 1143, (“Who could seriously argue that an unsupervised group of competitors appointed to regulate their own profession can be counted on to neglect their selfish interests in favor of the state’s?”); Brief Amicus of the Pacific Legal Foundation and Cato Institute, North Carolina State Bd. of Dental Exam’rs v. FTC, (August 2014): 3, (“Antitrust immunity for private parties who act under color of state law is especially problematic, given that anticompetitive conduct is most likely to occur when private parties are in a position to exploit government’s regulatory powers.”)

  See Maureen K. Ohlhausen, Reflections on the Supreme Court’s North Carolina Dental Decision and the FTC’s Campaign to Rein in State Action Immunity, before the Heritage Foundation, Washington, DC, March 31, 2015, at 16, https://www.ftc.gov/public-statements..., (“states need to be politically accountable for whatever market distortions they impose on consumers.”); Edlin & Haw, “Cartels by Another Name,” at 1137, (“political accountability is the price a state must pay for antitrust immunity.)

  See Federal Trade Commission, Office of Policy and Planning, Report of the State Action Task Force (2003): 54, (“clear articulation requires that a state enunciate an affirmative intent to displace competition and to replace it with a stated criterion. Active supervision requires the state to examine individual private conduct, pursuant to that regulatory regime, to ensure that it comports with that stated criterion. Only then can the underlying conduct accurately be deemed that of the state itself, and political responsibility for the conduct fairly placed with the state.”) This test has been developed and refined in a variety of cases over the past 35 years. See: California Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc., 445 U.S. 97 (1980); Cmty. Comm’ns Co., Inc. v. City of Boulder, 455 U.S. 40, 48-51 (1982); City of Columbia v. Omni Outdoor Advertising, Inc., 499 U.S. 365 (1991); FTC v. Ticor Title Ins. Co., 504 U.S. 621 (1992).

  North Carolina State Bd. of Dental Exam’rs v. FTC, 135 S. Ct. 1101 (2015).

  Edlin & Haw, “Cartels by Another Name,” at 1156. (“Requiring that the state place its imprimatur on regulation is at least better than the status quo, in which states too often delegate self-regulation to professionals and walk away.”) See also North Carolina State Bd. of Dental Exam’rs v. FTC, 135 S. Ct. 1101 (2015) (“[Federal antitrust] immunity requires that the anticompetitive conduct of nonsovereign actors, especially those authorized by the State to regulate their own profession, result from procedures that suffice to make it the State’s own.”).

  Maureen K. Ohlhausen, Commissioner, Fed. Trade Commission, “Regulatory Humility in Practice,” Remarks of the American Enterprise Institute, Washington, D.C. (April 1, 2015).

  Edlin & Haw, “Cartels by Another Name,” at 1094, (“state action doctrine should not prevent antitrust suits against state licensing boards that are comprised of private competitors deputized to regulate and to outright exclude their own competition, often with the threat of criminal sanction.”). See also Brief Amicus of the Pacific Legal Foundation and Cato Institute, North Carolina State Bd. of Dental Exam’rs v. FTC, (August 2014): 2, 21, http://www.americanbar.org/content/da..., (noting that courts “should presume strongly against granting state-action immunity in antitrust cases.  It makes little sense to impose powerful civil and criminal punishments on private parties who are deemed to have engaged in anti-competitive conduct, while exempting government entities—or, worse, private parties acting under the government’s aegis—when they engage in the exact same conduct. . . . “Whatever one’s opinion of antitrust law in general, there is no justification for allowing states broad latitude to disregard federal law and erect private cartels with only vague instructions and loose oversight.”)

  Wright, “Regulation in High-Tech Markets,” at 7.

  FTC, Report of the State Action Task Force, 44, (“an unfortunate gap has emerged between scholarship and case law. Although many of the leading commentators have expressed serious concern regarding problems posed by interstate spillovers, their thinking has yet to take root in the law. Such spillovers undermine both economic efficiency and some of the same political representation values thought to be protected by principles of federalism.”); Brief Amicus of the Pacific Legal Foundation and Cato Institute, North Carolina State Bd. of Dental Exam’rs v. FTC, (August 2014): 13, (“Allowing states expansive power to exempt private actors from antitrust laws would also disrupt national economic policy by encouraging a patchwork of state-established entities licensed to engage in cartel behavior. This would disrupt interstate investment and consumer expectations, and would have spillover effects across state lines.”) Cooper and Kovacic, “U.S. Convergence with International Competition Norms,” at 1598, (“When a state exports the costs attendant to its anticompetitive regulatory scheme to those who have not participated in the political process, however, there is no political backstop; arguments for immunity based on federalism concerns are severely weakened, if not wholly eviscerated, in these situations.”

  See Adam Thierer, The Delicate Balance: Federalism, Interstate Commerce, and Economic Freedom in the Technological Age (Washington, DC: The Heritage Foundation, 1998): 81-118.

Mercatus Filing to FAA on Small Drones

Today, Eli Dourado, Ryan Hagemann and I filed comments with the Federal Aviation Administration (FAA) in its proceeding on the “Operation and Certification of Small Unmanned Aircraft Systems” (i.e. small private drones). In this filing, we begin by arguing that just as “permissionless innovation” has been the primary driver of entrepreneurialism and economic growth in many sectors of the economy over the past decade, that same model can and should guide policy decisions in other sectors, including the nation’s airspace. “While safety-related considerations can merit some precautionary policies,” we argue, “it is important that those regulations leave ample space for unpredictable innovation opportunities.”

We continue on in our filing to note that  “while the FAA’s NPRM is accompanied by a regulatory evaluation that includes benefit-cost analysis, the analysis does not meet the standard required by Executive Order 12866. In particular, it fails to consider all costs and benefits of available regulatory alternatives.” After that, we itemize the good and the bad of the FAA propose with an eye toward how the agency can maximize innovation opportunities. We conclude by noting:

 The FAA must carefully consider the potential effect of UASs on the US economy. If it does not, innovation and technological advancement in the commercial UAS space will find a home elsewhere in the world. Many of the most innovative UAS advances are already happening abroad, not in the United States. If the United States is to be a leader in the development of UAS technologies, the FAA must open the American skies to innovation.

You can read our entire 9-page filing here.

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Additional  Reading

Permissionless Innovation & Commercial Drones, February 4, 2015.
DRM for Drones Will Fail, January 28, 2015.
Regulatory Capture: FAA and Commercial Drones Edition, January 16, 2015.
Global Innovation Arbitrage: Commercial Drones & Sharing Economy Edition, December 9, 2014.
How to Destroy American Innovation: The FAA & Commercial Drones, October 6, 2014.
Filing to FAA on Drones & “Model Aircraft”, Sept. 23, 2014.
Private Drones & the First Amendment, Sept. 19, 2014.
[TV interview] The Beneficial Uses of Private Drones, March 28, 2014.
Comments of the Mercatus Center to the FAA on integration of drones into the nation’s airspace, April 23, 2o13.
Eli Dourado, Deregulate the Skies: Why We Can’t Afford to Fear Drones, Wired, April 23, 2013.
Permissionless Innovation: The Continuing Case for Comprehensive Technological Freedom  (2014).
[Video] Cap Hill Briefing on Emerging Tech Policy Issues (June 2014).

The Wrong Way to End the Terrestrial Radio Exemption

A bill before Congress would for the first time require radio broadcasters to pay royalty fees to recording artists and record labels pursuant to the Copyright Act. The proposed Fair Play Fair Pay Act (H.R. 1733) would “[make] sure that all radio services play by the same rules, and all artists are fairly compensated,” according to Congressman Jerrold Nadler (D-NY).

… AM/FM radio has used whatever music it wants without paying a cent to the musicians, vocalists, and labels that created it. Satellite radio has paid below market royalties for the music it uses …

The bill would still allow for different fees for AM/FM radio, satellite radio and Internet radio, but it would mandate a “minimum fee” for each type of service for the first time.

A February report from the U.S. Copyright Office cites the promotional value of airtime as the longstanding justification for exempting terrestrial radio broadcasters from paying royalties under the Copyright Act.

In the traditional view of the market, broadcasters and labels representing copyright owners enjoy a mutually beneficial relationship whereby terrestrial radio stations exploit sound recordings to attract the listener pools that generate advertising dollars, and, in return, sound recording owners receive exposure that promotes record and other sales.

The Copyright Office now feels there are “significant questions” whether the traditional view remains credible today. But significant questions are not the same thing as clear evidence.The problem with the proposed Fair Play Fair Pay Act is two-fold. First, notwithstanding that there is now some uncertainty around the traditional view of the AM/FM market, the bill mandates new minimum fees anyway. Second, it would empower a government panel consisting of three judges appointed by the Librarian of Congress to engage in what could become highly-subjective decision-making.

The Copyright Royalty Judges shall establish rates and terms that most clearly represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller.

The most efficient way to get an accurate indicator of what a willing buyer and a willing seller would’ve negotiated in the marketplace is to call for private negotiations. The Copyright Office recommends this approach, too. Only when a music rights organization (MRO) and a licensee are unsuccessful in reaching an agreement on their own would the Copyright Royalty Board set the rates.

Each MRO would enjoy an antitrust exemption to negotiate performance and mechanical licenses collectively on behalf of its members—as would licensee groups negotiating with the MROs—with the CRB available to establish a rate in case of a dispute.

If Congress wants to end the terrestrial radio exemption, this is the better way to do it. Plainly, however, promotional value counts for something—and even the proposed Fair Play Fair Pay Act acknowledges that the value of the promotional effect qualifies as a legitimate form of compensation to recording artists and record labels.