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Make Economics at the FCC Great Again

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Most of us employ informal cost-benefit analysis (CBA)—or what Benjamin Franklin described as weighing pros and cons—whenever we make decisions in our daily lives.[1] It seems fair to expect federal agencies to do the same when considering new rules. Surprisingly, though, some agencies, including the Federal Communications Commission (FCC), are not required to engage in CBA before issuing a rule.

In a recent speech, FCC Chairman Ajit Pai promised to rectify this situation. In particular, he announced his plan to establish an FCC Office of Economics and Data. The office would, among other things, prepare CBAs to help the Commission determine whether the benefits of a given proposal are expected to outweigh its costs and consider how the costs and benefits of the proposal will be distributed among different segments of society.

Such an office is long overdue.

Executive Agencies Have Conducted CBAs for Decades

Since 1981, presidents have required all executive agencies, such as the Environmental Protection Agency (EPA) and the Department of Transportation, to conduct CBA as part of a regulatory impact analysis for all significant regulatory actions.[2] CBA is a tool that allows regulators to identify welfare-maximizing policies by considering the expected costs and benefits of the policies. By performing CBA on a variety of regulatory alternatives, these agencies can issue regulations that produce the greatest net benefits for society, to the extent permitted by law.

Once controversial, CBA—or at least some form of CBA—is now almost synonymous with sound policy. In 2015, Justice Scalia, writing for the Supreme Court’s majority in Michigan v. EPA, declared that “[n]o regulation is ‘appropriate’ if it does significantly more harm than good.”[3] And Justice Kagan, writing for the dissent, agreed that EPA must consider the harms of its regulation.[4] While these statements sound like common sense, independent agencies like the FCC (whose commissioners are appointed for fixed terms and can only be removed for cause) are not required to conduct CBA and, therefore, have lagged behind executive agencies like the EPA (whose leaders serve at the pleasure of the president) in the use of the tool.

CBA Would Help FCC Ensure It Regulates in the Public Interest

Conducting economic analyses is in the agency’s interest, too. Under the Administrative Procedure Act, courts have an obligation to set aside an agency action that is “arbitrary [or] capricious.”[5] In ensuring that agency action is reasonable, courts evaluate whether agencies base their actions on relevant and reliable data and articulate a rational connection between the evidence and their actions.

Increasingly, courts are seriously evaluating whether agencies properly considered the costs and benefits of regulations.[6] For example, the D.C. Circuit has invalidated Securities and Exchange Commission rules due to the agency’s failure to fully consider benefits and costs, especially in light of its statutory obligation to consider effects on efficiency, competition, and capital formation.[7] The Supreme Court’s decision in Michigan v. EPA underscores the importance of some form of CBA to reasoned decisionmaking. The decision, despite involving an executive agency, was not based on any requirement limited to executive, as opposed to independent, agencies. It was grounded in principles of sound policy that informed what it meant for regulation to be “appropriate.” Although the justices split 5 to 4, none of the justices thought that EPA should ignore the costs and benefits of its regulation; they simply disagreed on when it needed to take costs into account.[8] And if no regulation is appropriate if it does more harm than good, then surely no regulation can truly be in the public interest, as FCC rules are statutorily required to be, if it does more harm than good.[9]

Thus, the courts, intentionally or not, are creating incentives for independent agencies to use economic analysis. The possibility of needing to demonstrate to the court a link between evidence and actions puts pressure on independent agencies to step up the analyses accompanying their decisions.

Although courts have let FCC off the hook in the past,[10] the agency probably won’t be so lucky in future litigation. In fact, its most recent “win” (on applying Title II to broadband providers) was accompanied by a lively dissent by Judge Williams, who detailed numerous flaws in FCC’s analysis.[11] In future cases, judges who sympathize with Judge Williams’s concerns may find themselves in the majority.

The FCC has always maintained a staff of economists, but their influence has ebbed and flowed at the agency, largely based on the chairman’s interest in economic analysis.[12] Although this is neither the first time that FCC has tried to refocus on economics nor the first time a chairman has tried to establish an economics shop at the agency,[13] Chairman Pai’s latest attempt is promising because it coincides with the judicial push toward more complete agency analysis.

Challenges Ahead

The importance of CBA does not mean that bringing it to the FCC will be easy. The agency is likely to face several challenges in fully integrating economic analysis into its decisionmaking.

One difficulty facing all CBA is how to value nonmarket activities. In the context of the environment, for example, regulators must consider how much people value certain wildlife, parks, or even places like distant wildlife refuges they might never visit. The FCC will have to think of ways to quantify nonmarket activities specific to its authority. For example, to accurately evaluate a regulation that would unbundle set-top boxes from cable television service, the agency would have to quantify the expected costs associated with higher basic cable prices, less content innovation, and effects on privacy and weigh those costs against expected benefits of, say, reducing set-top box rental fees.[14]

Such estimates would be difficult to quantify. But when EPA first set out to monetize the health and welfare benefits associated with reducing air pollutants, for example, its task was also not easy.[15] Moreover, not attempting such an analysis would mean that the agency was implicitly assuming an answer. Failing to attempt to enumerate and quantify costs and benefits does not make them go away.

The solution is to continue to improve estimates of costs and benefits and ensure that all important effects, whether direct or indirect, positive or negative, are considered.[16] The analyses have already improved over the years, now routinely monetizing a wide variety of costs and benefits, even those that were once thought unquantifiable.[17] By encouraging research, which Chairman Pai embraced in his speech, the FCC will undoubtedly rise to these challenges.

Another challenge the FCC will face is how quickly it can build the necessary expertise in CBA. Fortunately, as Chairman Pai noted, the FCC already has a staff of top-notch economists—he just needs to make sure they’re starters on the regulatory playing field. The FCC can also take advantage of resources available within the federal government and the lessons we have learned from the decades of executive branch agencies’ use of the tools. For example, the FCC could take advantage of guidelines on economic analysis and the wealth of resources at the EPA, which has “formidable” economic analysis capacity.[18] The FCC could also request guidance from the Office of Information and Regulatory Affairs (OIRA), which reviews the economic analyses of executive agencies, by voluntarily submitting its analyses for OIRA review.

Conclusion

In the years ahead, the FCC will likely have to employ more rigorous analysis to meet its statutory mandate to act in the public interest. At the very least, it will have to evaluate whether its regulations do more good than harm. To this end, an Office of Economics and Data is welcome. Though employing economic analysis will not always be simple, the FCC should meet these challenges by emulating agencies such as the EPA, using OIRA review, and encouraging independence and research. A genuine commitment to employing economic analysis without regard to particular policy preferences would yield better-informed decisions and better outcomes for the American people.

* Caroline Cecot is Affiliate Faculty at Antonin Scalia Law School at George Mason University and Legal Fellow at the Institute for Policy Integrity at New York University School of Law. She is also a contributor to the Technology Policy Institute blog.

[1] See Int’l Union, United Auto., Aerospace & Agric. Implement Workers of Am., UAW v. OSHA, 938 F.2d 1310, 1321 (D.C. Cir. 1991) (quoting Benjamin Franklin’s letter to a friend outlining his decisionmaking strategy).

[2] Although previous presidents required some assessment of costs of proposed regulatory actions, President Reagan first formalized this requirement in Executive Order 12,291. Exec. Order No. 12,291, 46 Fed. Reg. 13,193, 13,193-94 (Feb. 19, 1981). This executive order was replaced by President Clinton’s Executive Order 12,866, which modified some of the requirements slightly. Exec. Order No. 12,866, 58 Fed. Reg. 51,735, 51,735 (Oct. 4, 1993). President Obama supplemented President Clinton’s executive order in 2011. Exec. Order No. 13,563, 76 Fed. Reg. 3821, 3821 (Jan. 21, 2011). A significant regulatory action is defined as one that is likely to result in a regulation that has an annual effect on the economy of $100 million or more or raises novel legal or policy issues, among other things. Exec. Order No. 12,866, 58 Fed. Reg. at 51,738.

[3] Michigan v. EPA, 135 S. Ct. 2699, 2707 (2015).

[4] Id. at 2714 (Kagan, J., dissenting) (“I agree with the majority—let there be no doubt about this—that EPA’s power plant regulation would be unreasonable if ‘[t]he Agency gave cost no thought at all.’”).

[5] 5 U.S.C. § 706(2)(A) (2012).

[6] For more information on how courts evaluate agency CBAs, see Caroline Cecot & W. Kip Viscusi, Judicial Review of Agency Benefit-Cost Analysis, 22 Geo. Mason L. Rev. 575 (2015).

[7] Bus. Roundtable v. SEC, 647 F.3d 1144, 1448-49 (D.C. Cir. 2011); Chamber of Commerce of the U.S. v. SEC, 412 F.3d 133, 136 (D.C. Cir. 2005).

[8] See Michigan, 135 S. Ct. at 2699.”

[9] The FCC is authorized to regulate according to public interest, convenience, or necessity. See, e.g., 47 U.S.C. § 302a.

[10] United States Telecom Ass’n v. Fed. Commc’ns Comm’n, 825 F.3d 674 (D.C. Cir. 2016); Charter Commc’ns v. FCC, 460 F.3d 31 (D.C. Cir. 2006); Consumer Electronics Ass’n v. FCC, 347 F.3d 291 (D.C. Cir. 2003).

[11] United States Telecom Ass’n, 825 F.3d at 744 (Williams, J., dissenting in part) (concluding that FCC acted arbitrarily and capriciously when it reclassified broadband as a telecommunications service).

[12] Gerald R. Faulhaber, Hal J. Singer, & Augustus H. Urschel, The Curious Absence of Economic Analysis at the Federal Communications Commission: An Agency in Search of a Mission, 11 Int’l J. Commc’n 1214, 1222 (2017).

[13] See id.; Thomas W. Hazlett, Economic Analysis at the Federal Communications Commission, RFF Discussion Paper 11-23 (May 2011) (proposing an economics office), http://www.rff.org/files/sharepoint/WorkImages/Download/RFF-DP-11-23.pdf.

[14] See Faulhaber et al., supra note 12, at 1226, 1229 (calling for FCC to undertake this analysis).

[15] See Richard L. Revesz, Cost-Benefit Analysis and the Structure of the Administrative State: The Case of Financial Services Regulation, 34 Yale J. Reg. (forthcoming 2017).

[16] See, e.g., Richard L. Revesz & Michael A. Livermore, Retaking Rationality: How Cost Benefit Analysis Can Better Protect the Environment and Our Health (2008).

[17] See, e.g., Revesz, supra note 15.

[18] Id.