D.C. Circuit Review – Reviewed: Where are the Economists?

by Aaron Nielson — Wednesday, June 15, 2016@Aaron_L_Nielson

Yesterday, the D.C. Circuit announced its decision in United States Telecom Association v. FCC, i.e., the Net Neutrality case.* The co-authored majority opinion (Judges Tatel and Srinivasan) upheld the FCC’s new scheme over Judge Williams’ partial dissent. Reviewing the competing opinions, I was struck by something: the asymmetrical treatment of economists.

First, let’s review the dissent’s extensive reliance on the views of economists:

“I look first to the support offered by the Commission for its claim. The Order asserts that ‘[t]he Commission’s conclusion [that allowance of paid prioritization would disadvantage certain types of edge providers] is supported by a well-established body of economic literature, including Commission staff working papers.’ This claim is, to put it simply, false. The Commission points to four economics articles, none of which supports the conclusion that all distinctions in rates, even when based on differentials in service, will reduce the aggregate welfare afforded by a set of economic transactions. Indeed, the Commission plainly didn’t look at the articles. None of them even addresses price distinctions calibrated to variations in quality of service; rather they are devoted to the sort of price differences addressed by the Robinson-Patman Act, targeting sellers who sell the same good of the same quality at different prices. Three say that in some circumstances rules against price differentials can be beneficial (to repeat, the articles speak of rules against differentials not related to quality of service), not that they are beneficial. The fourth paper, still within the sphere of non-quality-related price distinctions, is still worse for the Commission, concluding that ‘a flat ban’ on price discrimination (even assuming no differential in cost and quality, unlike the Commission rule) ‘could have adverse welfare consequences,’ and that ‘the analysis does not reveal whether there is any implementable form of regulation that would be welfare-improving.’ It is probably no coincidence that the author of three of these articles, Michael Katz, a former chief economist at the Commission, filed a declaration in this proceeding opposing the type of regulation adopted in the Order as overly broad, especially given that the behavior banned was at most responsible for only hypothetical harms.”

“At oral argument it was suggested that with paid prioritization the speed of the high rollers comes at the expense of others. This is true and not true. Consider ways that the United States government applies paid prioritization in two monopolies that it runs, Amtrak and the U.S. Postal Service. Both offer especially fast service at a premium. If the resources devoted to providing extra speed for the premium passengers and mail were spread evenly among all passengers and mail, the now slower moving passengers and mail could travel a bit faster. But the revenues available would be diminished for want of the premium charges, and in any event it is hard to see how coach passengers or senders of ordinary mail are injured by the availability of speedier, costlier service. Of course one can imagine priority pricing that could harm consumers. The record contains a declaration recognizing the possibility and opposing the Commission’s solution. It is by the author of three of the very economics papers that the Commission says support its position, Michael Katz, who was a chief economist of the Commission under President Clinton. Pointing to the risk of distorting competition and harming customers through banning pricing strategies and ‘full use of network management techniques,’ Katz urged disallowing conduct ‘only in response to specific instances of identified harm, rather than imposing sweeping prohibitions that throw out the good with the bad.’ Perhaps the Commission has answers to this. But despite going out of its way to rely on papers by Katz that were irrelevant, the Commission never deigned to reflect on the concerns he expressed about harm to innovation and consumer welfare.”

“One prominent critic of the ban on paid prioritization—Timothy Brennan, the Commission’s chief economist at the time the Order was initially in production, who has called the rules ‘an economics-free zone’—offered an alternative that addressed these concerns. His argument goes as follows. If some potential content providers might refrain from entry for fear that poor service might stifle advantageous interactions with other sites (thus thwarting the virtuous cycle), that fear could be assuaged by requiring that ISPs meet minimum quality standards. . . . This is a proposal based on the notion that consumers value the things prevented by the Order, but it offers an alternative that solves a (perhaps hypothetical) problem at which the Order is aimed (relieving content providers of the fear discussed above and thus ensuring the virtuous cycle), without such significant costs as those the commentators discussed. The Order offers no response.”

“I’ve already noted with bemusement the Commission’s utter disregard of arguments by two of its former chief economists, Michael Katz and Tim Brennan, that were submitted into the record. Lest the point be understated, I should also mention that the views of yet a third, Thomas W. Hazlett, also appear in several submissions. CenturyLink points to Thomas W. Hazlett and Dennis L. Weisman, Market Power in U.S. Broadband Industries, 38 REVIEW OF INDUSTRIAL ORGANIZATION 151 (2011), for the proposition that there is no evidence that broadband providers are earning supra-normal rates of return. This may be another clue why the Commission steers clear of any claim of market power.”

“The silent treatment given to three of its former chief economists seems an apt sign of the Commission’s thinking as it pursued its forced march through economic rationality.”

Next, let’s review the majority’s response, which in large part consisted of this:

“Critically, we do not ‘inquire as to whether the agency’s decision is wise as a policy matter; indeed, we are forbidden from substituting our judgment for that of the agency.’ Nor do we inquire whether ‘some or many economists would disapprove of the [agency’s] approach’ because ‘we do not sit as a panel of referees on a professional economics journal, but as a panel of generalist judges obliged to defer to a reasonable judgment by an agency acting pursuant to congressionally delegated authority.’ City of Los Angeles v. U.S. Department of Transportation, 165 F.3d 972, 978 (D.C. Cir. 1999).”

As far as I can tell, the majority opinion never cites Katz, Brennan, or Hazlett—three former FCC chief economists. The dissent, by contrast, cites or mentions Katz 14 times, Brennan 3 times, and Hazlett 9 times.

So what to make of all of this? Perhaps the majority is right that the D.C. Circuit will not vacate an agency decision because of economic disagreements. That is what the snippet from City of Los Angeles says, though of course there are cases both before and after City of Los Angeles in which the D.C. Circuit appears to have rejected agency decisions for inadequate economic analysis. On Twitter, Daniel Deacon and Adrian Vermeule observe that this case suggests that “hard look” review is on its way out, or is at least retreating. Maybe so—“admin law” is changing (though if the history of administrative law teaches us anything, there will be pushback).

* This week, I’m doing two posts; one to discuss Net Neutrality decision, and the other to discuss the rest of the cases. Note that I do not claim to be an expert on Net Neutrality, much less the economics of the telecommunications industry. I was right, however, that the majority opinion would have no footnotes.

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About Aaron Nielson

Professor Nielson is an associate professor at Brigham Young University Law School. Before joining the academy, Professor Nielson was a partner in the Washington, D.C. office of Kirkland & Ellis LLP (where he remains of counsel). He also has served as a law clerk to Justice Samuel A. Alito, Jr. of the U.S. Supreme Court, Judge Janice Rogers Brown of the U.S. Court of Appeals for the D.C. Circuit, and Judge Jerry E. Smith of the U.S. Court of Appeals for the Fifth Circuit. All views expressed are the author's alone. Follow him on Twitter @Aaron_L_Nielson.

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