Cap and Trade for the Internet

Under Chairman Julius Genachowski, Al Gore’s old friends at the Federal Communications Commission are out to reinvent the Internet. In the name of a bogus crisis in broadband deployment, the FCC is today lathering on an array of network stimuli and subsidies as part of a new “National Broadband Plan” that will transform this current font of U.S. economic growth into a consumer of taxes and a playground for pettifogs.

This subsidy plan comes on top of previous ill-defined “network neutrality” requirements that would bar carriers from charging different prices for different forms of Internet content. Whether spam, TV programs, pornography, stolen video, movie downloads, streaming games, cyberwar intrusions or sensitive voice services, carriers of Internet packets could not discriminate among them.

“Network neutrality” is a new form of expropriation that parallels the “unbundling” regulations that precipitated the telecom crash of 2000 by requiring owners of last-mile links to homes and offices to share their lines with rivals. Like unbundling, it is demanded on the assumption that the U.S. is lagging in broadband because of abuses by the telecom carriers.

Since 2001, on both the federal and state levels, the U.S. has led the world in telecom deregulation. With business investment flooding into this arena, the U.S. has accomplished a broadband miracle, with residential bandwidth up 54 fold, wireless bandwidth to consumers up 542 fold. With some $4 trillion in investment in information infrastructure and software since the crash of 2000, including nearly $500 billion in 2008, the U.S. has moved from the back of the pack in broadband Internet to world leadership in Internet bandwidth and commerce.

The new broadband surge has created a heyday for such companies as Google, MySpace, Facebook, Apple, Twitter, Hulu and eBay’s Skype that ride virtually free on the Internet. Supporting the neutrality campaign with new-found friends in Washington, however, Google and its allies are now more focused on neutralizing possible competition than on keeping up the broadband bonanza.

In practice, actual network neutrality and access are determined not by the laws of the land but by the laws of network abundance and scarcity. With sufficient investment in bandwidth, carriers will have no economic incentive to exclude content from an unaffiliated provider. When bandwidth is scarce, carriers will have to allocate, ration and set priorities regardless of what the rules say, slowing everything down to the lowest common denominator. Network neutrality is particularly inappropriate for the booming wireless sector, which is the hope of underserved rural areas and needs to prioritize packets because wireless bandwidth always tends to be scarce.

What ultimately makes bandwidth scarce is Wall Street’s reluctance to back the companies doing the investment. Nothing can so wither broadband investment as murky mandates from Washington. As Bret Swanson of Entropy Economics has shown, corporations critical of network neutrality invest some 10 times more on networks than do net-neutrality supporters. This is a campaign by free riders to continue the free ride.

Investment in the Internet is now in jeopardy. With capital gains taxes set to rise next year, overall investment in information technology is down some 12% since 2008, IPOs languish, and venture capital is drying up.

The response from Washington is more calls for a “public option” Internet, built by the feds and by states and municipalities to compete with the private networks neutered and neutralized by the new rules. As we’ve seen in Europe, which has adopted a policy of suing U.S. companies such as Microsoft and Google that are surging ahead of the continent’s national champions, these public-option networks inevitably become bottlenecks for needed innovation.

The FCC’s new regulatory regime amounts to a kind of cap and trade for the Internet: It will cap Internet growth and restrict Internet trade. The likely winners are lawyers and special interests leeching off the telecom and Internet industries. A 2007 study by the Brookings Institution’s Robert Crandall, William Lehr and Robert Litan estimated that every one percentage point increase in broadband subscriptions by U.S. households yields nearly 300,000 new jobs. Do we really want to jeopardize this industry’s cornucopia of growth?

Mr. Gilder is a fellow at the Discovery Institute.