Phony Federalists

Originally published at The Wall Street Journal

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A phony theory of federalism may paralyze the Federal Communications Commission’s halting movement toward deregulating the telecom industry. The battle cry of the faux federalists is “states’ rights,” which is not the first abuse of that term, or of the federalist principle. Like similar abuses, this one deserves to fail.

The flashpoint is whether the FCC and Solicitor General Theodore Olson will seek Supreme Court review of a March 2 decision by the U.S. Court of Appeals in Washington, D.C. For the third time, that court rejected the core of the FCC’s regulatory scheme. In particular, the court rejected the FCC’s plan to delegate its own decision-making authority to 50 state regulatory bodies. The agency gambit was condemned by the D.C. Circuit as lawless, just as FCC Chairman Michael Powell had warned when he told his three regulation-friendly commissioners that they were “flouting the law” Congress passed in 1996 to encourage competition in the telecom industry.

The unanimous decision came from Judges Stephen Williams, Harry Edwards and Raymond Randolph. FCC Chairman Michael Powell supports the decision and has argued strongly against an appeal. But fellow commissioners, supported by regulatory wolves in their federalist suits, seem hell-bent on a challenge. To challenge this decision is like calling a time out when the football team is down 30 points with a minute left. What’s the point?

The appeals court decision should stand. Deregulation works, recent history proves it, and a proper understanding of the principle known as federalism supports it.

Federal deregulation beginning in the late 1970s helped drive the economic boom of the ’80s and ’90s. Pure, and often arbitrary, economic regulation was swept away in favor of market forces. While regulatory reform encouraged health and safety regulation that met cost-benefit tests, there was a very strong bias against economic regulation at any level of government.

After Congress eliminated most transportation regulation, the FCC declined to regulate computer services, and Congress deregulated federal and state regulation of Cable TV, and blocked state entry and rate regulation of the wireless industry. The result: the fastest-growing and most-vigorous markets in over 100 years. But that boom is now threatened by a misapplication of the principles of federalism.

The faux federalists argue that the doctrine of states’ rights permits — if not demands — regulation by the 50 states instead of a single federal deregulatory standard. This is a sham. Unjustifiable economic regulation does not become desirable just because it’s done by states and not by the FCC. If it were, we would not have the vigorous cable or wireless industries we have today.

The most scalding rejection of the phony federalists’ arguments came in 1999’s AT&T v. Iowa Utilities Board, in which Justice Antonin Scalia was forced to point out that the “question is whether the state commissions’ participation in the administration of the new federal regime is to be guided by federal-agency regulations. If there is any ‘presumption’ applicable to this question, it should arise from the fact that a federal program administered by 50 independent state agencies is surpassing strange.”

The D.C. Circuit has now twice followed Justice Scalia’s lead and tracked FCC Chairman Powell’s understanding of the balance struck by Congress: ” . . . the [1996 Act] does contemplate a state/federal partnership in certain areas,” but pivotal questions as to network sharing and competition are to be answered by the Commission itself. What the phony federalists are doing will fragment our integrated market structure, and throw struggling telecoms into yet another round of litigation in agencies and courts across the country.

Not all of these supposed federalists are FCC commissioners. Some are well-meaning people who have unfortunately become untethered from their free-market moorings. Their intentions are stellar, but their understanding of this issue is misguided.

The standard for justifying economic regulation of an industry is extremely high. To meet that standard, policymakers must determine that regulation would be better than no regulation. Even if one believes an industry should be regulated, it does not follow that the powers assigned by Congress to the FCC can be delegated to the states. As the Appeals Court explained, “when an agency delegates power to outside parties, lines of accountability may blur, undermining an important democratic check on government decision-making.”

These checks and balances have a very specific and noble end purpose: to protect and serve the American people. There is no doubt that the American people would be ill-served by allowing the separate states to overregulate the telecommunications system. Think what could happen to a simple phone call. In today’s world, there is no real difference between a call made to someone across the street and a call to someone across the country. An across-town call in Chicago may be routed through California or Florida, or even leave the country, before reaching its ultimate destination.

The communications market today is an inherently boundaryless world. The idea that it should be regulated by 50 separate states is exactly the kind of situation the Interstate Commerce Clause was designed to block.

None of this is to suggest that states don’t have a useful role to play. States have a responsibility to enforce consumer protections and manage emergency response services. They can also help by removing regulatory barriers. For years, Michigan lagged behind in broadband deployment, until the state implemented LinkMichigan, which eliminated tax disparities and burdensome fees and rights-of-way rules. What followed benefited everyone: real-time distance learning for rural residents, improved supply-chain management for small business, and powerful efficiency gains in the healthcare sector that lowered costs. TechNet awarded Michigan its highest ranking for broadband strategy. Broadband is the future, and Michigan is ahead of the curve.

This is more than a communications industry issue. It is part of a much larger argument over the proper role of states in the regulatory process, and how to limit government interference in competitive markets. Federalism is a treasured principle that is crucial for maintaining balance between competing governmental powers, and for fostering a dynamic economic environment. Properly applied, it can open the American economy to a new birth of growth — growth in new learning tools for schools and universities; growth in access to the very best medical consultation for people in remote areas as well as in big cities; growth in new technologies as we harness the greater bandwidth to the greater dreams of inventors and entrepreneurs; growth that benefits every worker and family in our nation. The real federalism we speak of increases freedom — and with it the fruits of freedom.

We urge the FCC and the solicitor general to turn away from faux federalism and forego a last ditch call for Supreme Court review.

Mr. Engler is the former governor of Michigan (1991-2003). Mr. Gray was the counselor to the President’s Task Force on Regulatory Relief (1981-1989). Mr. Starr is the incoming dean of the Pepperdine Law School.