Net Neutrality—and Obama's Scheme for the Internet—Are Lousy Ideas
"Net neutrality" and public-utility style regulation are about Internet freedom, just not the way advocates think.
President Barack Obama recently came out in favor of both "net neutrality" and the FCC changing the way that Internet service providers, or ISPs, are regulated. Shortly thereafter, Sen. Ted Cruz opined "'Net Neutrality' is Obamacare for the Internet; the Internet should not operate at the speed of government." Obama's and Cruz's statements fed into the popular misconception that the proposed FCC reclassification is the same thing as net neutrality. It's not. The policies are distinct, though both are bad ideas.
What Net Neutrality Is and Is Not
Net neutrality is about how traffic flows through the Internet. When someone sends a message over the Internet, it gets broken up into tiny bits called "packets." Each packet gets passed around from node to node, eventually arriving at its destination. It's like if you tore up a letter, put the parts in different envelopes, and then mailed each of them separately. When the packages arrive at their destination, they're reassembled in the proper order so you can view the content.
Net neutrality is a policy that mandates that all packets be treated the same regardless or source, destination, or content, with very limited exceptions for traffic that's illegal, malicious, or unwanted.
Sometimes people use "net neutrality" to refer to a whole swath of policy ideas that are not net neutrality. For example, some people think it's unfair that Internet speeds are usually faster in urban areas than in rural areas where there hasn't been as much investment in infrastructure, arguing for "net neutrality" as a solution.
Title II Regulation
To address perceived problems like slower access in rural areas, some people have advocated changing the way ISPs are regulated. Under Title II regulation, part of the Communications Act of 1934, in addition to a slew of other regulatory burdens, ISPs could be subjected to universal service requirements. That means they would be required to ameliorate bottlenecks caused by comparatively slow local infrastructure. Just like telephone companies are required to wire up every house more or less regardless of cost, ISPs would be required to bring all infrastructure up to a minimum standard. Let's be clear about something—it makes no economic sense from a society-wide perspective to make such a large investment to serve so few people. It's a handout to rural Internet consumers, pure and simple.
In exchange for the added regulatory burdens, the FCC has the power to set prices at a level that allows ISPs to make money. If that power were exercised, the cost of Internet access would no longer be subject to market forces. This is the default "public utility" model. Most advocates of net neutrality, including President Obama, don't want that to happen, suggesting the FCC make an exception for ISPs. But that process of making an exception, called "forbearance," isn't automatic. There are legal obstacles. If forbearance fails, we can expect a concerted lobbying effort by the ISPs to make sure rates are set as high as possible.
Weighing the Risks
Set aside for a moment whether the worst-case scenarios raised by net neutrality and regulatory reclassification advocates are terribly likely. They're not, as even this popular pro-neutrality cartoon attests. The nightmare outcome? The Internet becomes more expensive and less convenient for consumers, and it becomes harder for small content producers to compete.
That's what might conceivably happen. Here's what actually is happening, right now:
We know, indisputably, thanks to the heroic disclosures by Edward Snowden and the tireless work of journalists like Laura Poitras and Glenn Greenwald, that the federal government is attempting to use the Internet to build a global Panopticon, capable of accessing everyone's personal information at any time for any reason or no reason.
We also know that one way the government is trying to accomplish this is by securing the cooperation of private companies. You can attempt to thwart surveillance by using encryption—but encryption only protects data in transit. Once it's received and decrypted, it's an open book. If the government can compromise private data custodians, encryption loses a lot of its efficacy. This is exactly what happened to Google, which had its internal traffic bugged by the NSA.
Sometimes instead of outright sabotage, the government pressures companies into turning over information about their customers. See, for example, the brave efforts of Ladar Levison, head of now-defunct secure email provider Lavabit, to protect his customers—including Edward Snowden—from the government's prying eyes.
But not all tech companies have the spine of Lavabit. What we risk doing by ramping up the government's regulatory authority over the Internet is to make it easier for the government to pressure ISPs, many of which are data custodians, to get what they want.
Is it crazy to think the government might use its "legitimate" regulatory authorities to bully private actors? Let's consider the financial sector, one of the most heavily regulated parts of the economy.
In his book The Financial Crisis and the Free Market Cure, former BB&T chief John Allison relates how Bernanke's Federal Reserve blackmailed healthy banks into taking TARP money they didn't want:
The day after TARP passed, we were contacted by our regulators. This was an informal contact over the phone. I received a very carefully stated nondocumentable message. The essence of the message was that although BB&T had substantially more capital than it needed under long-established regulatory standards, given the current economic environment, the regulators were going to create a news set of capital standards. They did not know what the standards would be. However, they were "very concerned" that we would not have enough capital under these new standards unless we took the TARP capital. They had a regulatory team in place to reexamine our capital position immediately unless we took the TARP funding. The threat was very clear. (pp. 170-171)
Another example is the government's "Operation Choke Point" program, which puts pressure on banks to refuse to deal with people engaged in perfectly legal businesses the Obama administration, for one reason or another, doesn't like.
"Net neutrality" and public-utility style regulation are about Internet freedom, just not the way advocates think. Comcast and Netflix, two of the main parties in the public debate, are squabbling about who should bear the financial burden of building and maintaining the costly infrastructure needed to deliver streaming video to consumers. There's no dire threat to freedom hinging on the outcome of that fight. The threat to Internet freedom is government control. That means that if you care about liberty, you should oppose Net neutrality and Title II reclassification.
Thanks to Ryan Radia, Associate Director of Technology Studies at the Competitive Enterprise Institute, for his assistance with this article.