AEI-Brookings Joint Center Policy Matters 04-17


Phony Federalists. John Engler, C. Boyden Gray, and Kenneth Starr.  June 2004.

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.

This article appeared in The Wall Street Journal on June 1, 2004.