How Capitalism Will Save Us (45 page)

The Rap on airline deregulation is anything but the truth. Airline deregulation actually has made service cheaper and more abundant. Adjusted for inflation, fares today are 25 percent to 44.9 percent lower than they were before deregulation three decades ago. Carriers offer far more service to more cities. And studies show travel is safer, too. The real problem
in the United States isn’t our airline traffic jam. It’s the bureaucratic bottleneck in Washington.

F
ew economic policy discussions have been as muddied by technological jargon as the argument over net neutrality. We will spare you the mind-numbing lingo and technological details. The question, however, boils down to whether telecommunications companies should be able to set their own prices for the bandwidth they supply to Internet content providers. The dispute pits phone and cable companies like AT&T, Comcast, and Verizon—also known as Internet service providers or ISPs—against content providers such as Google, Yahoo!, and YouTube, among others.

Cable and telephone companies want to charge higher rates to those big customers because of the explosion of Web traffic clogging the information superhighway. Internet applications, such as video- and file-sharing networks, are rapidly taking up available space. A high-definition feature film, for example, requires as much data as 2,300 songs or 35,000 Web pages. According to the
Wall Street Journal
, bandwidth usage is growing at about 50 percent a year.

ISPs have traditionally relied on “all you can eat” pricing. Internet service companies assert that a tiered pricing system—where high-intensity users are charged more—will help to manage the congestion while encouraging companies to invest in more fiber-optic networks that expand their data pipelines.

But opponents of tiered pricing insist that it will force companies to “discriminate” against high-bandwidth users to control costs. For Web
users, this means that some Web sites might suddenly operate more slowly or be less available. Some say this is already happening. The Internet service provider Comcast came under fire from net-neutrality advocates, who alleged the company blocked service to some of its customers.

Net-neutrality advocates have turned their campaign into a moral crusade to preserve the democratic heart and soul of the Internet. Yet no one argues when tiered pricing is used in other industries. The example most often given is FedEx: it seems reasonable that the parcel delivery giant charges more money to people who make use of its service by requesting quicker package delivery. And even today there’s not true net neutrality. For instance, individuals pay premiums to get high-speed DSL service.

Despite the vague, high-tech label, government-mandated “net neutrality” is essentially price control. And price controls, no matter what they’re called, always end up harming the consumer. When companies are unable to generate sufficient profit, they have less money left over to invest in maintaining and improving operations. Enhancements are halted. Service eventually declines.

New York City’s chronic housing shortage provides a powerful example of the perils of price controls. New York’s rent-control laws were enacted in 1943, ostensibly to protect less affluent tenants against gouging by landlords. Other cities, including Boston, areas of Los Angeles, and San Francisco, followed New York’s example. By the early 1980s, about 10 percent of the nation’s renters were covered by rent-control regulations.

What happened? Less capital was available for real-estate development. The consequence: new housing in rent-controlled areas stopped being built or was sharply curtailed. By the 1990s, only about eight thousand new units were coming online each year in New York City, the lowest number since the Great Depression. Lower-income people had to make do with deteriorating rentals and more expensive nonrental housing.

Rent-control laws were loosened in the 1990s. But part of the market remains strictly controlled. To this day, New Yorkers are loath to move from rent-controlled apartments with cheap, below-market rents. The cost of housing in New York City today is about twice the national average.

Rent control did anything but bring more “neutrality” or fairness to the market. Affluent people were usually the ones who gained from hanging on to cheap, rent-controlled apartments. In one recent notorious case, an outcry ensued after it was disclosed that Charles Rangel, the
powerful chairman of the House Ways and Means Committee, had at least four rent-controlled apartments.

Meanwhile, studies have shown that “free-market cities” with no rent regulations, such as Philadelphia, Chicago, San Diego, Phoenix, and Seattle, have almost perfectly competitive housing markets, with housing available at every price level.

Little wonder some have called net neutrality “rent control for the Internet.” Net neutrality would turn the Internet broadband providers like Comcast and AT&T into the equivalent of New York City landlords. According to the
Wall Street Journal
, the debate in Washington has already discouraged investment. It’s one reason that the United States lags behind countries like South Korea and Japan in developing broadband capacity and is fifteenth in the world in bandwidth penetration.

Price controls are always destructive, a lesson we should have learned from the 1996 Telecommunications Act. Under the guise of fostering competition, the legislation mandated that incumbent companies such as Verizon lease their wires to new phone companies at subsidized prices. No surprise, the incumbents then slashed capital spending. Why invest money in facilities that would benefit competitors? When these controls were lifted, the start-ups failed because they had been artificial creations of political legislation.

Unfortunately, “net neutrality” is the latest case of one industry group attempting to harness the powers of government to distort market behavior to suit its interests. Whether it’s net neutrality or rent control, government-imposed price constraints only harm the economy and damage people and are anything but fair.