Expect a Recession When Net Neutrality Regulations are Repealed

July 13, 2017 in Economics, Home

Consider how the internet comes to your devices. All the way from the internet service provider leading into your home there are lines underground that are dug through public land along roadsides. Like our roads, these are shared spaces that can not be owned by any individual company. Instead, through our local governments we allow this shared land to be used under contract by private companies. Now, there can’t be a dozen companies laying internet lines, just like there can’t be multiple power line companies or water main companies. As a result, we have a federally regulated oligarchy or monopoly in these industries. This is the best way to operate these utilities.

Let’s imagine if these utilities, other than internet, were left unregulated. Power companies, which may have investments in certain media companies or other industries, could charge competitors a higher price for power. They could shut off power intermittently. Enron actually did this when the federal regulations were repealed last time the GOP had control. They cut off power to whole regions just to drive up demand and thus prices. Our ISPs would certainly do this, especially with small businesses who don’t have the same negotiating power as big businesses. ISPs have even more ability to manipulate the market and demand than power companies.

Let’s imagine if the roads were all privately owned by one or a few companies. They could put tolls outside of businesses that don’t pay an upfront ransom. They could make a stop light last longer out front of companies that compete with companies in which they hold investments. They own the roads and any businesses located on those roads have to play by their rules. It would be profitable for them to impose these barriers on businesses and customers. Without net neutrality there is no law preventing this. Ultimately, this kind of behavior would wreck these marketplaces and the whole economy.

But… won’t the ISPs consider this? No, large businesses like internet service providers only care to increase short term profits again and again. They don’t consider the long term macroeconomic effects of their decisions on the economy. Their heavy lobbying for net neutrality repeal is evidence of this.

The Bolivian water crises is another example of economic recessions cause by water privatization.

When these sorts of markets are left to the free market they will, and always have, suppress the freedom of other markets. This is because businesses in these industries have the ability to siphon a lot of profit out of the economy through extreme price inflation. These industries have an inelastic demand, which means the price can rise and have a small impact on demand. If people need something to survive or to maintain a job or run a business,  we’ll still purchase it  even if the price increase… until it bankrupts us. When prices in these industries rise then consumers have less money to spend in other industries, which suppresses growth in all markets.

We know that private companies must pursue optimal profits for their shareholders. The argument being made by those who oppose net neutrality is that the companies won’t seek optimal profits by interfering with the free market, but that is not a reasonable argument. We can’t just hope they won’t do what they are built to do. The ISPs say that if unregulated they can use the increased profits to improve internet quality, but in reality they have more of an incentive to slow it down for companies that don’t pay. Also, there isn’t enough competition or demand to provide them with the incentive to improve internet quality. Most people are happy enough with the current speeds they have. The only thing that will change is the price paid by customers and online businesses.

Small businesses, hit with higher bills, may have to increase the prices that they charge consumers. Actually, many small businesses in industries with elastic demand can’t increase prices because their customer base would shrink and they’d become unprofitable. Combine this with reduced demand from consumers who are paying more for internet and sales will drop significantly for small businesses. Higher unemployment will result from layoffs from small business, who employ more people at better wages that big businesses. Higher unemployment means even less demand for products and services. All of the effects of repealing net neutrality lead to an economic recession.

Long before I would support unleashing a monopoly or oligarchy from regulations into a marketplace, I would support socialization of the marketplace. The marginal inefficiency of government run organizations far outweighs the cost of price gouging and market suppression on our economy. Currently, we have the best of both worlds. We often contract private companies to efficiently run these utilities under strict federal guidelines that prevent them from disrupting and oppressing other free marketplaces.

Net neutrality must remain. I wouldn’t reject all changes to internet regulations; there could be some minor improvements to the regulations of ISPs. If any changes are to be made they must be examined closely to protect small businesses and prevent price inflation.

Between this repeal, the repeal of other regulations, their tax reform, and budget cuts, the economy is going to shrink into recession as soon as too much money is syphoned to the top… probably by the end of 2018 and maybe sooner if investors panic.